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Why are the substantive procedures to collect evidence for Profit and loss items not covered i the lectures
Short answer – because if you look at the syllabus, it doesn’t specify substantive procedures for profit and loss items.
For example:
4. The audit of specific items
For each of the ACCOUNT BALANCES stated in
this sub-capability:
Explain the audit objectives and the audit
procedures to obtain sufficient, appropriate
evidence in relation to:
a) Receivables:
b) Inventory:
etc ….Yes there are P&L items that make up the movements between opening and closing balances e.g.
Opening receivables + sales – cash receipts +/- adjustments (journals for bad debts, etc) = Closing receivables
Assuming the client has controls that are operating effectively (this should be all but the smallest of clients with – in the real world so small that they do not demand a statutory audit), the auditor will perform tests of controls on sales transactions (also purchases and payroll). If the audit concludes that controls are operating effectively to ensure that only valid transactions are recorded completely and accurately, then there is “indirect evidence” that the balances that result from transactions should exist and be accurate and complete at the year end.
However, ISAs don’t allow auditors to obtain evidence solely from ToCs for material account balances – so there must always be substantive procedures (reduced) – see diagram on page 49 of the notes.
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