Question

ADA as a risk assessment procedure versus a substantive test Timothy Steele, a recent college graduate and new audit staff member, is having lunch with Michael Watts, an audit senior. Both are working on the audit engagement of a retailer that has operations in North America and Europe. Timothy has another question for Michael: “In my reading I have seen a number of examples of audit data analytics. However, I am having a difficult time distinguishing between ADA as a risk assessment procedure and ADA as a substantive test.” Can you explain the difference to me and illustrate with a practical example?”

Required

Answer Timothy's questions. Explain the difference between ADA as a risk assessment procedure and ADA as a substantive test. Illustrate your explanation with practical illustrations.

Answer 1

ADA refers to Audit Data Analytics. It is a science and art of discovering and analyzing pattern , identifying anomalies and extracting other useful information in data underlying or related to the subject matter of audit though an analysis , modelling and visualization for planning and performing the audit.

ADA as risk assessment procedure

Using ADA as a risk assessment procedure matching of information with the data already present to assess the risk involved so as to decide the limit of the substantive procedure like matching of payroll data with vendor data for matching residential address which shows higher risk of fraud .

For illustration : Government paying some unemployment benefits , the auditor wants to verify the risk of misstatements , the auditor verify matches the data with the its employees data to check the fraud happening.

ADA as substantive procedure

Using ADA as a Substantive procedure involves matching information in the accounting records with the information on the underlying documents like vouching of quantities mentioned in the of invoice with the quantities mentioned in the shipping bill.

For illustration : Validating revenue transactions and receivable recorded by an electric power cooperative.

Most of the client of electric power cooperative are households and general consumers of electric power and the auditor cannot take confirmation from them. so. the auditor plans to use ADA as substantive test of details to verify both revenue and receivables by matching billing to members with the subsequent cash receipts.Further , receivables can be verified with comparing it with cash receipts in subsequent months .