Nature, timing, and extent
| Dimension | Higher risk means… |
|---|---|
| Nature | More reliable procedures — external confirmation and inspection over inquiry; more evidence from independent sources |
| Timing | Testing at or near year-end rather than at an interim date |
| Extent | Larger sample sizes, more items tested |
Two responses
- Overall responses — professional skepticism emphasis, assigning more experienced staff, more supervision, adding unpredictability to procedures, changing the overall strategy
- Responses at the assertion level — the specific further audit procedures: tests of controls and/or substantive procedures
Substantive procedures are never optional
IMPORTANT: Regardless of assessed risk, the auditor must perform substantive procedures for each material class of transactions, account balance, and disclosure. Controls reliance can reduce substantive testing, but never eliminate it.
Substantive procedures come in two forms
- Tests of details — examining individual transactions, balances, and disclosures
- Substantive analytical procedures — evaluating plausible relationships among data; efficient for large volumes of predictable transactions
Interim testing
If substantive procedures are performed at an interim date, the auditor must cover the remaining period — typically through substantive procedures for the roll-forward period, sometimes combined with tests of controls. The higher the risk, the less appropriate interim testing becomes.
EXAM TIP: If the auditor plans to rely on controls tested in a prior audit, evidence must be refreshed at least every third year, and controls addressing significant risks must be tested in the current period every time.