Test of Details: Substantive Audit Procedure

test of control vs substantive test

The extent used in practice means the number of items or sample sizes to which a particular test or procedure is applied. Substantive transaction tests emphasize verifying transactions recorded in the journals and then posted in the general ledger. Analytical procedures range from simple comparisons to complex models involving many relationships and elements of data. These seven assertions of financial data may be correct or not. Making management inquiries about the collectibility of customers’ accounts as evidence that trade debtors are accurate in their valuation. Paragraph 71 of Auditing Standard No. 12 for factors that the auditor should evaluate in determining which risks are significant risks. Of Auditing Standard No. 8, Audit Risk, for a definition of control risk.

Yes, you still need to perform your risk assessment work as a basis for planning the engagement. The third control you are reviewing is the reconciliation of the bank account by a person not involved in the receipting process. So, you review the year-end bank reconciliation and confirm that the person that reconciled the bank statement was not involved in cash collections. Re-performance is the most reliable type of test of controls and provides us better assurance comparing to other types. This is due to we gather direct evidence on how the control works when we use re-performance. Auditors may initiate a new transaction, to see which controls are used by the client and the effectiveness of those controls.

What is the difference between test of details and substantive testing procedures in an audit?

Timing –In some circumstances, substantive procedures may be performed at an interim date. This type of testing allows auditors to better understand the nature of a business as a whole. If they find that the company’s internal controls are strong, then they may reduce their substantive testing.

Furthermore, the test of details can include tracing, which is the opposite of vouching. During the process, auditors trace source documents to check whether they exist in the accounting records. With this type of substantive test of details, the assertions that auditors test are different as compared to those tested with vouching. Company’s Financial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period . These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.

Accounts Involving Related Party Transactions

Consider waiting until period-end to audit unreliable systems. If your interim work yields significant problems, you may not feel comfortable with roll-forward procedures. In other words, you may have to re-perform your interim work at period end. Prepaid assets, by contrast, usually has a low risk of material misstatement. So, in this instance, the auditor could use substantive analytics. Will it take less time to test the control than to perform a substantive procedure? Sometimes you may not know the answer to this question until you perform the test of controls.

  • If the initial test does not prove effectiveness, then you have to expand your sample or just punt—in other words, use a fully substantive approach.
  • If the auditor selects certain controls intended to address the assessed fraud risks for testing in accordance with paragraphs 16–17 of this standard, the auditor should perform tests of those controls.
  • The auditors may find it helpful to consider the relevant business process as a basis for determining relevant accounts, assertions, and procedures.
  • Relationships involving transactions subject to management discretion are sometimes less predictable.
  • If substantive procedures takes less time, then perform a test of details or use substantive analytics.
  • Despite the potential in the industry, MVT’s stock price has fallen 12 percent since its initial public offering five years ago, with the largest annual decline occurring during the current fiscal year.

Here’s what tests of controls involve and how they’re used. For significant risks, the auditor should perform substantive procedures, including tests of details, that are specifically responsive to the assessed risks. A summary of nature, timing and extent as they relate tests of details. Learning to match your procedures with risks is one of the most important things you’ll do as an auditor. Using canned audit programs or the same-as-last-year approach can lead to significant problems.


See if the controls continue to address a risk of material misstatement. And as you perform your annual walkthroughs, inquire about changes, observe the controls, and inspect documents. You want to know that https://online-accounting.net/ everything is working as it was in 2020, when the initial test was performed. And, yes, you do need to perform those walkthroughs annually, if that is how you corroborate your understanding of controls.

test of control vs substantive test

If the auditor selects certain controls intended to address the assessed fraud risks for testing in accordance with paragraphs 16–17 of this standard, the auditor should perform tests of those controls. Also a test of controls is necessary if substantive procedures don’t properly address a risk of material misstatement. For example, consider the controls related to reallocation test of control vs substantive test of investments in a 401. The participant goes online and moves funds from one account to another. Other than the participant, there are no humans involved in the process. When processes are fully automated, substantive procedures may not provide sufficient audit evidence. Thankfully, a type 2 service organization control report is usually available in audits of 401s.

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First let’s look at required tests and then optional ones. The first control you are testing is the issuance of receipts by an authorized person and your sample size might be sixty.

For example, if management is inclined to manipulate earnings near year-end, then interim tests may not be appropriate. Trace shipping documents to sale transactions in general ledger. Scan supporting documents such as sale invoices, shipping documents, and sale orders for numerical sequence. Vouch the selected sale transactions to sale invoices, shipping documents, and sale orders.

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