Accounting Information Systems: The Processes and Controls, 2nd Edition

TESTS OF TRANSACTIONS AND TESTS OF BALANCES (STUDY OBJECTIVE 9)

The auditor's tests of the accuracy of monetary amounts of transactions and account balances are known as substantive testing. Substantive testing is very different from testing controls. Substantive tests verify whether information is correct, whereas control tests determine whether the information is managed under a system that promotes correctness. Some level of substantive testing is required regardless of the results of control testing. If weak internal controls exist or if important controls are not in place, extensive substantive testing will be required. On the other hand, if controls are found to be effective, the amount of substantive testing required is significantly lower, because there is less chance of error in the underlying records. Exhibit 7-9 presents a process map of the substantive testing phase of the audit.

In an IT environment, the evidence needed to determine the correctness of transactions and account balances is contained in electronic data files within the computer system, from where it may be pulled by specialized audit techniques. Some techniques used to test controls can also be used to test transactions and financial statement balances. For example, parallel simulations, the test data method, the embedded audit module, and the integrated test facility can be used for both control testing and substantive testing.

Recent trends such as advances in automated controls; new compliance requirements; ...