Substantive Audit Procedures

Substantive Audit Procedures

What are substantive procedures in auditing?

Substantive audit procedures are critical in determining the level of risk and control weaknesses in an entity. A substantive audit procedures refers to audit procedures that are performed to provide a reasonable basis for evaluating whether there is a reasonable possibility that material misstatements exist due to fraud or error.

Many fund accounting candidates experience some difficulty when it comes to substantive procedures. Actually, many procedures complain that most candidates perform poorly when it comes to this field of accounting. It is therefore advisable to seek help from an experienced accountant for payroll accounting homework help.


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What activities do Substantive procedures in auditing include?

For you to gain a better understanding of the substantive procedures it’s important to know the activities that revolve around it. All the activities are ethical and ensure that everyone benefits fairly. The activities include:

1. Collection of Debts

Financial organizations carry out auditing processes to keep track of the money their clients owe them. Well-conducted procedures ensure that the client will pay his bills. Failure to carry out effective debt collection procedures could have a negative impact on the overall financial entity’s balance sheet. To ensure the collectability of debts, auditors may obtain and assess the following:

2. Confirmation of Account Balances

Just like how businesses conduct the predetermined overhead rate, banks conduct audits using substantive processes to verify the accuracy of their account balances. The audit process confirms that the bank has money in its accounts and does not carry money on its books. Failure to conduct these procedures could lead to losses on account balances, impeding the bank’s ability to manage liquidity. To confirm that an entity has sufficient assets, auditors may determine:

3. Distribution of Invoices

Auditors make sure that businesses have sufficient cash on hand to pay their invoices. To accomplish this, auditors may collect information on business cash flows and verify the integrity of internal control over financial reporting. Failure to carry out acceptable procedures for the distribution of invoices could result in a loss of cash and disrupt operations. Auditors must also make sure to understand where the entity is in its business cycle.

4. Monitoring Purchases

Auditors must make sure that businesses are not overspending on purchases, including goods and services. Many auditors include procedures that monitor these purchases. They ensure that businesses put adequate resources into purchasing to avoid overspending in the future, leading to financial losses in order to verify the organization’s purchase control processes and documentation, auditors may:

5. Verification of Payments

Auditors confirm that payments made to suppliers by the organization are appropriate. Inaccurate payments could result in financial losses, including losses of invoice balance and accounts receivable values. Auditors may carry out procedures to verify:

6. Verification of Assets

Auditors verify the current value of the asset using substantive procedures. This process makes sure that assets are not in excess of the organization’s needs, making it difficult to manage liquidity and overall financial health. Auditors may use procedures to identify the value of assets and monitor the change in value.

Types of substantive procedures in auditing

There are two primary categories of substantive auditing methods. The choice of the substantive procedure to use depends on the type of audit and financial records of the client. The financial experts also follow the generally accepted accounting principles when choosing the type of substantive procedure to follow. The two variations are ethical to ensure that they don’t jeopardize the rights of the client. The two variations include:

1. Substantive analytical procedures

Realistic connections between financial and non-financial facts are sought after by substantive analytical techniques. This process involves probing for value-based relationships. Financial statements and other records are used to shed light on the nature of a transaction with respect to economic events or accounting matters. Auditors set their own standards when performing the audit and may base their conclusions on the “good” books and records. Depending upon the client, auditors may take a hands-off or hard look approach. This method is generally used as an independent audit method.

2. Substantive tests of detail

When the likelihood of a major misrepresentation is high, an auditing technique called substantive testing of details is required. This is a method where the auditor directly probes the financial records of the financial entity. This method determines if there are any discrepancies in specific transactions, customers and suppliers, inventories, and cash balances. The potential impact of these differences may be more dangerous compared to other auditing methods.

Importance of substantive procedures in auditing

Carrying out a substantive procedure is very important to anyone in the accounting field. The advantages of carrying out a substantive procedure include: 

1. Check Accuracy and Completeness of a Business Transaction

Substantive procedures can help auditors to determine whether the financial statements or other records contain all the information that is required. The auditor will give a positive and negative opinion, indicating whether any discrepancies need to be addressed and how serious it is.

2. Reduce Audit Risk 

The main objective of substantive procedures is to ensure that the entity has adequate resources for business transactions. This includes verifying cash and current assets balances, inventory valuation, and purchases. Failure to perform these procedures can result in a loss of money and disrupt business operations.

3. Fraud Risk

A major goal of substantive procedures is to make sure the financial records are free from fraud, whether it is intentional or unintentional. The auditor will also determine whether there is any fraud that has been committed within the organization and whether misstated amounts are needed to be removed from the financial statements.

4. Financial Analysis 

When financial records are accurate and complete, the auditor can analyze the financial statements to understand the performance of an entity. Auditors will determine whether the business is profitable or loss-making, how financial statements are calculated, and whether accrual methodologies are appropriate.

Substantive Procedure for Account Transactions

To conduct a substantive procedure for account transactions, you should follow the following steps:

  1. The purchase invoices must be compared to the GRNs (products receipt notes) to confirm that the corresponding goods have been received for each purchase order after the purchase orders and related invoices have been confirmed.
  2. The purchase order’s rates and quantities should match those on the purchase invoice.
  3. Then, it is necessary to confirm that the received items have been posted to the appropriate ledger accounts.
  4. The cut-off processes for the acquisitions must then be carried out.
  5. Last but not least, the analytical process should be carried out by comparing the current purchase trends with the purchase trends from the previous year. If there is a significant variation in the trend, the causes of that difference should be identified. The actual process used to examine the Related Party Transaction

Factors that Affect the Substantive Procedures Performed in an Audit

Various factors influence how substantive procedures work, the factors include:

1.  The Materiality of the Account

Auditors determine the amount of money that depends on the audit. The amount will vary because of the different entities and their financial situation. The auditor will also consider any significant events that may cause an increase in clients’ information. Therefore, auditors need to verify the accuracy and completeness of financial records and give a clear opinion on them.

2.  The Assessed Risk of Material Misstatement

The materiality of an account determines the potential risk of financial loss. Auditors consider the type of account and the value of transactions being recorded. The auditors should determine if the client is low, medium, or high risk based on customer needs.

3. Necessary Degree of Assurance From the Procedure

The assurance degree of an audit is determined by the auditor and the client. This determines the type of procedure that will be performed on accounts. The higher degree of assurance will require more extensive testing of financial records and transactions, whereas a lower assurance may not require auditors to perform such detailed audits.

Substantive procedures may involve gaining access to client books, records, and documents or having direct contact with clients. These procedures are also based on the auditor’s exposure to various risks that can affect financial statements.

Additional Resources

This has been the Substantive Audit Procedures guide. To advance your career as an analyst, read more about the other elements that populate financial statements:

  1. Prepaid Expenses Journal Entry
  2. Asset Management Ratios
  3. Conversion Cost
  4. Write Off Accounts Receivable
  5. Net Operating Assets
  6. Net Operating Assets
  7. Why Accounting is Important