What is the substantive procedure?

The principle of objectivity : Objectivity PrincipleMeans taking into account all the facts and examine the facts and to provide evidence and supporting documents to the health of the financial operations of access to financial information is valid and reliable for use in decision-making wise .So this should be a list of the data on the basis of objective evidence and free of judgment and personal passions .And therefore must be measured financial information in a way to ensure access to the same results as if the accountant last re- measurement process .Problems with the application of the principle of objectivity :Some of the figures contained in the financial statements do not always reflect the facts , but there are some estimates, such as estimating the productive life of long-term assets .... The use of estimates to the difficulties for the External Auditor when examining these elements should be constantly alignment and balancing considerations appropriate and objectivity in the preparation of financial statements In other words you should disclose the data lacks a bit of objectivity ?The answer to this question should be yes, it is always desirable to disclose the current value of the assets even if those values ​​are lacking because the objective evidence of the existence of those values ​​is important and useful for the users of financial statements.

Substantive procedures (or substantive tests) are activities performed by the  auditor to  assemble evidence to support the assertion that there are no  material misstatements or fraud . There are two types of assertions: assertions relating to balances and assertions relating to transactions.

The different assertions of balances are:

·         completeness,

·         existence,

·         rights and obligations,

·         valuation & allocation, and

·         presentation & disclosure.

Those for transactions are:

·         occurrence (validity),

·         completeness,

·         accuracy,

·         cut-off and

·         classification.

Management implicitly assert that account balances and underlying classes of transaction do not contain any material misstatements: in other words, that they are materially complete, valid and accurate. Auditors gather evidence about these assertions by undertaking activities referred to as substantive procedures.

Examples

For example, an auditor may: physically examine inventory as evidence that inventory shown in the accounting records actually exists (existence assertion); inspect supporting documents like invoices to confirm that sales did occur (occurrence); arrange for suppliers to confirm in writing the details of the amount owing at balance date as evidence that accounts payable is a liability (rights and obligation assertion); and make inquires of management about the collectibility of customers' accounts as evidence that trade debtors are accurate as to its valuation. Evidence that an account balance or class of transaction is not complete, valid or accurate is evidence of a substantive misstatement but only becomes a material misstatement when it is large enough that it can be expected to influence the decisions of the users of the financial statement.

Types of procedures

There are two categories of substantive procedures - analytical procedures and tests of detail. Analytical procedures generally provide less reliable evidence than the tests of detail. Note also that analytical procedures are applied in several different audit stages, whereas tests of detail are only applied in the substantive testing stage.

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 to ensure that the procedure functions as planned

§  Inquiring or observing regarding a transaction

Examples of substantive procedures are:

§  Bank confirmation

§  Accounts receivable confirmation

§  Inquire of management regarding the collectibility of customer accounts

§  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

§  Confirm the calculations on an inventory valuation report

§  Observe fixed assets

§  Match purchase orders and supplier invoices to fixed asset records

§  Confirmaccounts 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

cconduct a physical observation of the assets, and then test for record accuracy by evaluating whether there is an asset impairment.