 In this presentation, we will discuss a substantive and reliance strategy. In other words, we will be comparing and contrasting a substance. First, a word from our sponsor. Well, actually, these are just items that we picked from the YouTube shopping affiliate program, but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased and used ourselves. Acer 27-inch monitor. I've been using an Acer monitor as my primary monitor for a few years now. This is the first Acer monitor that I have used after having used a series of different brands of monitors in the past. The Acer monitor has been performing well and I'm trusting the Acer brand more and more as I use the monitor. I have a 27-inch monitor which I think is ideal for what I do, which is of course the screen recording and the editing. If you would like a commercial-free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses you can purchase one at a time or have a subscription model given you access to all the courses. Courses which are well-organized have other resources like Excel files and PDF files to download and no commercials. This strategy and a reliance strategy. So once we have an understanding of the internal controls, the auditor can then decide on following a substantive strategy or a reliance strategy. So we have an understanding of internal controls then our question is what type of strategy are we going to follow. If we're going to follow a substantive strategy that means that the strategy sets control risks high for some or all assertions because of one or all of the following factors. When thinking about substantive strategies it's easy to kind of get the concept down sometimes but still mix up which way things are going or and when we think about test questions, when we think about something like control risk being high or control risk being low and what's that mean for substantive strategies it's easy to get kind of turned around on that. So when we think about a substantive strategy you're thinking about basically the inline type of strategies meaning we're going to be relying on kind of the ground level work, the kind of more of the grunt work where we're typically going to be needing a lot more of it. The substantive test you can think about the types of tests being out there. We're going to be out there at the business where the auditors were out there at the business. We're asking them to pull files, give me some invoices, give me some bills. We're going to be testing this, tracing this, tracking this information. A lot of work on the substantive testing. So if we have a substantive strategy we're relying basically on the more work strategy us actually going out there and doing more digging into the operations of the organization. So the reason we would have a substantive strategy is because we're not reliant on internal controls. For some reason we've decided that the internal controls are something that we couldn't rely on. And so if we can't rely on the internal controls we're going to be doing more substantive, more actual work type testing. Now once you have that down you need to basically understand that that means that control risk has been set high. So we actually set the control risk high. What does that mean? So you recall that the control risk is going to be one of our risk factors. If we say the control risk is high then that means that there's a high risk that the internal controls that were set up by management will not catch a material misstatement. So that means so the control risks being high in other words means that we think that the internal controls are weak for whatever reason and therefore we can't rely on the internal controls and so we're going to skip more testing of the internal controls and go straight to the more difficult or longer testing of the substantive type testing. Actually going out to the client picking up those files, give me some bills, give me some invoices, let me trace these and test these and track these back. So that's going to be the information. So a substantive strategy sets control risk high for some or all assertions because of one or all of the following factors which could include controls do not pertain to an assertion. So the control setup might not be something that's tied out to that specific assertion that we are testing for. Controls are assessed as ineffective so they might have internal controls that are put in place but if they're not effective and or they're not effective for the particular assertion that we're trying to test for then that's going to be a problem with the internal controls. Testing the effectiveness of controls would not be efficient. So it's possible that the internal controls are in place but we just can't test the testing the effectiveness of the internal controls maybe would be more difficult take more time than the substantive testing in some particular cases in which case why would we do the more work we're doing less work we're trying to do less work that's the point of us relying on internal controls in the first place if it takes us more work to do the internal controls or test the internal controls then do the substantive testing then we'll do the substantive testing. Our reliance strategy the one that we hope to be using and almost have to be using for publicly traded companies but may not be using for smaller than publicly traded companies due to the fact that we need to rely internal controls for publicly traded companies in order to have the scope of the audit fit into the time frame that usually will be necessary for them whereas smaller companies don't usually have the ability to implement the same internal controls therefore we're going to rely on the internal control so under our reliance strategy the auditor plans plans to rely on internal controls and assesses control risk at a lower level so now we're going to say at this time we're going to say we've looked at internal controls we have an understanding of internal controls and therefore we're going to we're going to rely on the internal controls we think they're good and therefore we can rely on internal controls and do less of the actual substantive testing the more groundwork type of testing so in terms of lower or higher what that means is the controls assess the control risk at a lower level so we're going to assess the control risk low what does that mean it means that the risk of the controls not detecting material misstatement is low which means the controls are strong so if the controls are strong the control risk is low the risk that the controls that are being set up the separation of duties doesn't catch the error is low so we're going to set the control risk low and therefore we can depend more on it and do less of the substantive type of testing given the fact that we are depending on the controls and therefore set the detection risk higher and the detection risk being that our substantive test our audit process won't catch a material misstatement we can actually make that higher because we're relying on the controls so we don't we can have a higher detection risk lower on the control risk and still be within the range that we have planned for in our art strategy