Clarity around reviewing Board minutes as a substantive procedure

[crystal096]

Hi team,

I am getting confused with whether Reviewing Board minutes to approve XYZ is a substantive procedure.

In the BPP kit there are several multiple choice questions that have explicitly stated it is a test of control yet in the section B answers I have seen it be used as a substantive procedure. Please could you confirm? Here is an example:

217 X Co has a year ended 30 June 20X8. At the end of June 20X8 the company’s corporate headquarters building was revalued by a reputable firm of surveyors. Assuming a reliable valuation is obtained, which of the following procedures should be performed to obtain sufficient appropriate substantive evidence about the carrying amount of X Co’s corporate headquarters?

(1) Review the board minutes to ensure that the decision to revalue the headquarters was approved by the board.
(2) Agree the revalued amount in the valuation statement to the amount recorded in the non-current asset register.
(3) Recalculate the revaluation adjustment and agree that it is correctly recorded in the revaluation surplus.
(4) Confirm with the directors that all other assets in the same class as the headquarters have been revalued and agree this to the accounting policy disclosure.

2 and 3 only
1, 2 and 3
2, 3 and 4
1 and 4 only
Incorrect

The correct answer is: 2 and 3 only

This question demonstrates two important points. Firstly, candidates should ensure that they understand the difference between a test of control and substantive procedures. The test described in (1) is a test of control (ie it provides evidence as to whether the control of board approval has operated effectively) and therefore does not provide substantive evidence.

[Kim Smith]

Welcome to my forum!

For obtaining evidence – there are two types of audit procedure:
1. Test of controls – these provide indirect evidence about the accuracy/completeness etc of transactions (and hence balances) because they are just that – a test of control – was the control applied – yes or no?

2. Substantive procedures (which include substantive analytical procedures and tests of details) provide direct evidence about the accuracy/completeness etc of transactions and balances because they are concerned with monetary amounts.

In the instance you have given, (1) is a ToC because you are asking – was it approved? Answer can only be yes or no. There is no “substantiation” of a monetary amount.

Whether reviewing/inspecting board minutes is ToC of substantive procedures depends on the “what” you are inspecting. Suppose, for example, the directors revalue a property and the board minutes document that board approved that $x amount as the revalued amount – that would be substantive.

[crystal096]

thank you for the response and additional insight it is really useful.

Perhaps I am taking this too far and overcomplicating things but if I am doing a substantive procedure for trade receivables…

Reviewing Board minutes to assess if there are any discussions regarding a significant customer in dispute….

Would this therefore not be a substantive procedure as the answer to that is simply a yes or no? so its just a TOC

[Kim Smith]

First and foremost a ToC has to be testing a CONTOL (usually a control activity).

If a company’s system of internal control included a policy that writing debts over a certain off required board approval, a ToC would be to test whether for a sample of write-offs, were they approved? (Yes or no?)

A substantive procedure provides evidence of an assertion e.g. the completeness of a class of transactions or the valuation of an account balance. So if you reading the board minutes tells you that the board wants a claim to be filed to recover a bad debt, that is evidence that it more likely to be recoverable (i.e. accurately valued).

[crystal096]

you are amazing thank you Kim!

[Kim Smith]

And you are very welcome!

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