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Substantive Procedures in Auditing: Definition & Explanation

Substantive Procedures in Auditing: Definition & Explanation
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  • 0:00 Substantive Procedures Defined
  • 0:29 Importance
  • 1:51 Examples
  • 5:12 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

During an audit engagement, auditors are looking for evidence that supports their conclusions. To get this evidence, they perform substantive procedures. In this lesson, you'll learn what that means and learn some examples of substantive procedures.

Substantive Procedures Defined

A substantive procedure is a process, step, or test that creates conclusive evidence regarding the completeness, existence, disclosure, rights, or valuation (the five audit assertions) of assets and/or accounts on the financial statements. To qualify as a substantive procedure, enough documentation must be collected so that another competent auditor could conduct the same procedure on the same documents and make the same conclusion.

Importance

Most of the work auditors do is aimed at conducting substantive procedures. If you've ever worked at an organization that has been audited by external or internal auditors, you likely remember the requests for documentation, reports, and other original information. While this may not be the most fun if you are the one being audited, it is important to remember that the auditors are hired by someone in authority to provide an objective assessment of the completeness, existence, disclosure, rights, or valuation of some asset or account.

If an auditor presents such an assessment, and then ends up being wrong, they look pretty bad. So, they don't just ask, 'Do you give receipts every time you accept cash?' Instead, they get a copy of the detailed deposits and the receipt book and reconcile both until each bit of cash is accounted for with an original receipt. Everyone understands that auditors can't be absolutely sure their assessment is correct, but professional standards require them to document sufficient evidence to provide reasonable assurance of their conclusions.

There are many different procedures that auditors conduct that are substantive and some they conduct that aren't substantive. Not every procedure an auditor conducts has to be substantive; but, where non-substantive procedures are used, auditors should report the limitations of their work.

Examples

Anytime an auditor performs a procedure that results in obtaining documentation to support a conclusion they've made, they are conducting a substantive procedure. Depending on the asset or account being audited, these procedures may be different. Below are three common examples of substantive procedures auditors routinely perform.

Bank Confirmations

One of the assertions auditors test is completeness. If the financial statements say that a company has $500,000 in the bank, the auditors want evidence that there is actually $500,000 in the bank. They do this in three simple steps. First, they obtain the final version of the balance sheet and look at the amount of cash the company reports. Second, they research the cash ledger and identify where that cash is located.

For our company with $500,000, the cash ledger may report that $5,000 is kept onsite for petty cash and customer receipts, $245,000 is kept at ABC Bank in a checking account, and $250,000 is kept at XYZ Bank in a savings account. The final step is simply counting the cash in the petty cash safe and then calling the bank to get account statements for the date of the financial reports. If the bank statement reports the same amount as the cash ledger, then the conclusion is that the cash account is complete and correct. The auditor saves the copies of the bank statements, the cash ledger, the financial statements, and their cash count sheet as evidence of their conclusion.

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