What are Substantive Audit Procedures?
Substantive procedures are audit tests designed to directly detect material misstatements in account balances, transactions, and disclosures — they are the auditor's direct evidence-gathering response to assessed risk.
Substantive procedures are audit procedures designed to detect material misstatements at the assertion level, consisting of substantive analytical procedures and tests of detail; they must always be performed for material classes of transactions, balances, and disclosures.
- •Compares recorded amounts to an expectation
- •Efficient for large, predictable account balances
- •Investigates variances above a set threshold
- •Example: comparing rent expense to lease terms
- •Examines individual transactions or balances directly
- •Used for higher-risk or non-predictable items
- •Includes vouching, tracing, and confirmation
- •Example: confirming individual receivable balances
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Step-by-step worked examples
The auditor expects interest expense of $500,000 based on average debt and rate. Recorded interest expense is $550,000. Is further investigation needed if the threshold is 5%?
Variance % = |550,000 − 500,000| / 500,000 × 100 = 50,000/500,000 × 100 = 10% 10% > 5% threshold → yes, investigate the difference
Expected depreciation expense is $120,000; recorded is $124,000. Threshold for investigation is 8%.
Variance % = |124,000 − 120,000| / 120,000 × 100 = 4,000/120,000 × 100 ≈ 3.33% 3.33% < 8% → within threshold, no further investigation needed
For accounts receivable, the auditor selects a sample of customer balances and sends confirmation letters directly to customers. What type of substantive procedure is this?
This directly examines individual balances rather than comparing to an expectation It is a test of detail — specifically, external confirmation
Flashcards
Quick quiz
Q1.What is the main purpose of substantive procedures?
Q2.Expected COGS is $800,000; actual recorded COGS is $840,000. What is the variance %?
Q3.Which of these is a test of detail rather than an analytical procedure?
Q4.Can substantive procedures be entirely skipped if controls are assessed as strong?
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Common mistakes
Relying only on strong internal controls and skipping substantive testing. — Correct: Some level of substantive procedures is always required for material account balances, regardless of control strength.
Treating analytical procedures and tests of detail as interchangeable. — Correct: Analytical procedures compare to an expectation; tests of detail examine individual items directly — they serve different risk levels.
Setting the investigation threshold after seeing the variance. — Correct: The threshold for investigating a variance must be set before performing the analytical procedure to avoid bias.
Using analytical procedures for unpredictable, high-risk accounts. — Correct: Tests of detail are more appropriate when account relationships are not stable or predictable.
FAQ
What are substantive audit procedures?
Substantive procedures are audit tests — analytical procedures and tests of detail — designed to directly detect material misstatements.
What is the formula used in substantive analytical procedures?
Variance % = |Actual − Expected| / Expected × 100, compared against a preset investigation threshold.
What are examples of substantive audit procedures?
Confirming receivables with customers, vouching sales to shipping documents, recalculating depreciation, and comparing expenses to an independent expectation.
How to calculate the variance in an analytical procedure?
Subtract the expected amount from the actual amount, take the absolute value, divide by the expected amount, and multiply by 100.