Substantive Procedures in Auditing: Definition & Explanation Video & Lesson Transcript

Substantive Procedures in Auditing: Definition & Explanation

If your expectation is that payroll would be in this range and your computation yields 48%, then your substantive analytic provides evidence that salaries occurred. And this is much easier than a test of details such as a test of forty payroll transactions . Now once you performed and concluded that the control over the revenue cycle is working properly, then it is time to consider substantive testing.

  • Rent, utilities, and other costs can be recorded as part of inventory costs in some cases.
  • The items can be tracked and stored in their separate value groups as well.
  • They might report on their financial statements that they have $30,000 in inventory.
  • They are categorized as current assets on the balance sheet as the payments expected within a year.
  • An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws.
  • They are performed by the auditor to detect whether there are any material misstatements in the accounting transactions.

The higher the risk of misstatement, the more you should use a test of details. For instance, it’s better to use tests of details for significant receivable accounts.

Examples of Substantive Procedures

Normally, auditor designed their testing based on the samples selected and then verify with the supporting document. 1 Assertions are representations by management that are embodied in financial statement components. This type of substantive testing may be used directly or indirectly. These seven assertions of financial data may be correct or not. Making management inquiries about the collectibility of customers’ accounts as evidence that trade debtors are accurate in their valuation.

  • Substantive testing is part of the substantive audit approach and is performed at the execution stage of the audit.
  • If your expectation is that payroll would be in this range and your computation yields 48%, then your substantive analytic provides evidence that salaries occurred.
  • It is useful to note that the word “substantive analytical procedures” refers to analytical procedures that are performed as a substantive test.
  • The testing will be different from the balance sheet items and income statement items.
  • The auditor can make inquiries about the collectability of customers’ accounts to ensure that trade debtors are valued accurately.

Usually, this process involves examining these statements and collecting audit evidence. Vouching can help auditors ensure that the figures in the financial statements occurred during the period. On top of that, it also checks the Substantive Procedures in Auditing: Definition & Explanation accuracy assertion by comparing reported figures with the supporting evidence. Overall, vouching contributes to objectives outlined in audit engagements by auditors. Are you using substantive analytical procedures in your audits?

Can Substantive Analytical Procedures with Data and Data Analytics Replace Sampling as Tests of Details?

Test of details refers to collecting evidence that helps evaluate the correctness of the account balances, disclosures, and other accounting transactions made by the business entity in their financial statements. In Conclusion, the Test of details is a method of auditing financial information by digging deep into the details of transactions. To keep it simple, it is the process of obtaining comfort over the transactions by checking with the underlying supports. Vouching, Confirmations and Subsequent receipts are the way to perform Tests of details.

  • Analytical procedure is the process of analyzing plausible relationships among data including both financial and non-financial data.
  • If the risk of material misstatement is higher, auditors need to plan extensive audit procedures and vice versa.
  • The result of the test of control could only conclude the internal control context.

Many auditors rely solely on tests of details when a better option is available. Substantive analytics, in some cases, provide better evidential matter. Reperformance is simply just auditors independently repeating the audit procedures or internal controls the company has also performed.

Example of analytical review

Vouching is an audit procedure that involves checking general ledger transactions for supporting evidence. Auditors can test various assertions during the process, such as accuracy, occurrence, and even cut-off. Often known as the essence of auditing, vouching plays a crucial part in audits. During this process, auditors may check for various aspects of the financial records. Auditors can always perform their audits using multiple procedures. For example, aside from just checking supporting documents, they can also inspect physical assets or ask other related third parties for confirmation of existing transactions. By performing various audit procedures, auditors can strengthen the credibility of the audit result and reduce the chance of miscalculations and discrepancies.

What is the difference between audit procedures and substantive procedures?

An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise tests of details (of classes of transactions, account balances and disclosures) and substantive analytical procedures.

If its not the case then auditor will understand what is the amount of difference, reasons for the variance and investigates further depending on the nature of errors. Recalculation is when auditors re-perform certain calculations to check accuracy. It’s done by comparing the final figure calculated by the auditor with the figure recorded in the general ledger. It helps the auditor ensure the correct amount is incorporated in the financial statement. Analytical review is when auditors compare account balance, information, trend, market information to get reasonable assurance on the set of financial statement. Observation is when auditors observe the real business process with professional behavior and keeping risks in mind. For instance, an auditor can notice if the client complies with policies like material in/out movement halted during inventory count.

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