Differences and Methods in Substantive and Control Testing in Auditing

Compliance and risk management require organizations to ensure that internal controls are both effective and aligned with regulatory standards. Control testing evaluates the strength of these internal controls, while substantive testing focuses on verifying that actual operations and records meet compliance requirements. Together, these testing methods help auditors assess both the functionality of controls and the accuracy of compliance data, ultimately safeguarding the organization from risks and ensuring adherence to regulations. Understanding their differences and applications is crucial for accurate audits and effective risk management.

What is Control Testing in Auditing?

Control testing is a crucial component of the GRC and compliance audit process. It focuses on evaluating the effectiveness of an organization’s internal controls, which are designed to prevent operational errors, fraud, and non-compliance with regulations. The primary goal of control testing is to assess whether these controls are functioning as intended, providing auditors with confidence in their reliability.

Control testing typically involves reviewing the organization’s internal control processes and procedures to confirm they are being properly followed. Auditors may examine control documentation, observe control activities in action, and test controls over time. By verifying that internal controls are effective, auditors can determine how much trust they can place in the organization’s systems and processes to maintain compliance with regulatory standards.

Read: 10 Best Internal Control Management Software

Now that we understand control testing, let’s look into the different methods used to assess the strength of internal controls.

Methods in Control Testing

Control testing in compliance audits employs several methods to evaluate whether an organization’s internal controls are functioning as intended. These methods help auditors verify the effectiveness of controls in preventing errors, fraud, and non-compliance with regulations.

1. Concurrent Test

A concurrent test evaluates the effectiveness of internal controls in real-time as processes occur. Auditors assess controls while the activity is ongoing, providing immediate feedback on the control’s performance. This method assures that controls are functioning properly when needed most.

2. Walkthroughs

A walkthrough is a thorough review of a process from start to finish. The auditor traces each step, examining every control involved, to verify that internal controls are effectively implemented. This method provides a clear understanding of how controls are being applied in practice.

To simplify your walkthrough process and guarantee comprehensive audits, VComply can help automate and track each step, making your audits more accurate.

3. Control Observation

Control observation involves auditors observing activities within the company to make sure internal controls are being properly executed. For example, auditors may watch employees carry out specific tasks, such as reconciling records, to confirm that controls are adhered to during operations.

Read: Audit Procedures: Understanding Methods and Internal Controls

4. Reperformance

Reperformance is when auditors independently execute a process or procedure that the company uses to confirm it’s working correctly. For instance, auditors might reperform a process, such as recalculating a procedure, to verify the accuracy and reliability of the controls in place.

5. Inquiry

This method involves auditors asking questions and engaging with employees to confirm that internal controls are being followed. By inquiring about specific processes and actions, auditors can verify that employees understand and adhere to the established controls.

6. Inspection of Documents

Auditors review documents, records, and reports to verify that internal controls are being implemented correctly. This may include checking for required approvals, signatures, and supporting documentation, making certain that every step of the process aligns with compliance requirements.

Read: What are the limitations of internal controls and how to overcome them?

With these methods in mind, let’s walk through the steps involved in performing control testing audits.

Steps in Control Testing Audit

The steps involved in control testing are crucial for auditors to assess the effectiveness of an organization’s internal controls and their ability to maintain compliance with regulations. Here’s an overview of the process:

1. Identify the Controls to Be Tested

The first step is to identify the key internal controls that have the most significant impact on compliance and operational processes. These controls could include those related to risk management, regulatory compliance, or internal procedures designed to prevent errors or non-compliance.

2. Document Control Procedures

Documenting the procedures around each control is essential to certify that all stakeholders understand the role each control plays in maintaining regulatory compliance and operational integrity.

3. Test the Effectiveness of Controls

Auditors perform various tests, such as observation and inquiry, to determine if the controls are functioning as intended. They may also review control documentation to confirm that procedures are being followed correctly and consistently.

Also read: Understanding the Role of an Audit Committee

4. Evaluate Results and Provide Recommendations

Once testing is complete, auditors evaluate the effectiveness of the controls. If any weaknesses are identified, auditors provide recommendations for strengthening controls to improve compliance and operational efficiency.

5. Report Findings

The results of control testing are compiled into a comprehensive report that outlines the strengths and weaknesses of the internal controls. This report forms the foundation for future compliance efforts and improvements within the organization.

By following these steps, auditors can provide valuable insights into the effectiveness of internal controls, so that organizations meet their regulatory obligations and maintain strong compliance frameworks.

Once the steps are clear, let’s examine some examples of control testing in practice to better understand it.

Examples of Control Testing

Control testing can take many forms, depending on the type of business and the control environment. Here are a few examples:

1. Segregation of Duties

One example of control testing is verifying the segregation of duties, where no single employee should be responsible for both approving and executing key processes. Auditors test to make certain this principle is followed, minimizing risks related to errors or fraudulent activities.

2. Access Control Testing: 

In organizations with restricted access to sensitive audit software or data, auditors test access controls to guarantee that only authorized personnel can modify information. This makes sure that controls are in place to prevent unauthorized access and maintain data integrity.

3. Policy Adherence Testing

Auditors may assess whether employees are following established policies and procedures, such as safety protocols or regulatory compliance requirements. This makes sure that internal controls are consistently applied to maintain compliance with organizational and regulatory standards.

Moving on, let’s explore the role of substantive testing and how it differs from control testing in auditing.

Read: Best Practices for Remote Audits

What is Substantive Testing in Auditing?

Substantive testing focuses on verifying the accuracy and completeness of an organization’s compliance processes and controls. Unlike control testing, which evaluates the effectiveness of internal controls, substantive testing involves gathering direct evidence about how well compliance requirements and operational procedures are being followed. The goal of substantive testing is to identify any significant gaps or non-compliance issues and verify that regulatory standards and internal policies are being adhered to.

Substantive testing typically involves reviewing individual compliance activities, such as evaluating policy implementation, assessing adherence to safety protocols, and verifying the effectiveness of risk management processes. This form of testing assures that the organization’s practices are accurate and compliant with the necessary regulations and standards.

Read: What Are the Top Challenges in the Field of Audit?

After understanding substantive testing, let’s explore the methods used to perform it effectively.

Methods in Substantive Testing

Substantive testing methods are essential to verify that internal controls and compliance procedures are being followed correctly. The following methods help auditors evaluate the effectiveness of compliance practices and identify any discrepancies or areas of concern.

1. Analytical Procedures

These procedures involve comparing current operational data or compliance metrics with industry benchmarks or historical figures to identify significant variances. When discrepancies are found, they may indicate areas that need further investigation or improvements in compliance practices.

2. Sampling

In many cases, auditors will use sampling methods to evaluate compliance. By selecting a sample of records or activities, auditors can assess whether the organization is adhering to established policies and procedures, even if reviewing every single instance isn’t feasible.

3. Walkthroughs

A walkthrough is a detailed review of a process from start to finish. Auditors observe or simulate a specific process to see how policies and procedures are implemented in real-time. This helps verify that compliance controls are not only documented but also followed correctly in daily operations.

Streamline your compliance with VComply’s free, ready-to-use policy and procedure templates.

Next, we’ll go over the steps involved in substantive testing to guarantee accurate and thorough compliance audits.

Steps Involved in Substantive Testing

Substantive testing in compliance audits follows a structured process that confirms internal controls are functioning as intended and that compliance requirements are met. The steps performed in substantive testing are as follows.

1. Planning and Preparation

Auditors review previous compliance records and company operations to determine the scope of testing and focus on high-risk areas.

2. Performing Tests

Auditors conduct tests and gather sufficient evidence to support their conclusions, ensuring complete documentation for a clear audit trail.

3. Evaluating the Results

Auditors assess the results to determine compliance with regulations and internal controls. If discrepancies are found, further testing or corrective actions may be recommended.

Read: How to Conduct an Effective Audit: A Step-by-Step Approach and a Checklist for Success

Now, let’s look at some examples to understand better how substantive testing is applied in real-world situations.

Examples of Substantive Testing

Substantive testing allows auditors to dig deeper into an organization’s internal operations and assess whether compliance measures are truly being followed. Here are a few examples of how substantive testing is applied in compliance audits:

1. Policy Adherence Checks

Auditors may randomly select a sample of policies or procedures and cross-check them with actual practices. This could involve verifying that the correct approvals were made, guaranteeing all required documentation is in place, and confirming that employees are following the right procedures.

2. External Validation

In certain cases, auditors may contact external parties, like vendors or regulatory bodies, to confirm that the organization is in compliance with set standards. This provides an independent verification of the organization’s adherence to its obligations.

3. Internal Control Assessment

Substantive testing might include reviewing and evaluating the effectiveness of internal controls. Auditors may examine how policies are being executed within the organization, so that these controls are not only documented but also followed in day-to-day operations.

4. Regulatory Compliance Audit

Auditors may examine specific areas such as safety, environmental practices, or employee training records to confirm that the organization’s operations align with industry regulations and legal requirements. This helps determine that the company is not just talking about compliance but truly practicing it.

To enhance your compliance testing and streamline the audit process, VComply effectively manages your audits, automating procedures, ensuring accuracy, and providing comprehensive reporting for better oversight of compliance practices.

To wrap up, let’s examine the key differences between substantive and control testing.

Differences Between Substantive and Control Testing

While both control testing and substantive testing are integral to the compliance audit process, they serve different purposes and involve distinct approaches. Here’s a breakdown of the key differences.

Criteria	Control Testing	Substantive Testing
Objective	Evaluate the effectiveness of internal controls in preventing errors or non-compliance. If effective, it can reduce the need for further substantive testing.	Verify the accuracy and completeness of compliance data, making sure no material violations or risks.
Focus	Focuses on procedures, processes, and internal controls designed to prevent non-compliance or operational failures.	Focuses on verifying compliance data, such as policies, procedures, and supporting documentation.
Scope	Involves reviewing internal controls, processes, and procedures to certify adherence to compliance standards.	Involves a detailed examination of operational data and processes to detect discrepancies or compliance failures.
Methods	Walkthroughs, observation, reperformance, and inquiry to evaluate how controls are functioning.	Analytical procedures, tests of details, confirmations, and recalculations to verify compliance data.
Timing	Usually conducted earlier in the audit process to assess the strength of internal controls and determine reliance on them.	Performed later to validate the accuracy and completeness of compliance data, typically after control testing.
Evidence	Gathers indirect evidence by assessing the effectiveness of controls in place.	Gathers direct evidence from operational processes, reports, and documentation.
Nature	Process-oriented; focuses on the systems and processes that help maintain compliance.	Data-oriented; focuses on the actual results and compliance-related figures.
Scope of Review	Reviews and evaluates the systems and processes that maintain compliance and internal control.	Reviews and tests the compliance data itself to identify material discrepancies or non-compliance.
Reliance	If controls are effective, the auditor may reduce the extent of substantive testing required.	Relies on direct examination of data and cannot be reduced by the effectiveness of controls.
Outcome	Identifies weaknesses in internal controls and processes that could lead to non-compliance or operational risks.	Confirms or corrects compliance data to verify accurate reporting and adherence to regulatory standards.

Now, let’s see how control testing and substantive testing work together to guarantee a comprehensive audit.

How Control Testing and Substantive Testing Work Together

In compliance audits, control testing and substantive testing complement each other to offer a comprehensive evaluation of an organization’s adherence to regulatory standards and operational integrity. Control testing helps auditors assess the strength and effectiveness of internal controls, while substantive testing verifies the accuracy and completeness of compliance-related data and processes.

Read: 4 Steps to Conducting a Successful Internal Audit

If control testing indicates that internal controls are functioning properly, auditors may choose to perform less substantive testing, relying on these controls to mitigate the risk of non-compliance. On the other hand, if control testing uncovers weaknesses in internal controls, auditors may increase the scope of substantive testing to verify the organization’s compliance with regulations further and identify any gaps.

By integrating both testing methods, auditors can carry out a thorough evaluation of the organization’s GRC framework, providing stakeholders with reliable insights into the effectiveness of internal controls and the organization’s overall compliance posture.

Finally, let’s see how VComply’s tools can assist in both control and substantive testing, making the process more effective.

VComply’s Role in Control Testing and Substantive Testing

Managing control testing audits, and substantive testing effectively requires solutions that accelerate the process. By using VComply, auditors can improve their testing procedures so that both control testing and substantive testing are completed accurately, reducing the risk of overlooked discrepancies.

VComply’s ComplianceOps feature helps manage regulatory and control compliance, expediting audits and reporting. Additionally, RiskOps helps assess and quantify risks, providing a simpler way to manage and scale risk programs.

With PolicyOps, you can easily develop, review, approve, and distribute policies that assure compliance across your organization, aiding in effective control testing. For managing cases and resolving issues, CaseOps offers an integrated solution, making sure risks are addressed promptly and appropriately.

If you’d like to learn more about how VComply can support your audit and risk management efforts, click here for a free demo to click here for a free demo to see how it works.

Final Thoughts

In auditing, effectively using both control testing and substantive testing is crucial for obtaining reliable results. In comparison, control testing focuses on assessing internal processes designed to prevent non-compliance, substantive testing probes deeper into verifying the actual compliance data to assure its accuracy. Combining these two methods provides a more comprehensive approach, helping auditors identify risks early and conduct a thorough evaluation of an organization’s adherence to regulatory standards.

Simplify your risk management and improve your audits with VComply’s ComplianceOps, RiskOps, PolicyOps, and CaseOps. See how these powerful tools can transform your compliance audit process. 

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