About Me
CPA
1 Regulation (REG)
1.1 Ethics, Professional Responsibilities, and Federal Tax Procedures
1.1 1 Professional ethics and responsibilities
1.1 2 Federal tax procedures and practices
1.1 3 Circular 230
1.2 Business Law
1.2 1 Legal rights, duties, and liabilities of entities
1.2 2 Contracts and sales
1.2 3 Property and bailments
1.2 4 Agency and employment
1.2 5 Business organizations
1.2 6 Bankruptcy
1.2 7 Secured transactions
1.3 Federal Taxation of Property Transactions
1.3 1 Basis determination and adjustments
1.3 2 Gains and losses from property transactions
1.3 3 Like-kind exchanges
1.3 4 Depreciation, amortization, and depletion
1.3 5 Installment sales
1.3 6 Capital gains and losses
1.3 7 Nontaxable exchanges
1.4 Federal Taxation of Individuals
1.4 1 Gross income inclusions and exclusions
1.4 2 Adjustments to income
1.4 3 Itemized deductions and standard deduction
1.4 4 Personal and dependency exemptions
1.4 5 Tax credits
1.4 6 Taxation of individuals with multiple jobs
1.4 7 Taxation of nonresident aliens
1.4 8 Alternative minimum tax
1.5 Federal Taxation of Entities
1.5 1 Taxation of C corporations
1.5 2 Taxation of S corporations
1.5 3 Taxation of partnerships
1.5 4 Taxation of trusts and estates
1.5 5 Taxation of international transactions
2 Financial Accounting and Reporting (FAR)
2.1 Conceptual Framework, Standard-Setting, and Financial Reporting
2.1 1 Financial reporting framework
2.1 2 Financial statement elements
2.1 3 Financial statement presentation
2.1 4 Accounting standards and standard-setting
2.2 Select Financial Statement Accounts
2.2 1 Revenue recognition
2.2 2 Inventory
2.2 3 Property, plant, and equipment
2.2 4 Intangible assets
2.2 5 Liabilities
2.2 6 Equity
2.2 7 Compensation and benefits
2.3 Specific Transactions, Events, and Disclosures
2.3 1 Leases
2.3 2 Income taxes
2.3 3 Pensions and other post-retirement benefits
2.3 4 Derivatives and hedging
2.3 5 Business combinations and consolidations
2.3 6 Foreign currency transactions and translations
2.3 7 Interim financial reporting
2.4 Governmental Accounting and Not-for-Profit Accounting
2.4 1 Governmental accounting principles
2.4 2 Governmental financial statements
2.4 3 Not-for-profit accounting principles
2.4 4 Not-for-profit financial statements
3 Auditing and Attestation (AUD)
3.1 Engagement Planning and Risk Assessment
3.1 1 Engagement acceptance and continuance
3.1 2 Understanding the entity and its environment
3.1 3 Risk assessment procedures
3.1 4 Internal control
3.2 Performing Audit Procedures and Evaluating Evidence
3.2 1 Audit evidence
3.2 2 Audit procedures
3.2 3 Analytical procedures
3.2 4 Substantive tests of transactions
3.2 5 Tests of details of balances
3.3 Reporting on Financial Statements
3.3 1 Audit report content
3.3 2 Types of audit reports
3.3 3 Other information in documents containing audited financial statements
3.4 Other Attestation and Assurance Engagements
3.4 1 Types of attestation engagements
3.4 2 Standards for attestation engagements
3.4 3 Reporting on attestation engagements
4 Business Environment and Concepts (BEC)
4.1 Corporate Governance
4.1 1 Internal controls and risk assessment
4.1 2 Code of conduct and ethics
4.1 3 Corporate governance frameworks
4.2 Economic Concepts
4.2 1 Microeconomics
4.2 2 Macroeconomics
4.2 3 Financial risk management
4.3 Financial Management
4.3 1 Capital budgeting
4.3 2 Cost measurement and allocation
4.3 3 Working capital management
4.3 4 Financial statement analysis
4.4 Information Technology
4.4 1 IT controls and security
4.4 2 Data analytics
4.4 3 Enterprise resource planning (ERP) systems
4.5 Operations Management
4.5 1 Strategic planning
4.5 2 Project management
4.5 3 Quality management
4.5 4 Supply chain management
3 2 4 Substantive Tests of Transactions Explained

2 4 Substantive Tests of Transactions Explained

Key Concepts

Substantive Tests of Transactions

Substantive tests of transactions are audit procedures designed to detect material misstatements directly in the financial statements. These tests focus on the details of individual transactions and are performed to gather sufficient appropriate audit evidence.

Audit Evidence

Audit evidence is the information used by the auditor to draw conclusions on the financial statements. It includes both documentary evidence (e.g., invoices, contracts) and corroborative evidence (e.g., confirmations from third parties).

Example: An auditor may review sales invoices and shipping documents to verify that revenue transactions are recorded accurately and completely.

Audit Procedures

Audit procedures are the specific actions taken by the auditor to gather evidence and evaluate the assertions made in the financial statements. These procedures can include tests of details, analytical procedures, and inquiries.

Example: The auditor may perform a test of details by selecting a sample of sales transactions and tracing them to the general ledger to ensure they are recorded correctly.

Sampling

Sampling involves selecting a subset of items from a population to test. The auditor uses statistical or non-statistical sampling techniques to determine the sample size and selection method.

Example: An auditor may use statistical sampling to select a random sample of purchase orders to test for compliance with the company's procurement policies.

Assertions

Assertions are the implicit or explicit representations made by management about the financial statements. These include assertions about existence, completeness, accuracy, valuation, and presentation.

Example: Management asserts that all sales transactions have been recorded in the correct period. The auditor tests this assertion by performing substantive tests of transactions.

Materiality

Materiality is the concept that determines the significance of an item in the financial statements. Items that could influence the decisions of users are considered material and require more attention during the audit.

Example: If a company's revenue is $10 million, an error of $100,000 in revenue would be considered material and would require correction and disclosure in the financial statements.

Examples and Analogies

Consider substantive tests of transactions as "quality control checks" in a manufacturing process. Just as quality control checks ensure that each product meets standards, substantive tests ensure that each transaction is recorded accurately.

Audit evidence is like "pieces of a puzzle," where each piece (evidence) helps the auditor form a complete picture of the financial statements. Sampling is akin to "spot-checking" in a warehouse to ensure the quality of the entire inventory.

Assertions are like "promises" made by management about the financial statements. The auditor's role is to verify these promises through substantive tests. Materiality is like "critical thresholds" in a safety system, where exceeding these thresholds requires immediate attention.

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