Auditing is everything about trust. Businesses, regulators, stakeholders and investors rely on auditors for verification of whether or not the financial statements actually reflect financial health of a company. To attain this auditors follow a well-structured method called audit procedures. Within these procedures, there is an important component known as substantive procedures.
Even if they sound same, they serve varied purposes and play different roles in the whole audit process. A proper understanding between these two assists in helping businesses to prepare better for audits and facilitates auditing students and professionals in strengthening the conceptual clarity.
What are Audit Procedures?
Audit procedures are steps and methods that auditors make use of for gathering proofs and determine whether financial statements are free from material misstatements. They support audit right from planning to conclusion.
These procedures assists auditors in identifying risks, assess the internal controls, gather proofs and form a final opinion. They are like the roadmap of the whole audit.
Audit Procedures Mainly Involves:
- Testing controls: These tests do evaluations of the quality and efficiency of the internal records. Strong internal controls decreases the chance of errors and frauds. Some of the instances are reviewing approval procedures, seeing segregation of duties, tracking system access restriction and scrutinizing reconciliations.
- Substantive procedures: These tests do scrutinization of the accuracy, validity and completeness of the financial data. Dissimilar to controls testing, that focuses on the system, substantive procedures mainly targets the numbers and disclosures in the financial statements.
About Substantive Procedures
Substantive procedures are specified audit methods that are used for verification of the actual figures, disclosures and the amounts presented in the financial statements. They are important for detecting material misstatement caused by fraud or error.
Even though internal controls appears dependable, auditors are needed for performing substantive procedures as controls alone can’t give guarantee of absolute accuracy. Substantive procedures falls under two major categories:
- Substantive analytical procedures: These involves comparison of financial data and analysis of relevant relationships. Auditors find trends, fluctuations and patterns that might signal misstatements. Like for instance, doing comparison of existing sales to prior years, reviewing gross profit trends, doing analysis of ratios and checking if the costs aligns with business activity.
- Test of details: These are in detail, document level checks that verified individual transactions or the balances. For example, confirming the receivables with the consumers, scrutinizing the supporting invoices, doing physical inspection of the inventory or checking the bank statements. These tests offers a strong, direct proof.
Difference Between Audit Procedures And Substantive Procedures
Even if substantive procedures are a part of audit procedures, they are substantially different in both focus as well as purpose.
Audit procedures are wide and involves all things right from understanding the internal controls to carrying out risk assessments and doing verification of financial records. They assists auditors in designing the plan, and deciding whether deep testing is needed or not.
Substantive procedures focuses only on verification of financial statement accuracy. They are narrow but are more in detail and they directly address the chance of misstatements. When audit procedures are complete audit strategy, substantive procedures are the target tools utilized for validating numbers.
In simple terms, audit procedures are procedures that assists auditors in understanding how the business operates, but substantive procedures gives confirmation of what all financial statements shows.
Why Both Procedures Are Important?
A premium quality audit can’t depend on just one. Audit procedures alone can’t give confirmation of correctness of financial data. Substantive procedures alone can’t recognize the systemic weaknesses or any risks. Through combination of both:
- Auditors get a high-clarity understanding of the internal systems
- Early identification of risks
- Efforts are effectively allocated
- Misstatement are detected
- Standards of audit are met
- A dependable audit opinion is formed
This creates a balanced approach that makes sure there is transparency and confidence in financial reporting.
Conclusion
Audit procedures and substantive procedures serve a different but complementary role. Audit procedures offers the framework and direction for the audit, while substantive procedures helps in delivering the required evidence for confirming financial statement accuracy. Together they make sure that the whole audit is proper, dependable and in line with professional standards.
For businesses, a proper understanding of these procedures assists them in preparing more efficiently for audits. For students and professionals, identifying the difference helps in strengthening the audit execution and enhances the work quality.
