Tests of control & Substantive testing

stuartander

Hi,

I am total confused i think.
Am i right in thinking tests of control are something to do with internal controls? (What tests would you do)
An substantive testing is???

Thanks

Steve Collings

Hi,

Tests of controls (also known as 'compliance tests') are tests an auditor will undertake on an entity's internal control environment, so yes you are spot on!! If the auditor concludes that the internal control environment is operating effectively, this can help them reduce the detailed substantive testing they do. Tests of control can be things like checking cheques over a certain amount are signed by a director or checking the purchasing cycle works as understood and there are no identified weaknesses.

Substantive testing (also known as 'tests of detail') is where the auditor will trace transactions from their underlying source documentation to their ultimate destination in the financial statements, illustrated as follows.

In a sales cycle audit using substantive procedures, the auditor will trace a sample of items from the source document to the sales figure in the financial statements. Assume in our scenario that the first document initiating a sale is a purchase order from the customer, so from the purchase order we will:

1. From the purchase order vouch this to the goods despatch note.
2. From the goods despatch note, trace the goods to the sales invoice.
3. Test the casts on the sales invoice (i.e. check the arithmetical accuracy).
4. Trace the sales invoice to the debtors (receivables) control account.
5. Trace the VAT element to the VAT control account.
6. Trace the sales value to the nominal ledger (the sales account).

It is always important when doing substantive testing that the auditor starts from the document that initiates the transaction.

You might find my article helps to make this concept clear.

Best wishes
Steve