Auditing is considered a very integral function of the business because it validates the extent to which operations and financial standing within the company have been taken care of.
In this regard, it is increasingly important to recognize the fact that the process itself is supposed to be designed and executed in the manner in which the best possible results can be achieved.
In this regard, there are numerous different steps and processes that should be carried out in order to ensure that the audit process is designed to cover all audit assertions so that there is no ambiguity regarding the way forward with the audit process.
Substantive audit procedures tend to be one of the most important aspects of the audit process, because of the important role it plays in gathering the required evidence for the audit.
Substantive audit procedures can be regarded as processes or steps that are taken by the auditors for making the conclusive evidence pertaining to completeness, existence, disclosure, rights, or valuation of assets of the financial statements that they are auditing.
Therefore, this is mainly about gathering conclusive audit procedures, so that a conclusion can be reached, pertaining to the underlying audit procedure.
These processes are, therefore, carried out by the auditors in order to ensure that there are no material misstatements in the financial statements.
Usually, a procedure is considered as a substantive audit procedure only if the two auditors who carry out this particular task are able to reach the same conclusion pertaining to the audit assertion as the other auditor.
Types of Substantive Audit Procedures:
There are two main tests of substantive audit procedures. Firstly, there is a Test of Detail, and secondly, there are Analytical Procedures.
As far as the Test of Detail is concerned, it can be seen that it mainly includes verification of transactions, account balances, as well as to disclosures.
This is an important component because of the reason that helps the auditors to ensure that there are no malpractices evident in the reported transactions within the companies.
In the same manner, it is also imperative to ensure that these details have been corroborated in order to gather the much-needed reasonable accuracy relating to that specific component.
On the other hand, as far as Analytical Procedures are concerned, it is deduced that it consists of evaluations of financial information through analysis of plausible relationships among financial, as well as non-financial data.
They mainly comprise of investigation of different identified fluctuations that are relatively inconsistent with other information within the same threshold.
As a matter of fact, both these types of substantive audit procedures contribute in a different manner towards the audit process, because they tend to focus on the minute details of the audit transactions that have been reported so that a better conclusive judgment can be drawn.
Examples of Substantive Audit Procedures
As mentioned earlier, substantive audit procedures can be defined as numerous verifications and checks that are carried out on numerous different levels in order to ensure that all necessary ground has been covered.
In general, substantive audit procedures can include the following:
- Examination of documents that indicate that the procedure was performed
- Performing procedures twice (or more, if required), to ensure that procedure functions as expected
- Inquiring or observing regarding transactions that take place
In order to conduct procedures like the ones mentioned above, substantive audit procedures will have to be conducted including bank confirmation, accounts receivable confirmations, observation of physical inventory counts, observation of fixed assets, confirmation of account payables, the examination of accounts receivable as well as confirmation of the debt.
Importance of Substantive Audit Procedures
As a matter of fact, substantive audit procedures are deemed important because they tend to provide backing and claim regarding the judgment that has been made by the auditor.
It is considered an increasingly important part of the audit process, because of the reason that it tends to eliminate any unwarranted claims that could otherwise have been put forth by the auditor.
Therefore, it adds a layer of validation within the audit process because they know that these audit procedures have been carried out in sufficient detail.
When should the auditor perform substantive testing?
The auditor might not straight forward to substantive testing for their audit. and they event could not perform the control testing immediately.
First, the auditor will have to obtain an understanding of the entity control environment and control activities that will have significantly affect the quality of financial information in the financial statements that they are auditing. Once auditors complete their procedures in obtaining this information, auditors should already have a better understanding of the risks associated with financial statements.
The auditor will therefore decide which controls that designed by management that they could test if they make the assumption that they will rely on the control of it is passed their testing. Substantive testing is performed by auditors once they completely obtain their understanding of the entity’s control environment, control activities, assessed the risks and completed their control testing.
If after understanding the entity’s control environment, and control activities, auditors make a conclusion that internal control could not rely on, they will straight to substantive testing. And if after auditor complete the control testing, they could that internal control also could not rely on, they will go to substantive testing also.
Therefore, it can be seen that Substantive Audit Procedures can be considered as a really crucial aspect of the overall audit process because of the fact that they tend to provide the groundwork for the claims made by the auditor.
They ensure that there are no discrepancies or misstatements in the financial statements, and therefore, this greatly helps them to determine that no overgeneralizations have been made in this regard.