What is a Substantive Audit Approach? (Explanation & Example)


Substantive Audit Approach is one of the audit approaches used by auditors to verify the event and transactions in the financial statements by cover the larges volume of them.

The principle of substantive audit approach is that when auditors cover the larges volumes with a high value of financial transactions and events in financial statements, there are fewer risks that material misstatements are uncovered.

A substantive audit approach could be used by both internal audit and external audit activities and it is sometimes called a vouching approach. That meant most of the audit works that perform by using this approach are done mainly by vouching and verifying documents based on their selection.

This approach is considered a traditional approach while risks based approach is now the most popular. However, the substantive audit approach still using in the situation where there is weak internal control over financial reporting.


There are two main principles involved with the substantive audit approach. First, auditors review the client’s internal control system that involved with the financial reporting system or the areas being audited.

For example, internal control on financial reporting, internal control on cash collection, payment to customers, and procurement, etc. They doing this by documenting all key control areas, procedures, and related procedures.

Once the understanding of internal control is done, the auditor needs to validate the key control to ensure that all key control areas are working properly and no overrides from management. At the end of validating key control, the audit will then concluded whether those key control areas are reliable or not.

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If they are reliable, that means the risks of misstatements that could not detect by control are low. And if the controls are not reliable, then the risks of misstatement that might not be detected by internal control over financial reporting are high.

Mostly, the auditor uses the COSO framework to documents client internal control. Five major elements of the COSO framework that they normally documents are control environment, risk assessment, information and communication, and monitoring of control.

The substantive audit testing really depends on the conclusion of internal control testing. Technically, if the controls are concluded by auditors as strong, then auditors will not do many works on substantive testing. That means fewer samples will be tested and verified.

However, in some situations, auditors might not test the client’s internal control based their knowledge about the client’s internal control concluded to be unreliable.

In this situation, auditors will decide not to test the key controls and they jump to a substantive test. Because control over financial reporting is not reliable, to minimize the risks of material misstatements, auditors need to have a large sample size and it could be reached to 100%.

No matter how strong internal controls over financial reporting are, the auditor could not rely 100% on those internal controls by ignoring substantive tests. Substantive review still needs to be done by the auditor.

How does a substantive audit approach is performed?

As we mentioned above, the substantive audit approach is focused more on vouching. That means when auditor performs an audit on financial statements by using a substantive approach, most of the event and transactions of elements in financial statements are selected and verified.

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The elements of financial statements here include assets, liabilities, equity, revenue, and expenses. For example, when auditor testing on assets, the substantial event, and transaction of assets need to be tested.

In other words, the large volume of assets is selected to physically inspected when the auditor wants to verify the existence and completeness of assets listing.

Recommended audit book: Best Selling Auditing Book

The following are the best selling auditing books that we think could help you to understand more about an audit from principle to advance.

Principles of Auditing & Other Assurance Services (Irwin Accounting):
Auditing and Assurance Services (16th Edition):
Auditing & Assurance Services with ACL Software Student CD-ROM (Irwin Accounting):

Written by Sinra