In an audit of financial statements, substantive tests are audit procedures that __

 Options:

a) may be eliminated for an account balance under certain conditions b) are designed to discover significant subsequent events c) will increase proportionately when the auditor decreases the assessed level of control risk d) may be test of transactions, test of balance and analytical procedures

The Correct Answer Is:

d) may be test of transactions, test of balance and analytical procedures

Correct Answer Explanation: d) may be test of transactions, test of balance and analytical procedures

In an audit of financial statements, substantive tests are crucial procedures employed by auditors to obtain audit evidence regarding the accuracy and completeness of the financial information. The correct answer to the question is “d) may be test of transactions, test of balance, and analytical procedures.”

Substantive tests encompass a variety of audit procedures:

i. Test of Transactions:

These procedures focus on examining individual transactions to ensure they are valid, properly authorized, accurately recorded, and classified correctly. By testing transactions, auditors aim to verify the occurrence, completeness, accuracy, and authorization of recorded transactions in the financial statements.

ii. Test of Balances:

These tests concentrate on verifying the ending balances of accounts in the financial statements. Auditors perform substantive tests on account balances to confirm their existence, completeness, accuracy, and valuation.

For instance, they might perform detailed examinations of account reconciliations or conduct physical inventory counts to validate the existence of assets.

iii. Analytical Procedures:

These involve evaluating financial information through analysis of plausible relationships and trends. Auditors compare current financial data to historical figures, industry benchmarks, or expectations based on the entity’s operations. Analytical procedures help identify potential inconsistencies or unusual fluctuations that may require further investigation.

Now, let’s break down why the other options are not correct:

a) May be eliminated for an account balance under certain conditions:

Substantive tests are fundamental components of an audit that are essential for validating the accuracy and completeness of financial statements.

While under specific circumstances, such as a highly effective system of internal controls combined with low assessed risks, auditors might reduce the extent of substantive testing, elimination of these tests for an entire account balance is rare.

Auditors are required to obtain sufficient appropriate audit evidence, and substantive tests play a critical role in achieving this objective. Even when reliance on controls is high, some substantive procedures are usually performed to provide additional assurance.

b) Are designed to discover significant subsequent events:

Substantive tests focus primarily on transactions and balances existing at the balance sheet date, ensuring the accuracy and completeness of financial statements up to that specific date.

While auditors do assess the impact of subsequent events on financial statements if they provide additional evidence of conditions that existed at the balance sheet date, substantive tests are not primarily aimed at discovering subsequent events.

Auditors may consider subsequent events separately but within a different audit procedure set.

c) Will increase proportionately when the auditor decreases the assessed level of control risk:

Control risk and substantive testing have an inverse relationship. When the auditor assesses control risk as low, it means they have higher confidence in the entity’s internal controls. Consequently, they may rely more on those controls and perform fewer substantive tests.

Conversely, when control risk is assessed as high, auditors will perform more substantive tests to compensate for the lack of reliance on internal controls. Therefore, a decrease in control risk often results in a decrease, not an increase, in the extent of substantive testing.

In summary, while each of these options touches on aspects of an audit, none accurately describes the nature and purpose of substantive tests in their entirety.

Substantive tests encompass various procedures aimed at obtaining sufficient and appropriate evidence regarding the accuracy and completeness of financial information, including tests of transactions, balances, and analytical procedures, ensuring the reliability of financial statements for stakeholders and regulatory compliance.

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