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. The following list is a sampling of the available tests:

  • Conduct a bank confirmation to test ending cash balances
  • Contact customers to confirm that accounts receivable balances are correct
  • Observe the period-end counting of inventory
  • 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
  • Contact lenders to confirm that loan 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).

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.

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.