An invoice can support two different audit questions: whether an employee performed the required review and whether the recorded transaction is correct. The auditor identifies the objective before selecting the evidence and deciding what constitutes an exception.
- Tests of controls evaluate whether controls operated effectively in addressing the risks for which the auditor intends to use them.
- Substantive procedures seek material financial statement misstatements through tests of details, substantive analytical procedures, or an appropriate combination.
- Tests of details examine individual transactions, balances, or disclosures and their supporting attributes, including amounts, dates, contractual terms, and presentation.
Inspection of a review record addresses control performance when the auditor examines the reviewer's work and resolution of discrepancies. Inspection of the underlying contract addresses transaction recognition when the auditor evaluates whether the recorded amount belongs in the financial statements.
In a nonissuer financial statement audit, understanding relevant controls and determining their implementation does not automatically establish operating effectiveness across the intended reliance period.
- Control testing is required when planned substantive work depends on control effectiveness or substantive procedures alone cannot supply sufficient appropriate evidence.
- Substantive procedures remain necessary for each material transaction class, account balance, and disclosure, regardless of assessed risk.
Common mistakes
- Signature substituted for performance. A date beside P411's signature does not establish when the required vendor, price, quantity, and receipt comparisons occurred.
- Arithmetic substituted for review. Agreement with the $4,000 depreciation charge establishes the selected calculation's accuracy, without establishing management's review.
- Wrong completeness population. Selecting only recorded invoices cannot reveal every omitted obligation; source records must be capable of identifying missing items.
Bottom line
- The procedure's objective determines whether it tests a control or a financial statement assertion.
- Inquiry alone does not establish operating effectiveness; observation, inspection, and reperformance provide different supporting evidence.
- Recalculation tests mathematical accuracy, while reperformance independently executes a procedure or control.
- Conflicting inquiry responses require focused follow-up, corroboration, and documented evaluation of responsibilities and motivations.
Exam shortcut
Mark the requested conclusion first: control operation, recorded amount, omitted item, or recognition period. Then choose evidence capable of answering that question. For a control exception, compare required performance time with corroborated actual performance time. Treat paper dates as evidence to investigate. In a dual-purpose worksheet, keep two conclusion columns. A correct payment amount cannot fill the control column.
The full lesson (about 5,816 words, 39 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.D1
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