Which of the following is an example of test of details of account balances?
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The terms are used interchangeably, but technically, substantive testing procedures include test of details and analytical procedures. Test of details relates to obtaining source documentation and reconciling, tracing, vouching, etc. Analytical procedures relate more to using financial and nonfinancial information to derive expected balances and comparing to the actually reported balance. Substantive Procedures:Substantive procedures are performed to detect material misstatements at the relevant assertion level, and include tests of details of classes of transactions, account balances, and disclosures and substantive analytical procedures. The auditor should plan and perform substantive procedures to be responsive to the related assessment of the risk of material misstatement. In order to effectively determine appropriate substantive procedures, the auditor should understand the nature, extent, and timing of their respective applicability. Nature – Substantive procedures include tests of details and substantive analytical procedures. Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. Extent – The greater the risk of material misstatement, the less detection risk that can be accepted; consequently, the greater the extent of substantive procedures. Because the risk of material misstatement includes consideration of the effectiveness of internal control, the extent of substantive procedures may be reduced by satisfactory results from tests of the operating effectiveness of controls. Timing – In some circumstances, substantive procedures may be performed at an interim date. When substantive procedures are performed at an interim date, the auditor should perform further substantive procedures or substantive procedures combined with tests of controls to cover the remaining period that provide a reasonable basis for extending the audit conclusions from the interim date to the period end. If you are studying for the CPA exam, then sign up for a free trial to have full access to the Universal CPA platform for 7 days here. Universal CPA is the only course that has visual learning and bite-sized video explanations for every single MCQ and simulation. To learn more about the Universal CPA course and see a demo of the course, visit this link. Previous Question Next Question Back To All Questions If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review) Read More Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current... Read More Understanding Variance AnalysisVariance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company... Get full access to Accounting Information Systems: The Processes and Controls, 2nd Edition and 60K+ other titles, with free 10-day trial of O'Reilly. There's also live online events, interactive content, certification prep materials, and more. Test of details in an audit is the detailed testing performed by the auditors to collect audit evidence that the balances, underlying disclosures, and the transactions associated with the financial statements are correct during the audit so that they could form the audit opinion. In other words, these are the primary responses of an auditor to check for the risk of material misstatement in the financials. There is no set definition for a test of details in the audit standards. It is only mentioned that it is one of the two substantive procedures, the other being substantive analytics. Some examples of the test of details performed by an auditor are:
The test of detail is just going deep into the transaction’s details. On the other hand, substantive analytics are much broader in perspective. Selection of Procedures – Test of DetailsThe main thing to do when selecting the appropriate procedures to be performed is to pay attention to the nature of the risk. When auditors do this, they can determine the nature, timing, and extent. 1) Nature of EvidenceIf an auditor finds reasonable evidence that the receivables figure is understated or overstated, one of the pieces of evidence he can use is the confirmation of receivables balances by the customers themselves. AdvertisementsRelated article Limitations and Advantages of an Audit of Financial Statements This is a third-party confirmation and is more appropriate than evidence from within the organization. The receivables have no reason to respond dishonestly; hence, this evidence is more reliable. 2) Timing of evidenceWhether interim audit procedures should be performed depends on the company’s accounting system’s reliability. If the systems are audited and proven reliable, an auditor can place more reliance on the system and hence, has to perform fewer tests of details. 3) Extent of EvidenceIf an auditor perceives a company as a higher risk, he may require more evidence. He may want to audit more information and increase the test of details to be performed. AdvertisementsFiguring out how to coordinate your audit techniques with risks is one of the most significant things an auditor will do. Utilizing canned audit programs equivalent to a previous year’s methodology can prompt huge issues. In this manner, know your risks. At that point structure and perform responsive methodology. The test of details of balances is intended to demonstrate that the tests of control and the substantive tests related to transactions are all reasonable. The test of control is an audit test. It is intended to quantify the adequacy of the controls. If, for instance, the test shows that the controls are frail, this will affect the test of details of balances. Substantive tests of detail are helpful sources of confirmation when a mix of dependence on controls and systematic techniques despite everything, doesn’t give the degree of affirmations that are thought to be significant, or in circumstances that are not usually where a controls-dependent methodology is either not doable or isn’t viewed as practical. Related article Meaning of True and Fair View in Audit Opinion Examples of test of details on wages & salaries account
The results of the tests of controls and substantive tests of transactions influence the techniques, test size, timing, and things chosen for the tests of details of the figures (i.e., successful internal controls will bring about diminished testing when contrasted with the tests of details required on account of insufficient internal controls). The consequences of tests of controls additionally influence the public organization auditors to report on internal controls over financial reporting. There are three types of tests to check for the test of details; the test of controls, the test of transactions, and the test of balances. Tests of controls are performed to measure the effectiveness of controls. The test of transactions is done to check for the accuracy of the financial statement transactions. Test of balances is done to check if any material misstatement exists in the balances of the accounts of the financial statements. What is a test of account balance?A test of balances is done to check whether any material misstatement exists in the balances of the financial statements' accounts. This test of details tries to demonstrate that the tests of control and the substantive tests related to transactions are all reasonable.
What is test of details in accounting?What are Tests of Details? Tests of details are used by auditors to collect evidence that the balances, disclosures, and underlying transactions associated with a client's financial statements are correct.
Which of the following best describes tests of details of balances?Which of the following best describes tests of details of balances? Tests of details of balances are specific audit procedures that are intended to: test for monetary errors in the financial statements.
Is recalculation a test of detail?Recalculation procedures can be used as a test of control and a substantive test, and like reperformance, it results in audit evidence obtained directly by the auditor so it's considered to be highly reliable evidence. The procedure can be done manually, but is most often done using CAATs.
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