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Hi,i am very much confused about substantive procedures i neither found any example of how it works in the book nor on the site. Please help me out with a practical example highlighting how SP works and the difference between SP and TOC. Thank yOu
Consider receivables:
TOC would test to see that: there are controls to ensure that credit limits were properly established, invoices are raised for all despatches, invoices posted to accounts etc. The controls could include authorisation, matching, control account reconciliations. If the controls are well-designed and operate properly there should be little chance that the receivables balance contains material misstatements.
Substantive tests would look directly at the year end receivables balance. If that were, say $5m how can the relevant assertions be tested? For example, receivables circularisations ask customers directly to verify what they owe. Waiting for amounts to be paid after year end help with valuation.
The substantive tests would work even if there were no controls. However, the better the controls are, then the fewer substantive tests need to be performed.
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