What is the relationship between audit risk and test of controls and substantive test?

Answer 1

Test of account balances to verify the correctness of the amounts. The three forms of substantive tests are: (1) tests of transactions (which are often conducted concurrently with compliance tests); (2) tests of balances; and (3) analytical review procedures.

Tests of transactions and balances gather evidence of the validity of the accounting treatment of transactions and balances. They are designed to identify errors and irregularities. Statistical sampling may be used in determining the accuracy of financial statement numbers.

Tests of transactions may be conducted continually throughout the audit year or at or close to the balance sheet date. When the CPA traces a sales invoice from the journal to the ledger for correctness, it is called a transaction test. When the CPA compares the book balance of cash to the book balance, it is a test of balances. This test is done near or at the year-end reporting date. Another substantive test is calculating interest expense on corporate debt and verifying the amount in the financial records. analyticalreviewprocedures involve examining the reasonableness of relationships in financial statement items and uncovering variations from trends. The procedures may be applied to overall financial information, financial data of segments, and individual elements. If relationships appear reasonable, evidence corroborating the account balance exists.

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M.Salman Pasha