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Substantive
testing is an audit that looks
for flaws in financial records. These tests are required to prove that a
company’s financial records are comprehensive, valid, and accurate.
Substantive audit procedures
prove that each material assertion in the financial statements is true. That
said, tests may also reveal monetary errors or misstatements in the recording
or presentation of transactions and balances.
Types of Substantive Tests
There are three types of substantive tests,
explained below.
- Analytical procedures. Substantive
analytical procedures compare several financial and operational data sets
to examine whether trends and relationships are consistent. These
techniques are intended to alert you to potential issues with your
financial records, which you can then investigate further.
- Test of details of transactions. A test of
transactions focuses on the individual transactions that make up an
account balance. This test of details is done to check for the accuracy of
the financial statement transactions. Auditors typically choose a sample
to test whether the details (each line in specific General Ledger) match
the (nature of) transaction recorded in a company’s books.
- Tests of details of balances. A test of balances
is done to check whether any material misstatement exists in the balances
of the financial statements’ accounts. This test of details tries to
demonstrate that the tests of control and the substantive tests related to
transactions are all reasonable. For example (mostly) is external/third
party confirmation (letter).
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