Overview

Substantive tests are auditing processes used to find or prevent miscalculations in financial records. Substantive tests provide a record of financial activity alerting professionals to do further review. There are three types of substantive tests: analytical tests, tests of transaction details, and tests of balance details. These tests generally cover the following categories: transactions, account balances and disclosures. There is a difference between substantive procedures and substantive tests. Substantive procedures are designed to detect material misstatements based on assertions. Substantive tests examine details of transactions, account balances, and disclosures.

Directions

For this assignment you will complete the Substantive Tests Assignment Template found in the What to Submit section to compare the ways substantive tests are applied to different types of financial statements. Use the resource, Seven Examples of Substantive Procedures, found in the Supporting Materials section as a guide.

Specifically, you must address the following rubric criteria:

1. Explain the difference between substantive testing and internal control testing.
2. Identify a test for each substantive procedure.
   1. Long-term debt obligations
   2. Accounts payable
   3. Accounts receivable
   4. Cash
   5. Fixed assets
3. Recommend the key internal control for the substantive test.

Seven Examples of Substantive Procedures Here are seven examples of substantive procedures in auditing to help you understand the concept:

1. Counting Inventory Inventory protocol requires employees to confirm that the merchandise they have physically in stock matches their records. Counting inventory is common for professionals who work in retail. Management often divides the staff into teams and assigns them a section of materials to count. Next, the employees count how many items they have in the stockroom or on the sales floor, and they update their documents if their physical counts mismatch the recorded count.

Example: In a home goods store, one employee counts 50 lanterns in stock, but the recorded inventory is 52, leaving two items unaccounted for. The associate searches the sales floor for the missing items but determines there's a discrepancy. Thanks to the substantive procedure, the store has an accurate count of how many lanterns they can sell to customers.

2. Monitoring Purchases When professionals sell products to consumers, they often keep purchasing records to track how many goods they've sold and the remaining items in their inventory. The substantive procedure occurs when associates compare their number of purchases with the number of goods they have yet to sell.

Example: If a store opened with 100 cupcakes, and their records indicate they've sold 50 of them, then they count the remaining cupcakes to confirm they have 50 left. Monitoring purchases can enable employees to track their sales numbers accurately.

3. Distributing Invoices Another example of substantive procedures in auditing is sending an invoice to the customer after they request a good or service. Invoices include the amount of money the customer owes the supplier, including a detailed list of fees associated with the purchase. It confirms the activities the supplier completed per the buyer's request and verifies the date the transaction occurred and personal information about the customer. It also represents an agreement that the bill aligns with what the customer bought.

Example: A homeowner hires a finish carpenter to install crown molding in a primary bedroom. Once the process is underway, the carpenter sends an invoice to the homeowner with how much the installation costs, serving as a record of the client-tradesperson relationship. The homeowner remains informed that the crown molding they've chosen and the size of the room they want renovated costs a certain price, according to the invoice.

4. Verifying Payments Payment verification occurs when the supplier receives compensation for the services they rendered. They use the invoice to ensure the funds the customer sent match the amount on the invoice. If there is a discrepancy, the supplier can contact the customer and refer to the agreed figures the invoice stated.

Example: Using the finish carpenter scenario, suppose the invoice stated the crown molding installation cost $2,000 for one bedroom. The customer would send the payment, and the carpenter would then count the money to verify that they indeed received $2,000. Counting the funds received is an example of a substantive procedure in auditing.

5. Corroborating Customer Orders With the invoice, the client exercises substantiative protocols to confirm their required payments match what they initially ordered.

Example: In a business-to-business transaction, a technology company fulfills the request to send 12 desktop computers to a buyer. The invoice states the price of each computer and the total cost of the order. The buyer, an administration company, multiplies the individual computer costs by 12 to confirm that the total cost matches its calculations. It also physically counts the number of computers it received to ensure the technology company met its expectations correctly.

6. Collecting Debt Financial institutions perform auditing procedures to track the amount of money customers owe them.

Example: To fund your bachelor's degree program, you might need to borrow student loans each year until you graduate. Six months after earning your diploma, the corporation that provided the loans would send you a message with the amount you need to repay. In this case, the corporation calculated the costs you've collected throughout your education career, and they sent confirmation emails that the amount you received matches what you consented to borrow.

7. Confirming Account Balances Banks use substantiative procedures in auditing to verify the amount of money in customers' accounts. Professionals make sure the balance on the financial statement aligns with the actual funds that the account possesses.

Example: Suppose a bank statement indicates a client has $100,000. The auditors determine how the client has distributed the funds to different locations. They determined the client withdrew $10,000 of the total amount in cash and transferred another $60,000 to a savings account at another bank. The remaining $30,000 served as an investment in stock in a foreign country. The auditing protocol enables professionals to count the monetary resources customers have and verify their amounts according to the statements.

ACC 411 Module Five Substantive Tests Assignment Template

Directions:

1. Explain the difference between substantive testing and internal control testing.
2. Complete the test column in the table below by replacing the bracketed text.
3. Complete the key internal control column in the table below by replacing the bracketed text.

Difference Between Substantive Testing and Internal Control Testing

[Insert text here.]

Tests and Internal Controls

Financial Statement Area	Test: Substantive Procedures to be Tested	Key Internal Control
Long-Term Debt Obligations	[Identify a test for this substantive procedure.]	[Identify one key internal control.]
Accounts Payable	[Identify a test for this substantive procedure.]	[Identify one key internal control.]
Inventory	[Identify a test for this substantive procedure.]	[Identify one key internal control.]
Accounts Receivable	[Identify a test for this substantive procedure.]	[Identify one key internal control.]
Cash	[Identify a test for this substantive procedure.]	[Identify one key internal control.]
Fixed Assets	[Identify a test for this substantive procedure.]	[Identify one key internal control.]