Question

What is the relationship between the results of tests of controls and substantive testing?

Answer 1

If an auditor assesses control risk as being less than high, the auditor must gather evidence from controls testing to support their assessment. If the evidence shows that control risk is less than high, the auditor can tolerate a higher level of detection risk. Higher detection risk means that the auditor can adjust the nature, timing, and extent of substantive testing such that less evidence is required from these tests.

 

Therefore, the evidence gathered from tests of controls can provide a reasonable level of assurance that there are no material misstatements in the financial statements. In this case, the auditor will perform only limited substantive testing (perhaps relying on analytical review). If the auditor is able to obtain only limited assurance from tests of controls, the auditor will need to perform more substantive testing. If the auditor is unable to gain any assurance from controls testing, the auditor will perform considerable substantive testing.

If the auditor is unable to gain any assurance from controls testing, the auditor will perform considerable substantive testing.