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Old Monday, February 19, 2018
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Default Substantive Procedures

Substantive Procedures

.17 Some procedures performed by the internal auditors may provide direct evidence about material misstatements in assertions about specific account balances or classes of transactions. For example, the internal auditors, as part of their work, may confirm certain accounts receivable and observe certain physical inventories. The results of these procedures can provide evidence the auditor may consider in restricting detection risk for the related assertions. Consequently, the auditor may be able to change the timing of the confirmation procedures, the number of accounts receivable to be confirmed, or the number of locations of physical inventories to be observed.

Extent of the Effect of the Internal Auditors' Work

.18 [The following paragraph is effective for audits of fiscal years beginning on or after December 15, 2010. See PCAOB Release No. 2010-004PDF. For audits of fiscal years beginning before December 15, 2010, click here]
Even though the internal auditors' work may affect the auditor's procedures, the auditor should perform procedures to obtain sufficient, appropriate evidential matter to support the auditor's report. Evidence obtained through the auditor's direct personal knowledge, including physical examination, observation, computation, and inspection, is generally more persuasive than information obtained indirectly. fn 5

.19 The responsibility to report on the financial statements rests solely with the auditor. Unlike the situation in which the auditor uses the work of other independent auditors, fn 6 this responsibility cannot be shared with the internal auditors. Because the auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about assessments of inherent and control risks, the materiality of misstatements, the sufficiency of tests performed, the evaluation of significant accounting estimates, and other matters affecting the auditor's report should always be those of the auditor.

.20 In making judgments about the extent of the effect of the internal auditors' work on the auditor's procedures, the auditor considers—

The materiality of financial statement amounts—that is, account balances or classes of transactions.
The risk (consisting of inherent risk and control risk) of material misstatement of the assertions related to these financial statement amounts.
The degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. fn 7
As the materiality of the financial statement amounts increases and either the risk of material misstatement or the degree of subjectivity increases, the need for the auditor to perform his or her own tests of the assertions increases. As these factors decrease, the need for the auditor to perform his or her own tests of the assertions decreases.

[Note deleted, effective for audits of fiscal years ending on or after November 15, 2007. See PCAOB Release 2007-005APDF. Click here to view the note.]
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