ACCA F8 Substantive Testing: Types, Evidence, Examples & Steps

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      ACCA F8 Substantive Testing

      Last Update On 15th January 2025
      Duration: 4 Mins Read

      Substantive testing is an important aspect of auditing in ensuring the validity and completeness of financial statements. Students undertaking the ACCA F8 course are introduced to a number of auditing techniques that include substantive procedures in the evaluation of financial data. It is used to obtain evidence that will substantiate the correctness of the financial statements and assist auditors in forming an opinion on the going concern of an organisation. This article explores the key aspects of substantive testing in ACCA F8, including its types, how evidence is gathered, and the role of assertions.

      What is ACCA F8 Substantive Testing?

      Meanings of substantive testing: For the ACCA F8 course, it refers to the processes auditors undertake when gathering direct evidence regarding financial transactions and account balances of an organisation. These tests are performed in order to find material misstatements in the financial statements so that the accounts show a true and fair view of the company’s financial situation. The procedures will be directed toward item-by-item testing of transactions, balances, and disclosures to ensure their accuracy and adequacy concerning their presentation in conformity with accounting standards.

      What are the Types of Substantive Tests?

      The two main categories of substantive tests that auditors use to gather evidence include:

      1. Tests of Details: These are tests that cover the actual checking of the transactions or account balances in some detail to verify their validity. For example, auditors may look at supporting documents for sales transactions or inspect the invoices for agreements between such invoices and the recorded amount.
      2. Substantive Analytical Procedures: These involve comparing financial data to expectations developed from one or more of the following: historical trends, industry benchmarks, or other reasonable measures. For instance, auditors can compare this year’s gross margin with last year’s margin.

      Both types of substantive procedures are intended to provide adequate and appropriate audit evidence for the auditor’s opinion.

       

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      How Do Auditors Get Evidence in Substantive Testing?

      Auditors obtain evidence in the following ways:

      • Inspection: Auditors verify documents, records, or physical assets to make sure they exist and are accurate.
      • Observation: Auditors observe processes or procedures to ascertain whether transactions have been correctly recorded or whether controls are operating effectively.
      • Confirmation: Auditors obtain confirmations from third parties, for example, bank statements or customer balances, for the validation of information.
      • Recalculation: Auditors perform recalculations to check the accuracy of financial information, such as recalculating depreciation or verifying the accuracy of tax calculations.
      • Inquiry: Auditors ask management and employees about certain financial transactions for better understanding.

      These procedures help auditors gather sufficient appropriate audit evidence that is reliable enough to form an opinion on the financial statements.

      What is an Example of Substantive Testing in ACCA F8?

      An example in the context of ACCA F8, whereby an auditor may apply substantive testing, includes verification of revenue recognition policy adopted by a company. In such a case, the substantive testing audit would inspect a sample of sales transactions, check the relevant invoice, confirm delivery of the goods, and ensure that the revenue was identified in the correct accounting period. This test would provide evidence to give validity to revenue figures reported in the financial statements.

      How Does Substantive Testing Relate to Assertions?

      Assertions are representations made by management about the financial statements, while substantive testing is meant to substantiate these assertions. The main assertions include:

      • Existence: Ensures that assets, liabilities, and transactions exist.
      • Completeness: It ensures that all transactions and balances are reflected in the financial statements.
      • Accuracy: Ensures that the amounts are recorded correctly and in conformity with the relevant accounting standards.
      • Valuation: This ensures that the assets and liabilities are correctly valued.
      • Rights and Obligations: Verifies that the company has the rights to its assets and obligations for its liabilities.

      Auditors, in turn, follow substantive procedures to obtain evidence to support or refute these assertions that the financial statements are free from material misstatements.

      What Are the Tests/Procedures Involved in Substantive Testing?

      Tests or procedures that the auditor may use to obtain substantive evidence include:

      1. Vouching: The verification of the validity of transactions by tracing them to the supporting documentation.
      2. Tracing: Transactions that have been recorded in the accounting system are supported by appropriate documents.
      3. Reperformance: This is the act of recalculation of figures to ensure that the figures calculated by the client are accurate.
      4. Analytical Procedures: Comparing financial ratios and trends to check on the reasonableness of the financial data.
      5. Confirmation: Sending out requests to third parties for confirmation of balances or transactions.

      These procedures help auditors gather sufficient evidence to support their audit opinion.

       

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      What Evidence is Required in Substantive Testing?

      A substantive testing audit requires evidence that is sufficient and appropriate. Sufficient and appropriate means that the evidence should be:

      • Relevant: It needs to relate directly to the claim that is under test.
      • Reliable: The evidence must come from credible sources, such as independent third parties.
      • Adequate: The evidence should be enough in quantity to be the representative basis for the conclusions reached by the auditor.

      For instance, a confirmation letter from a bank may offer very reliable evidence of the existence of a balance in a bank, while a reconciliation prepared by management may be less reliable unless supported by other evidence.

      Conclusion

      Substantive testing is a very important part of the audit process, which assists auditors in verifying the accuracy of financial statements. Students in the ACCA course learn various substantive procedures that test the validity of management assertions and gather evidence to support their audit opinions. These tests will enable the auditor to ensure that the financial statements are free from material misstatements and present a true and fair view of an organisation’s financial position.

       

      FAQs on ACCA F8 Substantive Testing

      What are substantive procedures in ACCA?

      Substantive procedures under ACCA include those tests of the auditor, which are used in the accumulation of evidence and verifying assertions about the validity of financial statements. The procedures include substantive analytical procedures and tests of detail.

      What are the three types of substantive tests?

      The three types of substantive tests are:

      1. Tests of Details: Verifying individual transactions or balances.
      2. Substantive Analytical Procedures: Comparing financial data with expectations.
      3. Reperformance: recalculating figures to ensure that the answer is accurate.

      Is the ACCA F8 easy?

      The difficulty of ACCA F8 differs according to each person’s background and experience. However, it is said to be a quite difficult examination that needs thorough knowledge in the areas of auditing principles and procedures.

      What is the F8 of ACCA?

      ACCA F8 is the paper that deals with accounting and assurance, including the procedures of audit, risk assessment, and the role of auditors in providing assurance about financial statements.

      What are the 7 audit procedures?

      The 7 common audit procedures include:

      1. Inspection
      2. Observation
      3. Inquiry
      4. Confirmation
      5. Recalculation
      6. Reperformance
      7. Analytical Procedures

       

      Partham Barot is an ACCA-certified professional. showcasing his expertise in finance and accountancy. he’s revolutionising education by focusing on practical, real-world skills. Partham’s achievements underscore his commitment to elevating educational standards and empowering the next generation of professionals.
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