What is the difference between test of details and substantive testing procedures in an audit?

Substantive Procedures in Auditing: Definition & Explanation

An audit program is a list of audit procedures to be performed. When the acceptable level of detection risk is high, less effective and less costly procedures can be used.

What is the difference between audit procedures and substantive procedures?

An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise tests of details (of classes of transactions, account balances and disclosures) and substantive analytical procedures.

If auditors could rely on it, then there are fewer works to do in substantive Substantive Procedures in Auditing: Definition & Explanation testing. But, the auditor concluded that the control could not rely on it.

Review Engagement (Limited Assurance): Definition and Example

Confirm the total amount by vouching and analytical review with the cost of sales or inventories. This testing is just to confirm whether the control over the revenue cycle is working or not. It is not to confirm whether the revenue transactions, amount, and classification are correct. Substantive testing is part of the substantive audit approach and is performed at the execution stage of the audit. In auditing related party transactions, the auditor is not expected to determine whether a particular transaction would have occurred if the parties had not been related or what the exchange price and terms would have been.

  • Here, Banks, Financial Institutions, and Debtors are examples of the third party confirmations .
  • Ledgers Scrutiny is ancillary procedures that aids in performing the test of details.
  • It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.
  • For example, if a manufacturer’s gross margin seems off, the accounting department might explain that its supplier increased the price of raw materials.
  • So, think of them as an efficient alternative to test of details.
  • Generally, auditors understand business, assess the risk of material misstatement, plan audit procedures, obtain audit evidence, and form their opinion.

The auditor must determine the substance of the related party transactions and their effects on the financial statements. All accounting estimates that could provide the material to the financial statements have been developed. Analytical procedures can be a powerful tool for obtaining audit evidence about income statement balances. The acceptable level of detection risk may affect the timing of substantive tests. If detection risk is high, the test may be performed several months before the end of the year.

What are the Types of Audit Procedures?

Auditors use analytics to understand or test financial statement relationships or balances. Significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values require additional investigation. In the case where an account balance or a class of transactions is found to be invalid, inaccurate, or incomplete, it amounts to evidence of a substantive misstatement. Auditors may also include internal control checks as a part of their vouching process. It entails checking for controls, such as authorization, verification, signatures, etc. These audit procedures also enable auditors to independently examine on their own and not just rely on the information that a company has given. This helps ensure that audit results are unbiased and as accurate as possible.

  • Inspect the purchase invoice, goods receipt notes, and payment to ensure recorded purchase/expenses do not contain material misstatement.
  • There are two categories of substantive procedures – analytical procedures and tests of detail.
  • All accounting estimates that could provide the material to the financial statements have been developed.

Moreover, now that you understand the role analytical procedures play in an audit, you can anticipate audit inquiries, prepare explanations and compile https://online-accounting.net/ supporting documents before fieldwork starts. Timing –In some circumstances, substantive procedures may be performed at an interim date.

Substantive Procedures Defined

According to ISAs auditor is required to identify and assess the risk of material misstatement at financial statement and assertion level. This is done by understanding the entity and its environment which also includes internal control system of the entity.

Audit team performs sampling procedures for performing this substantive procedures. High Level Scrutinizing of Ledgers or Transactions will help the audit team to identify the odd transactions or ledgers. Auditors also performs the analytical procedures based on entity’s risk-assessment. This procedure gives an excellent boost to the Auditor’s comfort over the financial information. So, the Audit team prefers sending Positive confirmation requests for all the revenue recorded in the books of accounts to the customers. Based on the response, if the balance as per requests agree to the revenue balance as per books then auditor completes the revenue balance testing.

Leave a Comment

Your email address will not be published. Required fields are marked *