What are Substantive Audit Procedures? (Definition, Explanation, Example, and More)

Auditors’ audit techniques or methodologies to detect material misrepresentation in financial statements are known as substantive audit procedures. Auditors cannot rely on the client’s internal control system for some clients; hence, they apply solely substantive audit procedures.

Similarly, auditors conduct substantive audit procedures to acquire substantive evidence concerning account balances, transaction classifications, and financial statement disclosures for their clients. Auditors are responsible for designing and carrying out substantive audit procedures to correctly respond to the assessed risk of significant misstatement during an audit.

As per the standard, auditors should follow processes to reconcile financial statements to underlying account records and look over the material journals and other adjustments utilized to prepare financial statements.

The following general areas of action are included in substantive procedures:

  1. Transaction types, disclosures and account balances, are all put to the test.
  2. Agreeing on the financial statements and notes to the underlying accounting records.
  3. Evaluating the material journal entries and other changes made during the financial statement preparation.

Types of Substantive Audit Procedures

When it comes to distinct substantive audit procedures that auditors might perform during the audit, there can be two possibilities for substantive audit procedures that they can use.

These are the tests of details and substantive analytical procedures. Both of these are distinct from one another. Auditors need to determine when each sort of substantive procedure is most appropriate.

Substantive analytical procedures

It refers to the process of examining logical links between data, both financial and non-financial data. When the potential threat of material misstatement is low, and there are suitable control procedures in place, substantive analytical procedures are typically done.

Auditors typically execute substantive analytical procedures by forming expectations and comparing them to the client’s experience. If there is a considerable discrepancy between the auditor’s expectations and the client’s record, additional testing is conducted to determine the cause of the discrepancy. Using analytical procedures, auditors tend to seek the whole amount rather than the details of individual transactions or payments.

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However, analytical procedures can have considerable drawbacks when implemented on their own. As an example,

  1. Auditors are still required to conduct a test of details for things that they regard as material or for which they believe analytical processes alone are insufficient.
  2. Auditors can examine the appropriateness of a financial statement component, but this does not mean the underlying accounting records are free of critical errors.

When auditors undertake a test of the client’s controls and find it satisfactory, they usually apply substantive analytical methods out of the two substantive audit procedures. In that situation, the auditors will have to depend only on substantive analytical procedures to offer adequate audit evidence.

Example

While evaluating sales, auditors might compare the sales figure in the client’s Income Statement to past years’ statistics to see how much it has changed and whether the change is consistent with the auditors’ requirements. In the same way, auditors can also compare a client’s revenues to its gross profits or cost of sales to see if the amount has improved as predicted. With this method, auditors can gain significant insight into what has changed for the client during the accounting period.

Substantive Test of Details

Audit procedures that auditors use to evaluate various audit claims of significant classes of transactions, account balances, and disclosures of the client’s financial statements, are known as tests of details. Auditors analyze the supporting evidence for specific transactions during a test of details that include reviewing sales invoicing to confirm the details of the supporting documents.

It is an invaluable method for auditors to use when looking for transactional data. They can tailor these procedures to each financial statement item they are checking to ensure the accuracy of the data. As a result, while verifying different audit assertions, tests of details are more direct than the previous method.

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As part of the test of details, auditors perform a variety of procedures. For instance:

  1. Consider the procedure of vouching. This entails tracking financial statement items from their original documents and comparing the specifics to accounting records.
  2. It can also include tracing, which is the inverse of vouching. Throughout this procedure, auditors keep a check on the source documents to confirm if they appear in the accounting records.
  3. Confirmations also known as circularization. Auditors use this method to submit written documents to third parties including banks, payables, and receivables, requesting them to check their balance with the client.

The purpose of all substantive tests of detail is to confirm specific balances or transactions. The principal approach used by auditors who look for the likelihood of major misstatements in financial statements is a test of details.

Example

When evaluating a client’s sales, auditors will utilize specific tests.  Vouching will be used in sales to ensure that all transactions within total sales have adequate supporting paperwork. They may also cross-reference the information in these documents with information in other supporting documents.

For instance, they may examine details in sales invoices with products delivery notes or sales orders. They will implement tracing in the same way. Auditors will choose a sample of invoices and inspect posting in the accounts using this method. This approach can rightly be used to check the accuracy of the sales figures disclosed in the financial statements.

Substantive Audit Procedure for Account Transactions

The following process helps check the account tractions for the business through substantive audit procedure:

  1. a) First, the purchase orders and invoices should be validated, and then the invoices should be linked with the GRN (goods receipt notes) to ensure that the corresponding requirements have been met for each purchase invoice.
  2. The purchase order’s rates and amount purchased should be the same as the purchase invoice.
  3. Following that, the posting of products received in the appropriate ledger accounts should be double-checked.
  4. Then the purchase cut-off procedures should be carried out.
  5. Finally, and perhaps most crucially, the analytical technique should be carried out by comparing purchase trends from the previous year with current purchases, and if there is a significant variation in trend, the causes for the difference should be determined.
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Can Audit Procedures Be Revised During The Substantive Testing?

During the planning phase, audit procedures are created due to the risks identified in the internal control over financial reporting and internal controls environment. If the auditor discovers in between the audit procedures that the audit processes are not adequately addressing the risks, he may alter the audit procedures. Before carrying out audit operations, auditors must first obtain approval from audit partners at all stages: planning, substantive, and conclusion.

Importance of Substantive Audit Procedures

In general, substantive audit processes are considered crucial because:

  • They tend to offer support and claim for the judgement made by the auditor; and
  • They are likely to eliminate any unjustified claims that would otherwise have been done by the auditor.
  • It adds a layer of validation to the audit process by ensuring that these audit procedures have been carried out thoroughly.

As a result, Substantive Audit Procedures can be considered a critical element of the whole audit process because they tend to offer the foundation for the auditor’s claims. They check for any discrepancies or misstatements in the financial accounts, which substantially aids them in establishing whether any overgeneralizations have been made in those particular cases.