Can you tell your tests of controls from substantive tests?

Summary

In this educational video, Dr. Amanda White explains the critical distinction between tests of control and substantive tests in auditing. She clarifies that tests of control assess if internal control systems are operating as intended, while substantive tests verify the accuracy of financial data. Using bank reconciliation as an example, she illustrates how these tests are sequenced and executed, including the concept of dual-purpose tests that can evaluate both control and substance in computerized systems. The video is designed to help students and professionals excel in ordered exams by avoiding common mistakes.

Takeaways

• 📚 The common mistake among students is confusing tests of control with substantive tests.
• 👩‍🏫 Dr. Amanda White, with her expertise in behavioral auditing, explains the differences between tests of control and substantive tests.
• 🛡️ A test of control assesses whether the control system operates as designed to prevent or detect material misstatements.
• 📈 Substantive tests aim to verify the accuracy of accounting data and transactions recorded.
• 🔄 The sequence typically starts with testing internal controls before moving on to substantive testing.
• 📋 An example of a control test is checking the approval signature on a bank reconciliation.
• 🔍 A substantive test of a bank reconciliation involves reperforming the reconciliation to ensure accuracy.
• 💻 Dual purpose tests can assess both control and substantive aspects, often found in computerized systems.
• 💡 In a dual purpose test, recalculating an invoice total can verify both the control (correct price retrieval) and substantive (accuracy of total calculation).
• 🔗 The results of control tests influence the extent of substantive testing needed, as they help reassess detection risk.
• 🌐 Dr. White invites viewers to engage with her content on social media and subscribe to her channel for more auditing insights.

Q & A

What is the main difference between a test of control and a substantive test?

A test of control assesses whether the control system operates as designed, while a substantive test verifies the accuracy and validity of the accounting data and transactions.

What is the purpose of testing internal controls?

The purpose of testing internal controls is to evaluate if they are effectively preventing or detecting material misstatements in the financial statements.

How does the sequence of testing internal controls and substantive tests work?

Internal controls are tested first. Based on the results, the auditor re-evaluates detection risk and then designs the substantive testing plan.

What is the role of the Financial Controller in the context of bank reconciliations?

The Financial Controller is typically responsible for reviewing and approving the bank reconciliation to ensure its accuracy.

What is the significance of the signature on a bank reconciliation?

The signature on a bank reconciliation signifies that it has been reviewed and approved, indicating that the internal control process has been executed.

How does a dual purpose test differ from separate tests of control and substantive tests?

A dual purpose test serves both to evaluate the effectiveness of a control and to verify the accuracy of the underlying transactions in one process.

Why are dual purpose tests becoming more common in computerized accounting systems?

Dual purpose tests are becoming more common because many manual processes are now automated controls within computer systems, allowing for simultaneous control and substantive testing.

What is the importance of recalculating totals in a substantive test?

Recalculating totals in a substantive test ensures that the transactions recorded in the financial statements are accurate and that the calculations are performed correctly.

How does Dr. Amanda White suggest students prepare for ordered exams?

Dr. Amanda White suggests that students understand the difference between tests of control and substantive tests to prepare effectively for ordered exams.

What is the ASA standard that Dr. White mentions for assessing clients?

The ASA standard mentioned for assessing clients is ASA 3115, which helps generate the audit risk model.

What does Dr. White recommend for someone who is new to bank reconciliations or needs a refresher?

Dr. White recommends watching her other videos on bank reconciliations for those who are new or need a refresher on the process.