What is the objective of substantive testing?
What are Substantive Procedures?
ExplanationThe intention behind performing the Substantive procedures by an auditor is to check that there is no material misstatement in the business’s financial records, i.e., they are complete, accurate, valid, and all the material information is disclosed. The method followed includes testing the account balances, examining the general entry, and other adjustments made while preparing the company’s financial statementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. It also includes making inquiries about suspicious transactions. Some examples can be external party confirmation like confirming the company’s bank balance from the Bank directly, performing a physical inventory count, confirming Accounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read moreaccounts payableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more from creditors of the business, etc. If you want to learn more about Auditing, you may consider taking courses offered by Coursera –
Example of Substantive ProcedureFor example, there is a company named BSR Trading, whose financial statements of the company show the following balances: You are free to use this image on your website, templates, etc, Please provide us with an attribution linkArticle Link to be Hyperlinked
Now the substantive procedures that can be followed on the above balances are:
TypesThere are two types which are as follows: You are free to use this image on your website, templates, etc, Please provide us with an attribution linkArticle Link to be Hyperlinked #1 – Test of DetailsTest of details refers to collecting evidence that helps evaluate the correctness of the account balances, disclosures, and other accounting transactions made by the business entity in their financial statements. #2 – Substantive Analytical ProceduresAnalytical procedures are an important method performed while conducting the process of auditing. In the analytical procedures, the evaluations are made on the financial statements by studying the plausible relationships between financial and non-financial data. For example, computation of ratios, comparing past year balances with the current year, etc. Substantive Procedure for Account TransactionsIt followed to check the purchases of the raw material of the business:
The substantive procedure followed to check the Related party transactionRelated party transaction is an arrangement between two related parties for the transfer of resources, services or obligations, irrespective of whether a price is charged or can affect the statement of profit or loss and the financial position of an entity.read more of the business:
ImportanceThe substantive procedure is important to check the accuracy & completeness of a business transactionA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more, 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. It assures the following assertions to the auditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more:
ConclusionSubstantive audit procedures are tests designed to collect evidence about the business transaction. The occurrences, validity, and existence of the transaction can be verified, and the accuracy of their accounting treatment can be checked. Recommended ArticlesThis has been a guide to what is a substantive audit procedure. Here we discuss examples of such audit tests on accounting transactions and their types. You may learn more about finance from the following articles –
What is the purpose of substantive procedures?Substantive procedures are intended to create evidence that an auditor assembles to support the assertion that there are no material misstatements in regard to the completeness, validity, and accuracy of the financial records of an entity.
What is the main purpose of substantive audit procedures?The primary purpose of substantive analytical procedures is to obtain assurance, in combination with other audit testing (such as tests of controls and substantive tests of details), with respect to financial statement assertions for one or more audit areas.
Why do auditors do substantive testing?Substantive testing is an audit procedure that examines the financial statements and supporting documentation to see if they contain errors. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate.
What are some examples of substantive tests?Examples of substantive testing
Verify that approved dividends exist by reviewing board minutes from the board of directors. Confirm that the balances in accounts payable are correct by contacting suppliers. Confirm that the balances in accounts receivable are correct by contacting customers.
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