In: Accounting
This is a question for someone with an auditing background:
Chapt 3 Q 2
What are the two primary ways to conduct substantive tests? Explain how the tests are different
A substantive test is used for gathering the evidence that substantiates whether an account balance and/or an economic transaction was recorded as per the generally accepted accounting principles (GAAP). There are two primary ways to conduct substantive tests that are discussed below:
1) Substantive analytical review: When applying substantive analytical reviews for gathering the evidence, the auditor is required to develop an independent expectation of what the auditor thinks the account balance must be. Afterwards the desired expectation is compared to the recorded amount. Analytical procedures are utilized for understanding the relationships between accounts within client information for the identification of the possible material misstatements. Any major differences are required to be investigated and corroborated with evidence. To ensure that the procedure is effective must be conducted with high degree of rigor and exacting precision.
2) Test of details: When auditor uses substantive test of details is required to understand the economic transaction and/or account balance to ensure, based on reliable and valid evidence, that the amount was recorded as per the norms of GAAP.
In general, the test of details is more effective, while a substantive analytical review is more efficient. But there are numerous situations where the substantive analytical procedures can be equally effective. Hence, most auditors rely substantially on substantive analytical reviews