Which statement accurately describes the relationship between tests of controls and substantive procedures?

Which statement accurately describes the relationship between tests of controls and substantive procedures?

• A. Tests of controls assess effectiveness of controls; substantive procedures test amounts and disclosures directly
• B. Substantive procedures assess the effectiveness of controls; tests of controls verify presence of documents
• C. Tests of controls check only compliance; substantive procedures check only estimation errors
• D. Substantive procedures replace the need for tests of controls if controls exist

Answer: (A)

Tests of controls evaluate how well the internal control system is working, while substantive procedures directly test the amounts and disclosures in the financial statements. The purpose of tests of controls is to determine whether controls, as designed and operated, can be relied upon to prevent or detect material misstatements. Substantive procedures then gather evidence about the actual monetary amounts and reporting, independent of the controls, to support the financial statement assertions. When controls are effective, the auditor may reduce the extent of substantive testing; when controls are weak, more substantive procedures are required. The other statements misstate this relationship: substantive procedures do not assess the effectiveness of controls, tests of controls aren’t merely about verifying the presence of documents, and substantive procedures do not replace tests of controls even if controls exist.

Tests of controls evaluate how well the internal control system is working, while substantive procedures directly test the amounts and disclosures in the financial statements. The purpose of tests of controls is to determine whether controls, as designed and operated, can be relied upon to prevent or detect material misstatements. Substantive procedures then gather evidence about the actual monetary amounts and reporting, independent of the controls, to support the financial statement assertions. When controls are effective, the auditor may reduce the extent of substantive testing; when controls are weak, more substantive procedures are required. The other statements misstate this relationship: substantive procedures do not assess the effectiveness of controls, tests of controls aren’t merely about verifying the presence of documents, and substantive procedures do not replace tests of controls even if controls exist.