Can you tell your tests of controls from substantive tests?
Who does substantive testing?
A company may hire external auditors or use its internal audit staff to carry out substantive testing. The internal audit team of the company could confirm whether their internal record systems are operating as intended. If the internal recordkeeping systems are not operating effectively, the internal audit team can fix the issue or improve the system to help the business perform better during the subsequent audit. The majority of the time during the year, internal auditors perform substantive testing at regular intervals. Substantive testing is frequently performed by external auditors once a year, typically at the end of the year.
What is substantive testing?
A technique used in auditing called substantive testing looks for errors or material misstatements in a company’s financial statements, accounts, and supporting documents. Substantive testing backs up a company’s assertion that its financial records are accurate, complete, and valid by providing proof that there are no errors. This time-tested auditing technique aids an auditor in developing a general assessment of the company’s financial statements. According to the circumstance, an auditor may use various auditing techniques and tests, including substantive testing.
What happens when substantive testing finds an error?
An auditor may demand that a company conduct additional audit testing if the auditor discovers any errors in the financial statements or the supporting documents. The auditor notifies the company and the audit committee of the errors they discovered in a management letter that is written by the auditor. Usually, there are only errors or misstatements if:
How do substantive tests work?
Here are the steps for how substantive auditing works:
1. A company makes assertions
An auditor is presented with the auditing assertions made by a company’s management team regarding their financial situation, whether they are implicit or explicit. During audits, companies generally fall into one of five categories of assertions, which are as follows:
2. The auditor creates a plan
Based on the assertions, the auditor develops a structured audit plan for the business. The auditor chooses the auditing procedures, such as substantive tests, that will help find any inaccuracies or false statements in the assertions. Analytical procedures, inquiry and confirmation, inspection, observation, and recalculation are some categories of auditing processes from which auditors can select. For instance, an auditor could watch a process in action and then check the accuracy of the paper records to evaluate fixed assets.
In their audit plan, auditors generally include the following three general activities for substantive testing:
3. An auditor shares audit results with a company
If any errors or material misstatements were discovered during the audit, the auditor records them in an official report, presents it to management, and, if necessary, requests additional audit testing. The auditor also expresses their general assessment of the business’s financial statements.
Examples of substantive testing
Each important step should have sufficient documentation to enable collection, review, and repetition. More than one auditor should be able to independently verify the accuracy of the documentation and reach the same conclusion. Following is a list of typical substantive auditing techniques and examinations that auditors conduct:
Substantive testing FAQs
Here are some frequently asked questions about substantive testing:
Does substantive testing take a long time?
Substantive testing can be a significant and time-consuming process, depending on the type and size of the business.
How effective is substantive testing?
Substantive testing involves some element of human bias or error, including the possibility of unintentionally overlooking or failing to spot a material misstatement. However, when combined with other strategies, substantive testing can be more successful. By using a larger sample size, altering the timing of the test, or running the test over a longer period of time, auditors can also increase effectiveness.
How are substantive tests designed?
An auditor decides the type, scope, and timing of the tests based on the assertion to ensure they meet an acceptable level of risk detection. More details on the type, scope, and timing of substantive tests are provided below:
What is meant by substantive testing?
Analytical techniques, a test of transactional specifics, and tests of balance specifics are the three categories of substantive tests.
What is an example of substantive procedures?
The phase of an audit known as substantive testing is where the auditor collects samples to look for any material inaccuracies in the client’s accounting records or other information. This evidence is needed to back up the conclusion that a company’s financial records are complete, accurate, and relevant.
What is the purpose of substantive testing?
Examples of Substantive Procedures Check with management to see if customer accounts can be collected. Match customer orders to invoices billed. Match collected funds to invoices billed. Observe a physical inventory count.