Substantive testing is the core evidence-gathering activity in an audit. These procedures directly test the accuracy and completeness of financial statement amounts and disclosures.
Types of Substantive Procedures
Tests of Details
Examination of individual transactions, balances, or disclosures:
- Vouching: Tracing recorded amounts back to source documents (tests existence/occurrence)
- Tracing: Following source documents forward to accounting records (tests completeness)
- Confirmation: Direct verification with third parties (bank, receivable, legal)
- Inspection: Physical examination of assets or documents
- Recalculation: Verifying mathematical accuracy
- Reperformance: Independently executing a procedure
Substantive Analytical Procedures
Using financial and non-financial data relationships to evaluate reasonableness:
- Trend analysis: Comparing current to prior period balances
- Ratio analysis: Evaluating financial ratios for unexpected changes
- Predictive models: Developing independent expectations using operational data
- Regression analysis: Statistical modeling of expected relationships
Assertions Tested
Each substantive procedure targets specific financial statement assertions:
| Assertion | What It Tests |
|---|---|
| Existence/Occurrence | Did the transaction or asset actually happen/exist? |
| Completeness | Are all transactions and balances recorded? |
| Valuation/Accuracy | Are amounts recorded correctly? |
| Rights and Obligations | Does the entity own the assets and owe the liabilities? |
| Presentation and Disclosure | Are items properly classified and disclosed? |
| Cutoff | Are transactions recorded in the correct period? |
Designing Substantive Tests
Based on Risk Assessment
- Higher risk = more extensive testing
- Significant risks require substantive tests of details (not just analytics)
- Lower risk = substantive analytical procedures may suffice
Sample Sizes
Determined by:
- Materiality and performance materiality
- Assessed risk of material misstatement
- Population characteristics
- Desired confidence level
Common Substantive Procedures by Account
| Account | Common Procedures |
|---|---|
| Cash | Bank confirmation, reconciliation review |
| Receivables | Customer confirmation, subsequent collections |
| Inventory | Physical observation, cost testing |
| Fixed Assets | Vouching additions, testing depreciation |
| Payables | Vendor statements, search for unrecorded liabilities |
| Revenue | Vouching to supporting documents, cutoff testing |