Para 2.1.23 — MSO (Audit)
Original Rule Text
2.1.23 Direct substantive tests are those tests of transactions and balances which seek to provide evidence as to the completeness, accuracy and validity of information in the accounting or financial statement. The testing involves examination of samples of transactions or account balances and is a form of inductive reasoning where the reasonableness of the aggregate results is inferred from the evidence of reliability of the individual details that have been tested. For example, if the auditor wants to test whether purchases have been made by following the established procedures and have been accounted for correctly in the records, he may test check some purchase transactions. If
the transactions tested conform to procedures and have been correctly accounted for, the auditor can infer that purchase procedures have been adhered to.
What This Means
Direct substantive tests examine actual transactions and account balances to verify that they are complete, accurate, and valid. The auditor selects a sample of transactions and checks them in detail. If the sample checks out, the auditor infers that the overall results are reasonable — this is inductive reasoning from specific samples to general conclusions. This is the most traditional form of audit testing in government audit.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Tests actual transactions and balances for completeness, accuracy, and validity
- 2Uses sample-based testing with inductive reasoning
- 3If samples are correct, overall reliability is inferred
- 4Provides direct evidence about financial statement amounts
- 5Most traditional and fundamental audit procedure
Practical Example
To verify whether purchases in the Transport Department followed procedures, the auditor selects 50 purchase orders from a population of 500. Each is checked for proper authorization, competitive quotations, receipt verification, and correct accounting. If all 50 conform to procedures, the auditor reasonably concludes that the department's purchase process is generally reliable.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
How big should the sample be for substantive testing?▼
What is the difference between substantive testing and compliance testing?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.