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Substantive test are audit procedure designed to substantiate the account balances or to detect
material misstatements in the financial statement.

 Analytical Procedures
Analytical procedures applied as substantive test enable the auditor to obtain corroborative
evidence about a particular account.

The following generalization maybe helpful assessing the predictability of the accounts.

 Income Statement Account are more predictable compared to balance sheet account.
 Accounts that are not subject to management discretion are generally predictable.
 Relationship in a stable environment are more predictable than those in a dynamic or unstable

Test of Details

Test of details of balances involve direct testing of the ending balance of an account, while test of details
of transactions involve testing the transaction which give rise to the ending balance of an account.

Effectiveness of Substantive Test

The potential effectiveness of the auditor's substantive test is affected by an nature ,timing and extent.

Nature of Substantive Test

The nature of substantive test relates to the quality of evidence. The auditor should determine the
appropriate quality of evidence needed to support the desired level of detection risk.

Timing of substantive test

Substantive test may be performed at interim date o at year end. Interim procedure are generally
considered less effective due to incremental audit risk involve when auditing interim balances.

Extent of Substantive Test

The extent substantive test is based on the auditors judgement after considering the materiality the
assess risk and the degree of assurance the auditor plans to obtain.

Relationship between Substantive Test and Test of Control

Test of controls provide evidence that indicates misstatement is likely to occurred. Substantive test on
the other hand, provide evidence about the existence of misstatement in an account balance.


- the auditor should obtain sufficient appropriate evidence to be able to draw reasonable conclusion on
which to base thr audit opinion.

 Underlying Accounting data refers the accounting record underlying the financial statement.
 Corroborating Information supporting the underlying accounting date obtained from client and
other sources.
Qualities of Evidence

When obtaining audit evidence from their test of control or substantive test, the auditor should consider
the sufficiency and appropriateness of audit evidence obtained.

Sufficiency refers to the amount evidence that the auditor should accumulate.The following factors may
be considered in evaluating the sufficiency of evidence:

 The competence of evidence

The amount of evidence that is sufficient in a given situation varies inversely with the
competence of evidence.
 The materiality of the item being examined
The more material the financial statement amount being examined, the more evidence will be
needed to support its validity.
 The risk involved in a particular account
The risk of misstatement in a particular account increase the more evidence will be needed.

Appropriateness is a measure of the quality of audit evidence and its relevamce to particular assertion
and its reliability.

The following generalization could help the auditor in assessing the reliability of audit evidence:

• Audit evidence obtained from independent outside sources (for example, confirmation received
from a third party) is more reliable than the generated internally.
• Audit evidence generated internally is more reliable when the related accounting and internal
control system are effective.
• Audit evidence obtained directly by the auditor is more reliable than that obtained from the
• Audit evidence in the form of documents and written representations is more reliable than oral

Cost/Benefits consideration when obtaining evidence

The auditors opinion to be economically useful must be formed within a reasonable period of time and
based on evidence obtained at a reasonable cost.


The sufficient appropriate evidence required by the professional standards must be clearly documented
by the auditor's working papers.

Function of Working Papers.

Working papers are prepared primarily to

• Support the auditors opinion on financial statements.

• Support the auditor's representation as to compliance with PSA.
• Assist the auditor in the planning, performance, review and supervision of the engagement.
Secondarily, working papers also assist the auditors in

• Planning future audit.

• Providing information useful in rendering other services (MAS or tax consultancy).
• Providing adequate defense in case of litigation.

Classification of working papers

In a continuing engagement, working papers are typically classified into permanent file or current
working paper file:

• Permanent file- contains information of continuing significance to the auditor in performing

recurring audits. This file would most likely include:
• Copies of the article of incorporation and by laws.
• Major contracts
• Engagement letter
• Organizational chart
• Analyses of long term account such as a plant assets, long term reliabilities and stock holders
• Internal control analyses

Current file- contains evidence gathered and conclusions reached relevant to the audit of a particular
year. This file would normally include:

• A copy of financial statements

• Audit program
• Working trial balance
• Lead schedules
• Detailed schedules
• Correspondence with other parties such as lawyer, customers, banks and management.

Ownership of working papers

Working papers are the property of the auditor and the client has no right to the working papers
prepared by the auditor.

Confidentially of working papers

Section 4 of the Philippines Code of Professional Ethics requires the CPA to respect the confidentially of
information obtained during the course of performing professional services.

• When disclosure is required by law or when the working papers are subpoenaed by a court.
• When there is a professional right to disclose information such as when the auditor uses his
working papers to defend himself when sued by the client of negligence.

Retention working papers

Working papers should be retained by the auditor for a period of time sufficient to meet the needs of his
practice and satisfy any pertinent legal requirement of record retention.
Guidelines for the preparation of working papers

The following techniques may be used by the auditor when preparing working papers.

 Heading
Each working papers must be properly identified with such information as the name of the
client, type od working papers, a description of its content, and the date of period covered bt
the examination.
 Indexing
Indexing refers to the use of lettering or numbering system (for example "A" for cash lead
 Cross Indexing/ Cross Referencing
Cross referencing is important to provide a trail useful to supervisors in reviewing the working
 Tick Marks
Working papers must include symbols that describe the audit procedures performed.


Accounting estimates are often made in conditions of uncertainly regarding the outcome of events that
have occurred or are likely to occur and involve the use of judgement. Examples include:

• Allowance for uncollectible accounts.

• Depreciation and Amortization.
• Accrued Revenue
• Deferred Taxes
• Loss Contingencies
• Percentage of completion income on construction contracts.
• Warranty Claims

Auditor's Responsibility

The auditor's responsibility is to obtain sufficient appropriate evidence as to whether

 Accounting estimate is properly accounted for and disclosed; and

 Accounting estimate is reasonable in the circumstances.


Refers to person or entity that may have dealing with one another in which one party has the ability to
exercise significant influence or control over the other party in making financial and operating decisions.
The auditor needs to be aware of them because:

 Generally accepted accounting principles in the Philippine require disclosure in the financial
statements of certain related party relationships and transactions.
 A related party transaction may be motivated by other than ordinary business consideration
such as profit sharing or event fraud.
 The existence of related parties or related party transaction may affect the financial statements
and the reliability of audit evidence.
Management's Responsibility

This responsibility requires management to implement adequate accounting and internal control
systems to ensure that transaction with related parties are appropriately identified in the accounting
record and disclosed in the financial statements.

Auditor's Responsibility

The following procedures may assist the auditor in identifying related parties:

 Review prior- year working papers for names of known related parties.
• Review the entity's procedures for identification of related parties.
• Inquire as to the affiliation of the directors and officers with other entities.
• Review shareholder records to determine the names of principal shareholders or, if appropriate,
obtain a listing of shareholders from share register.
• Inquire of other auditor's currently involved in the audit of predecessor auditors as to their
knowledge of additional related parties.
• Review the entity's income tax return and other information supplied to regulatory agencies.

The auditor may perform the following procedures to be able to identify related party transactions:

• Performing detailed test of transaction and balances.

• Reviewing minutes of meeting of shareholders and directors.
• Reviewing accounting records for large or unusual transactions or balances, paying particular
attention to transaction recognized at or near the end of the reporting period.
• Reviewing confirmation of loan receivable and payable and confirmations from banks to identify
the existence of guarantee and other related party transaction.
• Reviewing investments transaction like purchase or sale of an equity intest in a joint venture or
other entity.


The auditor's education and experience unable to auditor to be knowledgeable about business matters
in general. An expert is a person on firm possessing special skill, knowledge and experience in a
particular field other than accounting and auditing.

• Valuations of precious stone, works of arts, real state, and other specialized assets.
• Determination of amounts using specialized techniques like actuarial computations.
• Interpretation of technical requirements, regulation, or contract such as legal documents or
legal title to property.

PSA 620 identifies two kinds of experts, namely;

• Auditor's Expert
An expert, whose work in his/her field or specialization, is used by the auditor to assist the
auditors in obtaining sufficient appropriate audit evidence.
• Management's Expert.
Used by the entity to assist the entity in preparing the financial statements.

Determining the need of auditor's Expert

The auditor will be able to obtain sufficient appropriate evidence about an account balance or
transaction class event without the help of an expert. When the determining the need to used the work
of an expert, the auditor would consider:

• Whether management has used a management's expert in preparing the financial statements.
• The nature and significant of the matter, including its complexity.
• The risk of material misstatement in the matter.
• The expected nature of procedures to respond to identified risk, including the auditor's
knowledge of and experience with the work of experts in relation to such matters; and the
availability of alternative sources of audit evidence.

Evaluating the Auditor's Expert

After including that the help of the auditor's expert is needed to assist the auditor in obtaining sufficient
appropriate evidence, the auditor must;

1. Assess the competence and objectivity of the expert

The following factors must be considered when assessing the competence of the expert:

• Professional certification or licensing by, or membership in, an appropriate professional body;

• Experienced and reputation in the field in which the auditor is seeking audit evidence.
2. Understand the field of expertise of auditor's expert.

This understanding should enable the auditor to determine the nature, scopes and objectives of
the experts work; and evaluate the adequacy of that work for the auditor's purposes.

3. Establish the terms of the agreement with the expert.

The auditor and the expert should agree on matters such as the natures, scope and objectives of
the expert work; their duties and responsibilities; timing of completion; and the need for the
auditor's expert to observe confidentially requirements.

4. Evaluate the results of the work of the expert.

The auditor should assess the appropriateness of the experts work as audit evidence regarding
the financial statement assertion being considered.

Effect of the Reliance on Expert's Work on the Audit Report

The auditor has sole responsibility for the audit opinion expressed, and that responsibility is not redufed
by the auditors used of the work of an expert.


The external auditor should obtain a sufficient understanding of the internal audit activities to assist in
planning the audit and developing an effective audit approach. Considering the work of internal auditor
involves two important phases:

1. Making a preliminary assessment of internal auditing; and

2. Evaluating and testing the work of internal auditing.

Preliminary Assessment of internal auditing.

When planning the audit , the external auditor should make a preliminary assessment of the internal
audit functions when it appears that internal auditing is relevant to the external audit of the financial
statements in specific audit areas.

1. Competence
Consider the professional qualification and experienced of the internal auditors.
2. Objectivity.
Consider the organizational level to which the internal auditors report the result of their work.
3. Due professional care.
Consider proper planning, supervision and documentation of internal auditor's work.
4. Scope of function.
Consider the nature and extent of the internal auditors assignment.

Evaluating and testing the work of internal auditors.

This evaluation may include considering whether the work is performed by competent persons;
sufficient appropriate conclusion are reached; and exceptions are properly resolved.

This is an acceptable practice provided the external auditor supervises and reviews the work performed
by the internal auditors.

The auditors responsibility for audit opinion is not reduced by any use made of internal auditing.
Accordingly, the auditors report on financial statements should not include any reference to the work
performed by internal auditors.