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In the question Matthew Manufacturing, it is said that the Controls are weak therfore a Substantive Approach is to b used.
Is this because weak control means that there is obviously some errors in the Financial Statement?
When do we use Compliance Testing?
Is it when the controls are assessed strong so that we can confirm this?When using Compliance testing do we not do Substantive at all and vice versa?
Oh dear! This is very basic F8 stuff
“Compliance testing” no longer exists. It’s now referred to as “tests of control”
If the auditors initial assessment of the controls in place at the client suggests that there are no controls (or weak controls or even very strong controls but those controls are not auditable for whatever reason) then there’s no point in carrying out any tests of control
The auditors report their opinion on the truth and fairness of the view shown by the financial statements – primarily the numbers. So even though there nay be very good controls and the auditor is able to audit them and maybe there are no errors, not even for a single cent, the auditor MUST carry out sufficient substantive testing to be able to assert that the NUMBERS in the financial statements show a true and fair view
The auditor is not reporting on the controls but IS reporting on the view of the statements
OK?
So if the controls are assessed as strong, we do Test of Controls and then all do sufficient Substantive Testing to ensure the financial statement aren’t materially mistated?
Correct. If the controls appear to be strong and then we do tests of control and our tests show that the controls do appear to be working efficiently and effectively, we can then justifiably reduce the scope of our substantive work by increasing our assessment of materiality.
this has the effect of reducing the extent of our substantive work whilst still doing enough for us the be assured that the financial statements are probably free of material misstatement
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