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Controls vs. Substantive Tests in Auditing

Tests of controls evaluate the effectiveness of client controls to prevent or detect material misstatements. Depending on the results, auditors may rely on the client's controls to reduce substantive testing. Substantive tests directly test for financial statement misstatements and include tests of transactions, analytical procedures, and tests of details of balances. Tests of transactions verify specific recorded transactions, analytical procedures assess reasonableness of account balances, and tests of details of balances focus on ending account balances. The results of tests of controls inform the nature and extent of substantive testing performed.

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Eugene Cestina
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354 views13 pages

Controls vs. Substantive Tests in Auditing

Tests of controls evaluate the effectiveness of client controls to prevent or detect material misstatements. Depending on the results, auditors may rely on the client's controls to reduce substantive testing. Substantive tests directly test for financial statement misstatements and include tests of transactions, analytical procedures, and tests of details of balances. Tests of transactions verify specific recorded transactions, analytical procedures assess reasonableness of account balances, and tests of details of balances focus on ending account balances. The results of tests of controls inform the nature and extent of substantive testing performed.

Uploaded by

Eugene Cestina
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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  • Introduction to Audit Testing
  • Test of Controls
  • Substantive Test
  • Summary and Relationship of Tests

SUBSTANTIVE TESTS AND

TESTS OF CONTROLS
TEST OF CONTROLS
• A test of controls is an audit procedure to test the
effectiveness of a control used by a client entity to
prevent or detect material misstatements.
Depending on the results of this test, auditors may
choose to rely upon a client's system of controls as
part of their auditing activities.
EXAMPLE
• Reperformance. Auditors may initiate a new transaction, to
see which controls are used by the client and the
effectiveness of those controls.
• Observation. Auditors may observe a business process in
action, and in particular the control elements of the
process.
• Inspection. Auditors may examine business documents for
approval signatures, stamps, or review check marks, which
indicate that controls have been performed.
SUBSTANTIVE TEST
•Are procedures designed to test
for misstatements (often called
monetary misstatements) that
directly affect the correctness of
financial statement balances.
THREE TYPES OF
SUBSTANTIVE TEST
•Substantive Tests of
Transactions
•Substantive Analytical
Procedures
•Tests of Details of Balances
SUBSTANTIVE TESTS OF
TRANSACTIONS
• Are used to determine whether all six
transaction-related audit objectives have
been satisfied for each class of transactions.
Two of those objectives for sales transactions
are recorded sales transactions exist
(occurrence objective) and existing sales
transactions are recorded (completeness
objective).
SUBSTANTIVE
ANALYTICAL
PROCEDURES
•It involves the comparisons of
recorded amounts to expectations
developed by the auditor.
•Auditing standards require that these
comparisons be done during planning
and completing the audit.
TESTS OF DETAILS OF
BALANCES
•Focus on the ending general
ledger balances for both balance
sheet and income statement
accounts. The primary emphasis in
most tests of details of balances is
on the balance sheet.
EXAMPLE
• Confirmation of customer
balances for accounts receivable
•Physical examination of inventory
•Examination of vendors’
statements for accounts payable
SUMMARY OF TYPES
OF TESTS
• Tests of controls help auditors evaluate whether controls over
transactions in the cycle are sufficiently effective to support the
reduced assessment of control risk, and thereby allow reduced
substantive testing. Tests of controls also form the basis for the auditor’s
report on internal control over financial reporting for larger public
companies. Substantive tests of transactions are used to verify
transactions recorded in the journals and posted in the general
ledger. Substantive analytical procedures emphasize the overall
reasonableness of transactions and the general ledger balances. Tests
of details of balances emphasize the ending balances in the general
ledger.
RELATIONSHIP
THANK YOU!

SUBSTANTIVE TESTS AND TESTS OF CONTROLS
TEST OF CONTROLS • A test of controls is an audit procedure to test the effectiveness of a control used by a client entity t
EXAMPLE • Reperformance. Auditors may initiate a new transaction, to see which controls are used by the client and the effe
SUBSTANTIVE TEST •Are procedures designed to test for misstatements (often called monetary misstatements) that directly af
THREE TYPES OF SUBSTANTIVE TEST •Substantive Tests of Transactions •Substantive Analytical Procedures •Tests of Details o
SUBSTANTIVE TESTS OF TRANSACTIONS •Are used to determine whether all six transaction-related audit objectives have been s
SUBSTANTIVE ANALYTICAL PROCEDURES •It involves the comparisons of recorded amounts to expectations developed by the audi
TESTS OF DETAILS OF BALANCES •Focus on the ending general ledger balances for both balance sheet and income statement ac
EXAMPLE • Confirmation of customer balances for accounts receivable •Physical examination of inventory •Examination of vendo

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