What are 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. Thus, substantive procedures are performed by an auditor to detect whether there are any material misstatements in accounting transactions. Substantive procedures include the following general categories of activity:

• Testing classes of transactions, account balances, and disclosures
• Agreeing the financial statements and accompanying notes to the underlying accounting records
• Examining material journal entries and other adjustments made during the preparation of the financial statements

At a general level, substantive procedures related to testing transactions can include the following:

• Examining documentation indicating that a procedure was performed
• Reperforming a procedure
• Inquiring or observing regarding a transaction

Examples of substantive procedures are:

• Bank confirmation
• Accounts receivable confirmation
• Match customer orders to invoices billed
• Match collected funds to invoices billed
• Observe a physical inventory count
• Confirm inventories not on-site
• Match purchasing records to inventory on hand or sold
• Observe fixed assets
• Match purchase orders and supplier invoices to fixed asset records
• Confirm accounts payable
• Examine accounts payable supporting documents
• Confirm debt
• Analytical analysis of assets, liabilities, revenue, and expenses

Thus, an auditor who is testing a validity assertion regarding a company's fixed assets could conduct a physical observation of the assets, and then test for record accuracy by evaluating whether there is an asset impairment.

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