Substantive testing definition
/What is Substantive Testing?
Substantive testing is an audit procedure that examines the financial statements and supporting documentation to see if they contain errors. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate. There are many substantive tests that an auditor can use. If substantive testing turns up errors or misstatements, additional audit testing may be required. In addition, a summary of any errors found is included in a management letter that is shared with the client's audit committee.
The Purpose of Substantive Testing
Substantive testing is intended to provide the auditor with a reasonable level of assurance about the correctness and validity of a client’s financial reporting, or to spot possible material misstatements. Consequently, substantive procedures are designed to obtain audit evidence about the data produced by a client’s accounting system - specifically, in regard to its accuracy, completeness, and validity.
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Types of Substantive Tests
The following list is a sampling of the available tests:
Issue a bank confirmation to test ending cash balances
Contact customers to confirm that accounts receivable balances are correct
Observe the period-end physical inventory count
Confirm the validity of inventory valuation calculations
Confirm with experts that the fair values assigned to assets obtained through a business combination are reasonable
Physically match fixed assets to fixed asset records
Contact suppliers to confirm that accounts payable balances are correct
Review board of directors minutes to verify the existence of approved dividends
As indicated by the examples, substantive testing is likely to include confirmation of account balances with third parties (such as confirming receivables), recalculating calculations made by the client (such as valuing inventory), and observing transactions being performed (such as the physical inventory count).
Substantive Tests for Internal Audits
Substantive testing may also be conducted by a company's internal audit staff. Doing so can provide assurance that internal recordation systems are performing as planned. If not, the systems can be improved to eliminate the issues, thereby providing for a cleaner audit when the external auditors conduct their tests at year-end. Internally-conducted substantive testing may occur throughout the year.