How do you perform substantive testing?
The following list is a sampling of the available tests:
- Issue a bank confirmation to test ending cash balances.
- Contact customers to confirm that accounts receivable balances are correct.
- Observe the period-end physical inventory count.
- Confirm the validity of inventory valuation calculations.
What is the difference between a test of control and a substantive test of transactions?
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. Substantive testing is the stage of an audit when the auditor gathers evidence as to the extent of misstatements in client’s accounting records or other information.
What is the objective of substantive testing?
The Goal of Substantive Testing The main goal of substantive testing is to provide reasonable assurance about the validity and correctness of financial reporting, or to identify material misstatements.
What are general substantive procedures?
What are Substantive Procedures? Substantive procedures are intended to create evidence that an auditor assembles to support the assertion that there are no material misstatements in regard to the completeness, validity, and accuracy of the financial records of an entity.
What are examples of substantive test?
Examples of substantive testing
- Verify that approved dividends exist by reviewing board minutes from the board of directors.
- Confirm that the balances in accounts payable are correct by contacting suppliers.
- Confirm that the balances in accounts receivable are correct by contacting customers.
What are substantive tests of details?
Tests of details, a substantive procedure, is the auditor’s primary response to risks of material misstatement.
What is a substantive test example?
Examples of substantive testing Verify that approved dividends exist by reviewing board minutes from the board of directors. Confirm that the balances in accounts payable are correct by contacting suppliers. Confirm that the balances in accounts receivable are correct by contacting customers.
What is a substantive test of transactions?
Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger. EX: An auditor may examine a large purchase of inventory by testing that the cost of the goods included on the invoice is properly recorded in the inventory and accounts payable accounts.
What is the substantive testing phase of the audit?
Exhibit 7-9 presents a process map of the substantive testing phase of the audit. In an IT environment, the evidence needed to determine the correctness of transactions and account balances is contained in electronic data files within the computer system, from where it may be pulled by specialized audit techniques.
What happens if substantive testing turns up errors in an audit?
If substantive testing turns up errors or misstatements, additional audit testing may be required. In addition, a summary of any errors found is included in a management letter that is shared with the client’s audit committee.
What are the three types of substantive tests?
The three types of substantive tests are analytical procedures, a test of details of transactions, and tests of details of balances. The acceptable level of detection risk may affect the timing of substantive tests. If detection risk is high, the test may be performed several months before the end of the year.