Wiley Practitioner's Guide to GAAS 2020. Joanne M. Flood

for misstatements that exist at the period end by performing substantive procedures or substantive procedures combined with tests of controls to cover the remaining period

      (AU-C 330.A61)

      If the auditor detects misstatements at an interim date, the auditor should consider modifying the planned nature, timing, or extent of the substantive procedures covering the remaining period. (AU-C 330.24)

      Extent of Substantive Procedures

      The greater the risk of material misstatement, the greater the extent of substantive procedures. In designing tests of details, the auditor normally thinks of the extent of testing in terms of the sample size, which is affected by the planned level of detection risk, tolerable misstatement, expected misstatement, and the nature of the population. However, the auditor also should consider other matters, such as selecting large or unusual items from a population rather than sampling items from the population.

      Evaluating the Sufficiency and Appropriateness of the Audit Evidence Obtained

      The auditor must form a conclusion as to whether sufficient appropriate audit evidence has been obtained to reduce to an appropriately low level the risk of material misstatements in the financial statements. (AU-C 330.27 and .28) The auditor’s judgment as to what constitutes sufficient appropriate audit evidence is influenced by factors such as the following:

       Significance of the potential misstatement in the relevant assertion and the likelihood of its having a material effect, individually or aggregated with other potential misstatements, on the financial statements

       Effectiveness of management’s responses and controls to address the risks

       Experience gained during previous audits with respect to similar potential misstatements

       Results of audit procedures performed, including whether such audit procedures identified specific instances of fraud or error

       Source and reliability of available information

       Persuasiveness of the audit evidence

       Understanding of the entity and its environment, including its internal control

      (AU-C 330.A75)

      If the auditor concludes that he or she has not obtained sufficient evidence, the auditor:

       Attempts to obtain such evidence.

       Expresses a qualified opinion or disclaims an opinion if unable to obtain that evidence.

      (AU-C 330.29)

      Documentation

      The auditor should document the following:

       The overall responses to address the assessed risks of misstatement at the financial statement level

       The nature, timing, and extent of further audit procedures

       The linkage of those procedures with the assessed risks at the relevant assertion level

       The results of the audit procedures

       The conclusions reached with regard to the use in the current audit of audit evidence about the operating effectiveness of controls that was obtained in a prior audit

       Basis for not using external confirmations

       Agreement of financial statements with underlying accounting records

      (AU-C 330.30–.33)

      Testing at Interim Dates

      Convenience-Timed Tests

      Some audit tests can be applied at any convenient selected date before the balance sheet date and completed as part of year-end procedures. Examples are:

       Tests of details of the additions to, and reduction of, accounts such as property, investments, debt, and equity

       Tests of details of transactions affecting income and expense accounts

       Tests of accounts that are not generally audited by testing the details of items composing the balance sheet, such as warranty reserves and certain deferred charges

       Analytical procedures applied to income or expense accounts

      The common denominator in these tests is that the nature and extent of procedures applied are not necessarily influenced by doing a portion of the testing before the balance sheet date. For example, the auditor may decide to vouch all property additions and retirements over a specified dollar amount. The nature and extent of the test are not influenced by whether the testing is done all at year-end or one portion is done at an interim date and the remainder at year-end.

      Misstatements Detected at Interim Dates

      If the auditor confirms accounts receivable as of October 31 and discovers an error in the receivables balance, how should that misstatement be handled, given that the opinion is on the balance sheet as of December 31, not October 31?

      As a practical matter, the auditor should evaluate the results of interim testing to assess the possibility of misstatement at the balance sheet date. This evaluation is influenced by:

       The potential implications of the nature and cause of the misstatements detected at the interim date

       The possible relationship to other phases of the audit; for example, do the misstatements detected indicate a need to reconsider the assessment of control risk?

       Corrections that the entity subsequently records

       The results of auditing procedures that cover the remaining period

      This assessment may cause the auditor to reperform principal substantive tests at year-end or to otherwise expand the scope of substantive tests at year-end. (AU-C 330.A64)

      NOTE: Even if the misstatement detected at an interim date is corrected prior to year-end, there may be implications for evaluation of misstatements at year-end. Unless the auditor has applied procedures sufficient to provide reasonable assurance that similar misstatements have not occurred, the auditor may need to project a misstatement from interim to year-end.

Considering Control Risk When Testing at an Interim Date

      When performing principal substantive tests at an interim date, the primary control focus is on asset safeguarding and controls that address the completeness assertion. If the design of these controls is not effective, then the substantive tests related to existence and completeness assertions should be applied at year-end.

      Keep in mind that this consideration is tied to specific assertions, not to the overall account. For example, confirmation of receivables does not address the completeness assertion, which means that receivables could be confirmed at an interim date even if controls to address completeness were not effectively designed. However, the auditor would still need to consider the nature, timing, and extent of further audit procedures related to the completeness assertion.

      Length of Remaining Period

      How long can the remaining period be? Section 330 offers only the general observation that the potential for increased audit risk tends to become greater as the remaining period becomes longer.

      In practice, many auditors believe the remaining period should not exceed three months (i.e., for a December 31 audit, testing certain balances as of September 30). Another rule