Determiningtheoverallriskassessmentanddevelopingthe substantive audit program

For each signicant nancial statement account assertion, the inherent risk and control risk are assessed. The work performed around understanding the business provides the inherent risk assessment, while the results of any control testing provide the control risk assessment. Thisriskofmaterialmisstatementdeterminesthenature,timing,andextentofthesubstantive procedurestobeperformed;thatis,thedetectionrisktobemitigatedbyauditors.Theriskof material misstatement is determined using the following matrix:

ControlRisk
InherentRisk		Low	Medium	High
Low	Lowest	Lower	Medium
Medium	Lower	Medium	Higher
High	Medium	Higher	Highest

There is an inverse relationship between the risk of material misstatement and detection risk (DR). If the risk of material misstatement is high, there is adequate evidence to conclude that the risk of an error occurringis likely and that the controls in place are not operating effectivelytopreventordetectanerror.Consequently,thelevelofdetectionriskislow,which means the auditor needs to perform signicant substantiveprocedures toensure errors do not exist in the nancial statements. If the risk of material misstatement is low, then there is a lower risk of errors, and the controls can be relied upon, therefore controls will be tested.

However,recallsomesubstantivetestingisstillrequired.Whereitisconcludedthereisa medium risk, there is limited controls testing, and they are not to be relied upon, and substantive procedures will be highly relied upon.

Required

Basedonyourconclusionsfromassignments3and7,foronlytheaccountsandassertions listedinthetablebelow,completethefollowingworksheettodeterminetheriskofmaterial misstatementandtheacceptableDR(indicatewhethertheriskhasbeenassessedaslow, medium,orhighonworkingpaperA8-1).Then,designsubstantiveauditproceduresthat wouldaddresstheDRforeachofthethreeaccounts:(1)Cash,(2)AccountsReceivable(donot includetheAllowanceforDoubtfulAccounts),and(3)Sales,documentingyourworkin workingpaperA8-2.Whendeterminingtestingthresholdsforthedetailedprocedures,considerusing performance materiality.

Accountassertion

Sales

occurrence

Sales

completeness

Accounts Receivable

existence

Accounts Receivable

completeness

Cash

existence

Cash

completeness

#	Descriptionofprocedure	Existence/occurrence	Valuation/accuracy	Completeness	Rightsandobligations/cut-off	Presentationanddisclosure
1
2
3
4
5
6

Discussionpoints

Thekeycriteriaindesigninganyauditprocedurearethefollowing.

• Usespecicauditterminologywhendescribingyourtest.
• Useclient-specicterminologywhendescribingwhatdocumentationorsystemstocheck.
• Testsshouldbedetailedenoughforsomeoneelsetofollowthemwithoutanyfurther instructions.
• Testsshouldmatchtheassertionorinternalcontrolyouareinvestigating.

Gobackthroughyourproceduresanddeterminewhethertheymeetthesecriteria.

Whensubstantivelyauditinganaccountinthenancialstatements,doyouhavetoaudit all of the assertions? Or just some of them?