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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 ...
- Overview
- What are substantive procedures in auditing?
- Why are substantive procedures in auditing important?
- Types of substantive procedures in auditing
- 7 examples of substantive procedures in auditing
An auditor is a professional who monitors finances for a company. They often exercise substantive procedures to collect evidence of the company's transactions and confirm that its financial status is correct. Understanding the significance of substantive auditing protocols can enable you to track the amount of money your organization spends or receives in return. In this article, we define substantive procedures in auditing and provide multiple examples of professionals performing audits in real-life scenarios.
Related: What Is Auditing?
Substantive procedures in auditing are processes or methods that auditors use in order to find or prevent miscalculations in financial records. Substantive procedures often provide a record of some financial activity that alerts professionals that the activity is happening and documents it for further review. Substantive procedures in auditing can include the following activities:
•Sharing account balances and transactions
•Testing transaction classes
•Making account records
•Examining financial materials
•Inquiring about certain transactions
Substantive procedures in auditing are important because they prioritize thorough documentation of finances. As an auditor, it's essential for you to have evidence of every monetary transaction to draw conclusions about a financial status. The documents can include original receipts of purchases, bank statements and invoices that illustrate rendered services and compensation. Performing substantive procedures can help you justify your assertions. For instance, if you conclude a client has spent $1,000 in the past two weeks, you can use the documents that represent the client's activities, showing how you made your final assessment.
Keeping detailed records can be beneficial if an external auditor performs an audit on your organization. The documents can prove how you've tracked finances internally and that your tracking methods are objective and realistic.
Substantive analytical procedures
Substantive analytical procedures seek a realistic connection between financial and non-financial data. Once they identify the relationship, auditors can acquire proof that the amounts that appear on financial documents are rational. Analytics are typically appropriate when the transactions are accurate, which means there's little chance of material misstatement occurring. Auditors set their own standards when performing the audit and compare their predictions to the client's documents. Further testing is only necessary when there's a substantial discrepancy between what the auditor predicted and the figures on the client's record.
Substantive tests of detail
Substantive tests of details is an auditing protocol that's necessary when there's a high chance of material misstatement. Its purpose is to verify the auditor's conclusions about the amount of money in accounts and the figures that appear on the client's documents. Professionals gather proof to support their claims on financial statuses. It may be appropriate to use tests of detail when evaluating a significant amount of money. Read more: Substantive Tests: Definition, How They Work and Example
1. Counting inventory
Inventory protocol requires employees to confirm that the merchandise they have physically in stock matches their records. Counting inventory is common for professionals who work in retail. Management often divides the staff into teams and assigns them a section of materials to count. Next, the employees count how many items they have in the stockroom or the sales floor, and they update their documents if their physical counts mismatch the recorded count. For example: In a home goods store, one employee counts 50 lanterns in stock, but the recorded inventory is 52, leaving two items unaccounted. The associate searches the sales floor for the missing items, but determines there's a discrepancy. Thanks to the substantive procedure, the store has an accurate count of how many lanterns they can sell to customers.
2. Monitoring purchases
When professionals sell products to consumers, they often keep purchasing records to track how many goods they've sold and the remaining items in their inventory. The substantive procedure occurs when associates compare their number of purchases with the number of goods they have yet to sell. For example, if they opened the store with 100 cupcakes, and their records indicate they've sold 50 of them, then they count the remaining cupcakes to confirm they have 50 left. Monitoring purchases can enable employees to track their sales numbers accurately.
3. Distributing invoices
Another example of substantive procedures in auditing is sending an invoice to the customer after they request a good or service. Invoices include the amount of money the customer owes the supplier, including a detailed list of fees associated with the purchase. It confirms the activities the supplier completed per the buyer's request and verifies the date the transaction occurred and personal information about the customer. It also represents an agreement that the bill aligns with what the customer bought. For instance: A homeowner hires a finish carpenter to install crown molding in a primary bedroom. Once the process is underway, the carpenter sends an invoice to the homeowner with how much the installation costs, serving as a record of the client-tradesperson relationship. The homeowner remains informed that the crown molding they've chosen and the size of the room they want renovated costs a certain price, according to the invoice.
Aug 21, 2024 · The substantive procedure is important to check the accuracy & completeness of a business transaction, measurement & valuation of an asset or liability of that business, and check that all material items are disclosed properly, etc. These procedures are important while conducting the audit to comment upon the truth and fairness of the company's financial statements.
Example of substantive procedure relating to valuation of property, plant and equipment (PPE) 1. Choose the assertion that will be tested : Choose an assertion from Completeness, Valuation and allocation, Rights and obligations and Existence if you are testing the period-end balance of PPE; valuation of non-current assets is the assertion tested. 2
Jan 10, 2024 · The execution of substantive procedures is a dynamic process where auditors apply their professional judgment to gather sufficient and appropriate audit evidence. This phase is characterized by a responsive approach, where auditors may need to adjust their methods based on the evidence collected. As auditors delve into the financial records ...
Dec 7, 2023 · Substantive procedures are intended to create evidence that an assembles to support the assertion that there are no in regard to the completeness, validity, and accuracy of the financial records of an entity. Thus, substantive procedures are performed by an auditor to detect whether there are any material misstatements in .
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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 ...
