Question

1. Discuss the purposes of (1) substantive tests of transactions, (2) tests of controls, and (3) tests of details of balances. Give an example of each.

2. Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.

Answer 1

Question 1 :

Substantive tests are performed to find out errors or misstatements in financial statements and supporting documents.

It is needed as evdence to support the assertions made on finacial reords of the company.

The main purpose of this tests are determine whether all the six transaction related audit objectives have been satisfied for

each of classes.

Examples :

Contacting suppliers to confirm the payable balances are correct

Contact customers to confirm that accounts receivable balances are correct.

Tests of controls are performed by auditors testing processes and procedures carried out by client .

The main purpose of this test is to determine the effectiveness of both design and implementation of internal controls

Example :

Suppose if monthly payroll summary had to be authorised by finance manager, tests of control involves checking whether

client had control on it.

Tests of details are used to determine reasonableness of the balances ,disclosures and underlying transactions associated with client's financial statements.

The test of details of balances is meant to prove that the tests of control and the substantive tests of transactions are reasonable.

Example:

These tests include confirmation of accounts receivable, and examining documents supporting the balance in these accounts