Substantive Procedures Research Articles

Data-Driven Audits: Audit Analytic Platforms and General Ledger Analytic Tools

SUMMARY The future of auditing is a data-driven audit, which extracts and analyzes digital data stored in client accounting systems. To help conduct data-driven audits, audit firms are developing audit analytic platforms (AAPs). This paper focuses on one key application tool of AAPs that analyzes the entire population of general ledger transactions. These general ledger analytics tools (GLATs) use assessment routines to assign a risk score to each transaction, helping guide the auditor’s planning, risk assessment, and selection of high-risk transactions for substantive procedures. GLATs help support audit quality and provide valuable new insights about client operations. We discuss the analytics routines used by GLATs, the forces driving their use, and some potential limitations of this technology. Data Availability: Data are available from the authors. JEL Classifications: M4.

Functioning of the internal control system in construction organizations based on the business processes regulation

Subject. This article deals with the issues of regulation of business processes of the internal control system in the organizations of the construction complex of Russia. Objectives. The article aims to formulate the main methodological approaches to the arrangement of the internal control system based on the regulation of business processes. Methods. For the study, we used statistical, case, computational and constructive research methods, as well as analytical and substantive procedures. Results. The article finds that business processes need regulation, which helps systematize actions that are interrelated, which also helps implement strategic, tactical and operational plans of an economic entity. The article identifies the main reasons that hinder the development of building companies, and presents the regulations of the business process Apartment Sale in the form of a clear sequence of actions, which made it possible to develop a methodology for internal control with the involvement of almost all structural divisions of an economic entity. Conclusions and Relevance. Regulation of business processes is an important tool for improving the effectiveness of the internal control system, it contributes to the establishment of clear procedures and rules, standardization, business transparency and the efficiency of the business entity. The results of the study can be used as methodological recommendations for the creation of an internal control system based on the regulation of business processes.

Ted's Teas: A Two‐Part Accounting and Audit “Crossover Case”*

AbstractThis fictional case is based on a real specialty tea company in Nova Scotia. Ted's Teas is a two‐part crossover case that illustrates the integration of financial accounting and audit learning outcomes applied to real‐world scenarios. In Part 1, students assume the role of an internal accountant and apply knowledge of the Chartered Professional Accountants (CPA) of Canada's CPA Way to identify how to treat leases, changes in policy, and estimates as part of accounting knowledge under both Accounting Standards for Private Enterprises and IFRS frameworks. In Part 2, students “cross over” and change roles, so they are now external auditors for Ted's Teas, tasked to provide an analysis of risk of material misstatement, recommend an audit approach, and develop substantive procedures. This two‐part case presents opportunities for students to demonstrate technical competence in multiple areas, either separately in two different courses or combined in one “capstone” or case course. The case and teaching notes, including the marking rubrics, were adapted from principles used to train and evaluate CPA Professional Education Program candidates, tailored to an appropriate level for undergraduate and graduate learners.

How Do Non-Professional Investors, Jurors, and AICPA Peer Reviewers Evaluate Data and Analytics-Based Substantive Auditing Procedures?

SUMMARY To minimize the associated risks (e.g., litigation, regulatory scrutiny) of implementing increasingly advanced data and analytics-based substantive auditing techniques, audit firms should ensure that key audit stakeholder groups sufficiently understand such procedures and believe that they maintain or elevate audit quality. However, little is known about how various stakeholder groups view data and analytics-based substantive procedures. Ballou, Grenier, and Reffett (2021) address this question by examining how three key audit stakeholder groups (investors, jurors, and AICPA peer reviewers) view two commonly employed data and analytics-based auditing techniques (population testing and predictive modeling). Our paper summarizes Ballou et al.'s (2021) study by summarizing its research questions, experimental method, and results. We then conclude with a discussion of the study's implications for audit practice and, in particular, the steps that audit firms should take to ensure stakeholder comfort.

A Procedural Form of Proceedings in Disciplinary Cases

Based on the theory of administrative process, the paper characterizes a general purpose of disciplinary proceedings, provides the views of researchers on the activities of subjects of disciplinary authority to impose disciplinary sanctions as administrative proceedings, administrative jurisdiction or substantive procedure. A lack of consensus on the legal nature of disciplinary proceedings led to studying its most important characteristics and procedural category, namely: the procedural form, analysis of its content and structure. The author determines the meaning of the procedural form in disciplinary proceedings and the legal consequences of its non-observance. Taking into account available approaches, the paper describes the main features of the procedural form of proceedings in disciplinary cases. It has been substantiated that an independent procedural form is inherent in the enforcement of disciplinary cases – an obligatory qualitative feature of the activity in question. On the basis of the instrumental approach that implies consistent use of legal means to achieve the goals of legal regulation, to highlight a procedural component of the legal regulation mechanism, namely, the procedural and legal mechanism, the author structures the system of administrative procedural means that form the content of the procedural form of proceedings in disciplinary cases and examines their specific features. The author provides the definition of the procedural form of proceedings in disciplinary cases that takes into account its features as a scientific structure, a legal category, a structural model of administrative procedural activity of subjects of disciplinary power. It is concluded that the procedural form externally unifies and internally differentiates the main methods of law enforcement, reflects the course of legal activity and its results in procedural acts. It is stated that at present the procedural form of disciplinary proceedings is far from ideal, suggestions are made on possible directions for improving the procedural regulation of the activity in question.

МЕТОДИКА АУДИТУ ОПЕРАЦІЙ ПУБЛІЧНИХ ЗАКУПІВЕЛЬ

Public procurement is made to meet the needs of local communities and individuals in goods and services and it is financed from budget funds received from taxpayers. Therefore, among the public's requests is to ensure accountability and transparency in the use of budget funds in public procurement procedures. The purpose of the article is to substantiate the theoretical and methodological provisions and recommendations for the audit of public procurement operations. It is determined that the audit attention should be focused on the legality and adequacy of the proposal for public procurement (in terms of compliance with applicable law, economic efficiency and soundness). Automation of public procurement processes allows the auditor to obtain reliable audit evidence of the existence of transactions that do not meet the requirements of applicable law. During the audit, the auditor must assess the internal control system of the entity in order to form the auditor's opinion on its reliability and ability to prevent violations in the field of public procurement. But additional he/she must obtain sufficient and acceptable audit evidence for each fact and operation in the field of public procurement. At the planning stage an auditor must assess the risks of fraud in this area at the level of the entity, as well as determine whether the procedures for forming, placing and evaluating tenders meet the requirements of applicable law. In this case, the auditor should actively use the findings of previous audits on the entity and similar entities. Then an auditor may assess the risks of fraud or other violations as high and plan more in-depth audit procedures to test the internal control system and perform substantive procedures. It is expedient for the auditor to use methodical methods of re-execution (for example, in relation to the evaluation of received tender proposals), as well as to inspect primary documents issued for the performance of contracts in the field of public procurement (for example, accounting for inventory, non-current assets of public procurement). As a result, the auditor should form an opinion on the extent to which the public procurement operation meets the requirements of applicable law, including cost-effectiveness and efficiency.

Book review: The criminal justice system of the Netherlands: Organization, substantive criminal law, criminal procedure and sanctions

Book review: The criminal justice system of the Netherlands: Organization, substantive criminal law, criminal procedure and sanctions

Examination of form not substance: Rethinking the patent examination process in Nigeria

In an age where knowledge assets play significant roles in the economic development of nations, the patent system has become one of the essential drivers of technological and economic advancement. Thus, the essence of examining inventions is to ensure good quality of patents granted by a patent office and to ensure that such patent applications satisfy the novelty, inventive step, and industrial application criteria. It is standard practice in most countries that patent applications by patentees go through examination processes before they are granted patents. Local patent rules usually guide such examination processes. The Nigerian patent system is not an exception to such practice. However, it suffices to submit only necessary documents for inspection by officials of the Nigerian Patent Registry before a patent is granted. This process of registering patents in Nigeria, which is the depository process of examination, is not thorough compared to the substantive method of examination. The substantive procedure is lacking in the Nigerian patent system. The need for a substantive process of examination in Nigeria is what this article discusses. The article recommends a mix of both the depository and the substantive process of examination in Nigeria, as practised in some countries to issue quality patents that would aid technological and economic growth in the country. The article also concludes that much more needs to be done by the government and policymakers in Nigeria in terms of funds, human resources, and other things to ensure the institution and sustenance of a substantive method of examination of patent applications.

Examination of Form Not Substance: Rethinking the Patent Examination Process in Nigeria

In an age where knowledge assets play significant roles in the economic development of nations, the patent system has become one of the essential drivers of technological and economic advancement. Thus, the essence of examining inventions is to ensure good quality of patents granted by a patent office and to ensure that such patent applications satisfy the novelty, inventive step, and industrial application criteria. It is standard practice in most countries that patent applications by patentees go through examination processes before they are granted patents. Local patent rules usually guide such examination processes. The Nigerian patent system is not an exception to such practice. However, it suffices to submit only necessary documents for inspection by officials of the Nigerian Patent Registry before a patent is granted. This process of registering patents in Nigeria, which is the depository process of examination, is not thorough compared to the substantive method of examination. The substantive procedure is lacking in the Nigerian patent system. The need for a substantive process of examination in Nigeria is what this article discusses. The article recommends a mix of both the depository and the substantive process of examination in Nigeria, as practised in some countries to issue quality patents that would aid technological and economic growth in the country. The article also concludes that much more needs to be done by the government and policymakers in Nigeria in terms of funds, human resources, and other things to ensure the institution and sustenance of a substantive method of examination of patent applications.

Criminal Forfeiture under Kenya's Proceeds of Crime and Anti-Money Laundering Act: Nature and Challenges

Criminal forfeiture is an asset confiscation mechanism used to seize benefits gained from an offence that one is convicted of. In Kenya, the Proceeds of Crime and Anti-Money Laundering Act provides the facilitating legislation. The present state of the regime's underutilisation prompts an examination of the substantive law and procedure provided in this statute. The analysis indicates that the provisions are technical in nature and the process is systematic. This ensures that a procedurally and substantively fair process is undertaken, in keeping with constitutional provisions. Nonetheless, identified challenges, including the complex nature of the provisions, translate to unclear interpretation and consequently ineffective implementation. This state of affairs is reversible through increased understanding of the criminal forfeiture provisions and their operation. This can potentially lead to an upsurge in its use and facilitate depriving offenders of criminal gains, removing the incentive for crime and reducing proceeds available to fund criminal activities.

Justice in the East of Ukraine During the Ongoing Armed Conflict

This article reviews the consequences of the invasion by military elements of the Russian Federation and its adjuncts, including pro-Russian separatist armed groups, 1 into Ukraine’s eastern regions or oblasts following Russia’s annexation of the Crimea. The review focuses on the adverse impact and ongoing trespass on Ukraine’s (i) criminal and, to a lesser extent, civil and administrative justice systems; (ii) police, prosecutorial and court institutions; (iii) access to justice by the Ukrainian citizens residing in the conflict zones of the Donetsk and Luhansk oblasts, and (iv) the long-term implications of restoring Ukraine’s justice framework to the conflict areas once the invading forces are routed. The authors summarize the efforts of the invasive forces to undermine the rule of law by establishing their own presumptive rogue constructs for processing matters ordinarily adjudicated by sovereign courts. These rogue constructs staffed by persons of unquestioning political loyalty to the Russian Federation and operating pursuant to substantive law and procedure based on Russian legal models. Keywords: justice in Ukraine’s eastern oblasts

The Conditions for Reform: a Typology of “Backlash” and Lessons for Reform in International Investment Law and Arbitration

Abstract Understanding the “backlash” it is facing is a necessary condition for a successful reform of international investment law and arbitration. The article develops a typology of backlash in international investment law and arbitration, identifying three main tensions in the field: contractualism vs. unilateralism; economic rationality vs. political rationality; flat world view vs. diverse world view. The article claims that the reform discussion, including at the UNCITRAL level, should be informed by this backlash typology. Two main lessons may be learned, one at the methodological level and one at the substantive level: first, the reform discussion needs to be informed by the study of systems of domestic investment law and policy; second, the reform discussion needs to move beyond its Investor-State Dispute Settlement (ISDS) confines and also include reform of the substantive law and administrative procedures of States and of international treaties.

The Joint Effects of Rich Data Visualization and Audit Procedure Categorization on Auditor Judgment

We predict that the audit-effectiveness benefits of richer visualization depend on how auditors categorize the procedures used to generate visualized evidence. We experimentally test our prediction using analytical procedures, which can be categorized either as risk assessment or substantive procedures under certain conditions. As predicted, audit-senior participants more frequently identify more richly visualized outliers as high risk, but only when these visuals arise from risk assessment procedures rather than substantive procedures. Richer visuals also increase the comprehensiveness of auditors’ prescribed follow-up tests, again only when risk assessment procedures generate these visuals. Post-experimental responses corroborate our theory: Auditors view evidence as more persuasive and sufficient when categorized as substantive procedures rather than as risk assessment procedures, in which case they view evidence as more preliminary. We conclude that whether and the degree to which richer data visuals improve audit effectiveness depends on how audit procedures generating these visuals are categorized.

PROPOSED ANALYTICAL PROCEDURE FOR THE CUSTOMIZATION AND IMPLEMENTATION OF COBIT 5, AN AUDITING TOOL: AN ACTION DESIGN RESEARCH APPROACH

Customization is part of an audit planning exercise that addresses the issue of implementation of a broad audit framework for the achievement of the most desired audit outcomes for the audit client. Leading frameworks such as Control OBjectives for Information and related Technology (COBIT) that have successfully been used as an audit framework have changed focus from audit to complex governance and management framework, leaving audit professionals with the challenge to figure out how to configure it into an auditing tool. The framers of COBIT 5 recommend to Information Technology (IT) auditors to apply professional judgment, experience, and IT skills for the customization of the framework for their desired audit goals. This, however, has been controversial in theory and cumbersome in practice and no solution has yet been found for the problem. In this research, we use an Action Design Research approach to design a model for performing objective customization of COBIT 5 for better outcomes as the solution. We found that the Viable Systems Model’s Indices from the cybernetics science paradigm and the Process Assessment Model were relevant to achieve this goal. The resulting solution designed provides a more efficient, teachable, and simpler technique in the selection of substantive procedures for desired audit outcomes. The model can be very cost effective, save audit time, and reduce audit failure exposure.

The Audit Risk Model, the Signal Detection Theory, and the Information Manipulation Theory

The Audit Risk Model. The Statement of Auditing Standard (SAS) 99, 107, and International Standards on Auditing (ISA) 240, 315, and 330 require auditors to assess fraud risk factors and materiality level (risk of material misstatement) in a client's financial statements (Bhattacharjee, Maletta, & Moreno, 2016). It further requires auditors to gather sufficient appropriate audit evidences in order to provide reasonable assurance whether the client's financial statements are free of material misstatements (Bhattacharjee, Maletta, & Moreno, 2016). The auditors have to assess the effectiveness of a client’s internal control over the financial reporting, thereby plan the nature, timing, and the extent of their audit procedures to assess the fraud risk in a client's financial statements (Burton, Wilks, & Zimbelman, 2013). The SAS 107 provides a model for audit risk, in which, audit risk (AR) = inherent risk (IR) X control risk (CR) X detection risk (DR). The inherent risk is the susceptibility for an account or assertion to be materially misstated, whereas the control risk is the risk that an entity's internal controls fail to detect financial reporting misstatement. The detection risk is the risk that substantive and analytical audit procedures fail to detect misstatements in the financial reporting. However, this model does not address the influence of sociological, organizational, and ethical factors on the management fraud and does not account for type I and type II audit errors risk, which is the risk to reject fairly presented financial reporting (false negative), and the risk to accept fraudulent audit report (false positive) respectively.

The importance of control environment in an organization for an independent auditor to determine nature,timing, and extent of substantive tests: An application in Turkey

This paper explains the effect of control environment as a one of the components of an internal control in performing substantive procedures by auditors. Control environment constitutes the tone of an organization and represents the understanding of control from the point of all of the employees in an organization. So to determine the nature, timing and extent of substantive test which the auditor will perform to detect material misstatements at the assertion level, auditors should examine the control environment and have a judgement on the structure of control environment. Because of the holistic effect of the control environment, it is one of the most effective determinants for auditors. Auditors are asked about some factors related with control environment in Turkey and the frequency of the data analyzed. As a result, the factors of control environment are examined and the importance of the control environment in auditors’ decisions is emphasized.

Models for Investment Treaties in the Asian Region: An Underview

Many similarities and occasional differences are evident in New Zealand (as explained in Part 2) and Australia (Part 3) concerning their laws screening foreign direct investment (FDI) and current approaches towards investment treaties, including the now politically sensitive issue of investor-state dispute settlement (ISDS). These closely integrated countries may collectively be considered a ‘middle power’ able to influence the future trajectory of treaty negotiation and drafting in the wider Asian region, as part of its growing influence on international investment law more generally. To further tease out such potential, this paper therefore compares key areas of three existing key treaties already signed (the bilateral CER Protocol, their treaty with ASEAN, and the Trans-Pacific Partnership agreement: Part 4), as well as apparent positions set forth by Australia and New Zealand in a leaked investment chapter for the Regional Comprehensive Economic Partnership (RCEP or ‘ASEAN 6’ agreement: Part 5). Given the concerns about US-style treaty drafting displayed recently by Indonesia and India, major economies still negotiating RCEP with New Zealand and Australia (as well as bilateral agreements with the latter), we also consider the scope to promote more pro-state provisions regarding both substantive commitments and procedures such as ISDS, which characterise contemporary preferences of the European Union (Part 6). We conclude that this transition is likely not only given the evolving preferences of counterparties and local politics in New Zealand and (especially) Australia, but also because of various policy arguments for dialing back treaty commitments to foreign investors – albeit without eschewing them altogether.

A case study on fraudulent financial reporting: evidence from Malaysia

Purpose This paper aims to examine cases of fraudulent financial reporting (FFR) which were subject to published enforcement actions by the Securities Commission Malaysia (SC) from 1998 to 2012 for reasons of alleged financial misreporting. It investigates the main attempts used (how) and sensible motives (why) for these fraudulent reporting. Design/methodology/approach This study undertakes a close examination of the financial reports manipulated – annual accounts, interim reports and financial reports in listing proposals, initial public offering prospectuses and corporate restructuring proposals. Due to the limited number of FFR published, a close examination of these cases is the best way to reach a more comprehensive and detailed understanding of “how” FFR takes place, rather than performing large sample statistical analyses. This study also collects data which provide evidence for the possible motivations in resorting to the FFR. Findings The most common attempt used by the sample companies was to overstate their reported revenue by recognising fictitious sales from bogus customers. Sample companies who attempted this initial manipulation often followed with consequential manipulations and in some cases also embarked on masking manipulations. Sensible motives for the sample companies to manipulate their financial statements include capital raising exercises, closeness to defaulting on debt repayments and sustaining equity overvaluations. Research limitations/implications The primary limitation of this study is its lack of breadth due to the limited number of reported cases available. Moreover, taking the sample companies used from enforcement action releases published by the SC presupposes that the SC has diligently and correctly identified all the FFR cases – whereas there is a possibility that some companies involved in FFR may not yet have been detected or publicly revealed. Notwithstanding these limitations, our findings provide a comprehensive insight, which is sufficient in depth, into the operational aspects of FFR in Malaysia. Practical implications One practical lesson from the findings on “how” within the chain of manipulations is that auditors ought to review the effectiveness of their analytical and substantive procedures, as a number of the FFR cases remained undetected by the audit process. A second is that accounting standards setters may wish to reconsider the amount of discretion given to managers in financial reporting. On the one hand, some managers have used this discretion to provide useful information to the market; however, others have opportunistically used it for personal gain. Social implications From the societal perspective, it is time for managers, as agents of capital providers, to self-review their responsibilities and stewardship in financial reporting. There needs to be a paradigm shift in their attitudes towards the perceived incentives of, and opportunities for, FFR. Managers’ wrongdoings in these accounting scandals have had significant adverse consequences for society – including minority shareholders, investor confidence, future accountants and managers in the making. Originality/value This study provides direct and practical evidence on the “how” and “why” of FFR in the context of a developing country – Malaysia. Such evidence is limited in the existing literature and relevant to practitioners.

Problems of Professional Judgment Application in Evaluating the Company’s Going Concern

Background/Objectives: The main purpose of this article is to develop ways of improving the audit technology of audited entity’s ability to continue as a going concern to overcome the drawbacks of available procedures. Methods: Such scientific methods as observation, abstraction, analogy, deduction, abduction, induction, analysis, synthesis, formalization and modeling, as well as specific methods: retrospective analysis, comparative analysis and data grouping were used. A distinctive feature of the author’s technique is risk-based modeling of in-house audit standards with respect to evaluating the entity’s ability to continue as a going concern, based on the identification of labile areas of audit opinion and neutralizing them through the establishment of professional judgment borders. Findings/Improvements: The article has identified the main areas of uncertainty of preparation of accounting (financial) statements in a liquidation (bankruptcy) situation, as well as the problem of identifying these areas by the auditors in the course of the risk assessment and substantive procedures determined by the existing International Standards on Auditing (ISA 570).In the context of quality problem solution, the main risks in inadequate identification and assessment of importance of separate features of the audited entity’s ability to continue as a going concern have been determined. The main directions of in-house testing standardization of going concern assumption of an audited entity have been proposed and substantiated. Application: Implementation of these proposals will allow the independent auditors (audit organizations) and internal auditors to ensure the principles of objectivity, adequate diligence and audit rationality.

Searching for the Benchmark in the Administration of Islamic Criminal Law: Malaysia Experience

Administration of Islamic criminal justice system covers at least three main areas namely substantive law, court system and procedures on legal enforcement as well as punishment that may be imposed based on sharia. In a federal system of government practised in Malaysia, that conferred the power on the administration and enforcement of Islamic Criminal law to the state, agencies involved is made up of mostly officers from the state agencies, among others Enforcement Officer in the Department of Religious Affairs, Sharia Prosecutors, Sharia Counsel and Sharia Court Judge at the State Sharia Judicial Department. At the same time, state agencies are assisted by federal agencies such as Royal Malaysian Police, Sharia Judiciary Department Malaysia and the Prisons Department Malaysia. The competence and efficiency of Sharia administration of justice especially in criminal matters therefore is not the responsibility of the state alone but depends on the cooperation between the state and federal agencies. The administration of Islamic Criminal justice is subject to observation of the rights protected under the Federal Constitution. Besides observing the rights conferred in the Federal Constitution, the implementation of Islamic criminal law has to meet maqasid sharia which includes the preservation and protection of one religion, life, intellect, family honour and property. The question that can be asked is, what minimum criteria must be present to enable the administration of sharia criminal law to meet maqasid and fundamental rights protection, and therefore not devastating to the Muslim and society? This paper attempts to look at the appropriate benchmarks or minimum criteria that Sharia officers must possessed, and supports that the government need to provide for effective administration of Islamic criminal law. This paper will not discuss the question of fiqh but focused on the administration of Islamic criminal law. In addition, this paper also briefly looks at the issues of human rights and international law that would be involved in the administration of Islamic criminal law in Malaysia.