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I find Test of control & Substantive procedure subtle to understand because I feel that I am making some conceptual mistake in how to differentiate between two especially when I am practising them. Please correct me where I’m wrong.
1. When Test of controls are being written, we have to write firstly the procedures (Inspect, Observe, Enquire, Recalculate), and secondly the reason what control auditor is testing and we don’t use assertion here because we’re testing controls not account balances on the FS. (Is this correct?)
2. Whereas, substantive procedures are used to test the assertions (classes of transactions, account balances & disclosures) and when they are being written down I have to write starting
by with the procedure (AEIOU) first with the reason why they are being used for with stating the relevant assertion (cut-off, existence, completeness etc ) the auditor is verifying (Is that correct?)3. Can you please also confirm that we use assertion only in case when we are writing substantive procedures, whereas Test of controls are used to check the effectiveness of controls and not account balances, therefore we do not need to write down the assertion in test of controls?
1. See page 73 of the notes – REPERFORM (control – is not necessarily a recalculation) and ENQUIRE cannot be used on its own. Yes we are testing OPERATING EFFECTIVENESS of controls – not a financial statement assertion.
2. Yes
3. Yes BUT if controls are operating effectively that does provide evidence concerning the completeness, accuracy and validity of transactions including cut-off – and therefore of the existence of account balances. However, because this is only INDIRECT evidence (having tested only the controls and not the $ amounts) it is always necessary to perform SOME substantive procedures on all material classes of transactions and account balances.
See also here https://opentuition.com/acca/aa/ – down the page in the “Key AA Articles” section you will find:
“Audit tests: the difference between tests of control and substantive tests”Also there is an article you may find helpful “ACCA AA Exam technique: you have a VESTED interest in good answers” – the link to this is temporarily broken but I have reported it and I would expect it to be available again very soon.
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Thanks 🙂 Your response means a lot.
Could you help me on this,
I’m struggling with control & test of control questions where after identifying deficiency we have to write its control and test of control. BUT I can’t identify the appropriate control so does test of control.
Can you suggest how to appropriate identify the controls for a deficiency. Does the control activities help identify the control or test of control?
I have already looked into the notes but all that does not make sense to me. please help!
Good Q – if you look at the types of controls on page 68 it’s quite difficult to think how you would test for example “the control environment” where you would take a sample of 30 items (say) and ask Y/N has this been applied. So what you are looking to test are mostly the control activities – there is a good checklist for these on page 69. So the controls you should be recommending include, for example, segregation of duties – but you have to be specific about which duties are to be done by different people. In smaller businesses where it’s simply not practical to segregate duties you need to compensate for this with more supervisory controls – i.e. independent checking – so if the cashier has to do the bank reconciliation it should be reviewed by a suitable official. Remember a control activity should be EVIDENCED e.g. by a signature/initials or by x-ref of one form of documentation to another to confirm matching – the test of control is then to review that evidence – is there a signature? Y/N or is there a referenced GRN on the purchase invoice Y/N.
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