Substantive procedures (or substantive tests) are those activities performed by the
audit
An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon." Auditing al ...
or to detect
material
A material is a matter, substance or mixture of substances that constitutes an Physical object, object. Materials can be pure or impure, living or non-living matter. Materials can be classified on the basis of their physical property, physical ...
misstatement at the
assertion level.
Management implicitly assert that account balances and disclosures and underlying classes of transactions do not contain any material misstatements: in other words, that they are materially complete, valid and accurate. Auditors gather evidence about these assertions by undertaking activities referred to as substantive procedures.
Types of procedures
There are two categories of substantive procedures -
substantive analytical procedures and tests of detail.
[ Analytical procedures generally provide less reliable evidence than the tests of detail.
]
Examples
For example, an auditor may:
physically examine inventory
Inventory (British English) or stock (American English) is a quantity of the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.
Inventory management is a discipline primarily about specifying ...
as evidence that inventory shown in the accounting records actually exists (existence assertion);
inspect supporting documents like invoices to confirm that sales did occur (occurrence);
arrange for suppliers to confirm in writing the details of the amount owing at balance date as evidence that accounts payable is a liability (rights and obligation assertion); and
make inquires of management about the collectibility of customers' accounts as evidence that trade debtors are accurate as to its valuation.
Evidence that an account balance or class of transaction is not complete, valid or accurate is evidence of a substantive misstatement but only becomes a material misstatement when it is large enough that it can be expected to influence the decisions of the users of the financial statement.
References
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Auditing terms