Document ID: chunk:federal_register_of_legislation:F2021C01250:reg:27:p17
Version: federal_register_of_legislation:F2021C01250
Segment Type: reg
Provision Reference: reg 27 (pt 17/23)
Character Range: 54832–57983

Effectiveness of Controls (Ref: Para. 16-17)

A41.         A material misstatement detected by the auditor's procedures is a strong indicator of the existence of a significant deficiency in internal control.

A42.         The concept of effectiveness of the operation of controls recognises that some deviations in the way controls are applied by the entity may occur.  Deviations from prescribed controls may be caused by such factors as changes in key personnel, significant seasonal fluctuations in volume of transactions and human error.  The detected rate of deviation, in particular in comparison with the expected rate, may indicate that the control cannot be relied on to reduce risk at the assertion level to that assessed by the auditor.

Substantive Procedures (Ref: Para. 6, 18)

A43.         Paragraph 18 requires the auditor to design and perform substantive procedures for each material class of transactions, account balance, and disclosure.  For significant classes of transactions, account balances and disclosures, substantive procedures may have already been performed because paragraph 6 requires the auditor to design and perform further audit procedures that are responsive to the assessed risks of material misstatement at the assertion level. Accordingly, substantive procedures are required to be designed and performed in accordance with paragraph 18:

           * When the further audit procedures for significant classes of transactions, account balances or disclosures, designed and performed in accordance with paragraph 6, did not include substantive procedures; or

           * For each class of transactions, account balance or disclosure that is not a significant class of transactions, account balance or disclosure, but that has been identified as material in accordance with ASA 315.[7]

           * This requirement reflects the facts that: (a) the auditor's assessment of risk is judgemental and so may not identify all risks of material misstatement; and (b) there are inherent limitations to controls, including management override.

A44.         Not all assertions within a material class of transactions, account balance or disclosure are required to be tested. Rather, in designing the substantive procedures to be performed, the auditor's consideration of the assertion(s) in which, if a misstatement were to occur, there is a reasonable possibility of the misstatement  being material, may assist in identifying the appropriate nature, timing and extent of the procedures to be performed.

Nature and Extent of Substantive Procedures

A45.         Depending on the circumstances, the auditor may determine that:

           * Performing only substantive analytical procedures will be sufficient to reduce audit risk to an acceptably low level.  For example, where the auditor's assessment of risk is supported by audit evidence from tests of controls.

           * Only tests of details are appropriate.

           * A combination of substantive analytical  procedures and tests of details are most responsive to the assessed risks.

A46.         Substantive analytical procedures are generally more