Substantive Audit Procedures

Overview

Substantive audit procedures are the audit processes or methods that auditors perform to detect material misstatement that could occur in financial statements. Likewise, auditors perform substantive audit procedures to obtain substantive evidence about account balances, classes of transactions, and disclosures of the client’s financial statements.

Auditors usually perform substantive audit procedures after tests of controls to obtain evidence about various audit assertions. This can be done by various audit procedures such as inspection, confirmation, recalculation, and analytical procedures, etc.

In an audit, auditors have the responsibility to design and perform substantive audit procedures to properly respond to the assessed risk of material misstatement. In other words, the nature, timing, and extent of substantive audit procedure are directly influenced by the level of risk of material misstatement.

Types of substantive procedures

There are two types of substantive procedures which are substantive analytical procedures and tests of details. Auditors must decide when it is most appropriate to use which type of substantive procedures.

Substantive analytical procedures

Analytical procedure is the process of analyzing plausible relationships among data including both financial and non-financial data. Likewise, substantive analytical procedures are the audit procedures that auditors perform to obtain evidence about the reasonableness of amounts shown in the financial statements by using such plausible relationships among data.

Substantive analytical procedures are usually performed when the risk of material misstatement is low and there are adequate control procedures in place. And of course, only when there are plausible relationships among data, could auditors perform analytical procedures.

Auditors usually perform substantive analytical procedures by building their expectations and compare them to the client’s record. If there is a significant difference between auditor’s expectation and the client’s record, further test is usually performed for investigation of the reasons behind such difference.

For example, auditors usually perform substantive analytical procedures on interest expense of borrowings by multiply the average outstanding balance of borrowings with the average interest rate.

With the result of expected interest expenses, auditors then use them to compare with the client’s record. If it is not significantly different from the client’s record, no further test is required. Otherwise, more works will be required for the investigation of the reasons behind the significant difference.

It is useful to note that the word “substantive analytical procedures” refers to analytical procedures that are performed as a substantive test. On the other hand, when the word “primary analytical procedures” is used, it usually refers to analytical procedures that are performed at the planning stage of the audit to assess the risk and direct auditors’ attention to the high-risk areas of the audit.

Substantive tests of details

Substantive test of detail is another type of substantive procedures. In this case, tests of details are the audit procedures that auditors perform to test various audit assertions of significant account balances, classes of transactions, and disclosures of the client’s financial statements.

Likewise, auditors usually perform tests of details, instead of substantive analytical procedures, when there is a high risk of material misstatement on significant accounts or balances. Hence, comparing to substantive analytical procedures, tests of details are more direct when testing various audit assertions.

For example, auditors usually perform test of detail on expenses by vouching expense transactions to supporting documents, such as invoice, purchase order, and receiving report (goods received note), to ensure the occurrence assertion.

Another example is that when performing audit of cash at banks, auditors usually perform direct bank confirmation to ensure the existence of cash balances at banks.

It is useful to note that auditors usually use audit sampling in the tests of details. In other words, auditors usually only select a sample of transactions to test. This is due to it is usually impractical for auditors to test all transactions in the client’s financial statements.