SUBSTANTIVE PROCEDURES
WHAT ARE SUBSTABTIVE PROCEDURES?
A substantive procedure is defined as follows in ISA 330 paragraph 4(a): “An audit procedure
designed to detect material misstatements at the assertion level”
Substantive procedures comprise:
- Tests of details (of classes of transactions, account balances and disclosures); and
- Substantive analytical procedures.
Let us take a closer look at certain aspects of the definition.
- Detect material misstatement
o The ultimate aim of the auditor is to express an opinion on the fair presentation of
the financial statements.
o To express this opinion, the auditor must perform audit procedures (in this case,
substantive procedures) to obtain audit evidence in order to determine whether the
amounts and disclosures in the financial statements are free from material
misstatement.
o Remember that a misstatement could comprise errors and/or fraud.
- Assertion level
o ISA 315 (revised) paragraph 4 (a) and the glossary of terms, define the assertions as
“Representations by management, explicit or otherwise, that are embodied in the
financial statements, as used by the auditor to consider the different types of
potential misstatements that may occur”.
o As the auditor considers potential material misstatement at the assertion level, it
becomes extremely important to have a good understanding of what the assertion
entails.
o ISA 315 (revised) paragraph A129, determines that potential misstatement, which
may occur, will fall into the following two categories of assertions:
, WHEN SHOULD SUBSTANTIVE PROCEDURES BE PERFORMED?
In terms of ISA 330 paragraph 18 “Irrespective of the assessed risk of material misstatement, the
auditor shall design and perform substantive procedures for each material class of transactions,
account balance and disclosure.”
The reason for this requirement is:
- The auditor’s assessment of risk is judgemental and thus risks may be overlooked; and
- There are inherent limitations to internal controls, for example management override.
In addition, ISA 330 paragraph 21, states the following:
“If the auditor has determined that an assessed risk of material misstatement at the assertion level
is a significant risk, the auditor shall perform substantive procedures that are specifically responsive
to that risk. When the approach to a significant risk consists only of substantive procedures, those
procedures shall include tests of details.” Also refer to ISA 330, par A53 for more detail.
- An auditor will always perform substantive procedures during an audit.
- This is irrespective of whether the auditor decides to perform test of controls or not.
- Assuming the auditor decides to test controls, the auditor will still be required to
perform substantive procedures, which will most probably consist of analytical review
procedures.
- When the auditor decides not to test controls, the auditor will then perform
substantive procedures, which will consist of tests of details and analytical review
procedures.
In terms of ISA 330 paragraph 6 “The auditor shall design and perform further audit procedures
whose nature, timing and extent are based on and are responsive to the assessed risks of material
misstatement at the assertion level”.
The auditor’s response to assessed risks of material misstatement at the assertion level will be
incorporated as follows into the audit plan [ISA 300 par 9, and ISA 330 par 7(a)]:
Nature (ISA 330 par A9 and A10)
For detecting material misstatement at assertion level, including:
- analytical procedures – for large volumes that tend to be predictable over time; and
- tests of details – of all assertions for each material class of transactions, account balance and
disclosure (ISA 330 par 18 and par A42 to A47).
Timing (ISA 330 par A11 to A14)
This refers to when audit procedures are performed or the period over or date at which audit
evidence applies.
When substantive procedures are performed at an interim date, the auditor should perform further
substantive procedures or substantive procedures combined with tests of controls to cover the
WHAT ARE SUBSTABTIVE PROCEDURES?
A substantive procedure is defined as follows in ISA 330 paragraph 4(a): “An audit procedure
designed to detect material misstatements at the assertion level”
Substantive procedures comprise:
- Tests of details (of classes of transactions, account balances and disclosures); and
- Substantive analytical procedures.
Let us take a closer look at certain aspects of the definition.
- Detect material misstatement
o The ultimate aim of the auditor is to express an opinion on the fair presentation of
the financial statements.
o To express this opinion, the auditor must perform audit procedures (in this case,
substantive procedures) to obtain audit evidence in order to determine whether the
amounts and disclosures in the financial statements are free from material
misstatement.
o Remember that a misstatement could comprise errors and/or fraud.
- Assertion level
o ISA 315 (revised) paragraph 4 (a) and the glossary of terms, define the assertions as
“Representations by management, explicit or otherwise, that are embodied in the
financial statements, as used by the auditor to consider the different types of
potential misstatements that may occur”.
o As the auditor considers potential material misstatement at the assertion level, it
becomes extremely important to have a good understanding of what the assertion
entails.
o ISA 315 (revised) paragraph A129, determines that potential misstatement, which
may occur, will fall into the following two categories of assertions:
, WHEN SHOULD SUBSTANTIVE PROCEDURES BE PERFORMED?
In terms of ISA 330 paragraph 18 “Irrespective of the assessed risk of material misstatement, the
auditor shall design and perform substantive procedures for each material class of transactions,
account balance and disclosure.”
The reason for this requirement is:
- The auditor’s assessment of risk is judgemental and thus risks may be overlooked; and
- There are inherent limitations to internal controls, for example management override.
In addition, ISA 330 paragraph 21, states the following:
“If the auditor has determined that an assessed risk of material misstatement at the assertion level
is a significant risk, the auditor shall perform substantive procedures that are specifically responsive
to that risk. When the approach to a significant risk consists only of substantive procedures, those
procedures shall include tests of details.” Also refer to ISA 330, par A53 for more detail.
- An auditor will always perform substantive procedures during an audit.
- This is irrespective of whether the auditor decides to perform test of controls or not.
- Assuming the auditor decides to test controls, the auditor will still be required to
perform substantive procedures, which will most probably consist of analytical review
procedures.
- When the auditor decides not to test controls, the auditor will then perform
substantive procedures, which will consist of tests of details and analytical review
procedures.
In terms of ISA 330 paragraph 6 “The auditor shall design and perform further audit procedures
whose nature, timing and extent are based on and are responsive to the assessed risks of material
misstatement at the assertion level”.
The auditor’s response to assessed risks of material misstatement at the assertion level will be
incorporated as follows into the audit plan [ISA 300 par 9, and ISA 330 par 7(a)]:
Nature (ISA 330 par A9 and A10)
For detecting material misstatement at assertion level, including:
- analytical procedures – for large volumes that tend to be predictable over time; and
- tests of details – of all assertions for each material class of transactions, account balance and
disclosure (ISA 330 par 18 and par A42 to A47).
Timing (ISA 330 par A11 to A14)
This refers to when audit procedures are performed or the period over or date at which audit
evidence applies.
When substantive procedures are performed at an interim date, the auditor should perform further
substantive procedures or substantive procedures combined with tests of controls to cover the
