Chapter 24 Substantive Tests of Controls and Balances

CHAPTER 24
Substantive tests of
transactions and balances
Substantive Tests
 These are procedures that directly test accounts or

classes of transactions to detect material monetary
errors or misstatements in financial statement
assertions.
These includes:
1. Substantive test of transaction

2. Substantive tests of details on account balances, and
3. Analytical procedures
Auditor use test of details of balances to detect
material misstatements in account balances. These
tests provide direct evidence about an account
balance or a component of it.
Analytical procedures evaluate financial

information by studying plausible relationship among
financial data and/or nonfinancial data. The
procedure may involve simple comparison of data or
using very complex models.
I. Sales Transaction
 Substantive Tests of Transaction
Assertions
o Existence/Occurrence
o Completeness
o Rights and obligations
o Valuation/Measurement
o Presentation and disclosure
Substantive Tests of Details of Balances
Assertions
o Completeness
CONTINUATION…
Analytical Procedures
Misstatements Analytical Procedures
Overstatement or • Compare the sales amount and
understatement of sales gross profit percentage for
product lines by month and with
those of previous year.
Overstatement or • Compare sales returns and
understatement of sales returns allowances as a percentage of
and allowances gross sales with previous years’
percentages.
Overstatement or • Compare the accounts
understatement of allowance for receivable turnover with the rate
uncollectible accounts for previous years and with
industry data.
Errors in individual customers’ • Compare individual customer
accounts receivable balances with balances of the
previous year.
II. Cash Receipt Transactions
Substantive Tests of Transaction
Assertions
o Completeness
Assertions
o Completeness
CONTINUATION…
Analytical procedures are not used extensively in
auditing cash. Auditors compare actual cash balances to
budgeted cash balances to identify variations that merit
investigation. A reasonable relationship between the
budgeted cash balance and the recorded cash balance
provides evidence about the existence of cash.
Comparing monthly cash balances during the period with
those of the previous period also may identify variations
that should be investigated
III. Purchases Transactions
Assertions
o Completeness

Assertions
o Completeness
o Valuation
CONTINUATION…
Analytical procedures also provide evidence about
the completeness of purchases and accounts payable.
Auditors compare current-year individual accounts
payable and expense account balances with previous-
year balances, and they compare the ratios of the
purchases to accounts payable and the ratios of accounts
payable to current liabilities with previous-year ratios.
IV. Cash Payments Transactions

Assertions
o Completeness
V. Payroll Transactions
Assertions
o Completeness
Misstatements Analytical Procedures
Fictitious Employees may exist • Review the payroll register,
or significant overpayments may general ledger, and payroll
be made to employees earnings records for entries that
appear unusual, such as very
large paychecks or employees
not assigned to departments
CONTINUATION…
Payroll expense may be • Compare average pay per
overstated or understated employee for the current year to
average pay for prior year(taking
to consideration pay raises).
Payroll expense may be • Compare direct labor as a
overstated or understated percentage of cost of sales with
the previous year’s percentage.
Commission expense may be • Compare the ratio of
overstated or understated commissions expense to sales
with the previous year’s ratio.
Fictitious employees may exist or • Compare the number of hours
hours may be overstated employees worked with those
indicated on production reports
and budgets.
Payroll tax expense may be • Compare payroll tax expense as
overstated or understated a percentage of cost of salaries
and wages with the percentage for
previous years.
VI. Productions Transactions
Assertions
o Completeness/Rights and obligations
Auditors’ substantive tests of balances relating to production are
primarily analytical procedures and variance analyses. Appropriate analytical
procedures include comparing actual cost per unit produced to (a) budgeted
cost, (b) prior year’s cost, and (c) standard cost. Auditors can compare the
relationship between actual costs of material, labor, and overhead for
production in the current period to those for production for a previous period;
significant variations should raise questions about whether costs are
misclassified. Manufacturing reports, such as performance reports, variance
analyses, and other reports used for internal management, should be
reconciled to the amounts recorded in the accounting records for production.
VII. Inventory Warehousing Transactions
Assertions
o Completeness
Assertions
o Completeness
CONTINUATION…
1. Gross Profit – Compare gross profit to historical
results and to results of other entities in the industry.
2. Inventory of prior period or budgeted inventory –
Compare inventory to inventory for the prior period or to a
budgeted inventory.
3. Inventory Turnover – Compare inventory turnover for
the entity to historical inventory turnover for the entity and
to turnover of other entities in the industry.
4. Scan Inventory – Auditors frequently scan the
inventory for unusual or slow-moving items.
VIII. Property, Plant, and Equipment
Assertions
o Completeness
IX. Investments
Assertions
o Completeness
X. Notes Payable
Assertions
o Completeness
XI. Shareholder’s Equity

Assertions
o Completeness

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CHAPTER 24

 These are procedures that directly test accounts or

1. Substantive test of transaction

Analytical procedures evaluate financial

Substantive Tests of Details of Balances

Substantive Tests of Transaction

XI. Shareholder’s Equity

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