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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. Types of Substantive TestsThe following list is a sampling of the available tests:
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 AuditsSubstantive 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. What is an Accounts Receivable Confirmation?When an auditor is examining the accounting records of a client company, a primary technique for verifying the existence of accounts receivable is to confirm them with the company's customers. The auditor does so with an accounts receivable confirmation. This is a letter signed by a company officer (but mailed by the auditor) to customers selected by the auditors from the company's accounts receivable aging report. The letter requests that customers contact the auditors directly with the total amount of accounts receivable from the company that was on their books as of the date specified in the confirmation letter. The auditor typically selects customers for confirmation that have large outstanding receivable balances, with secondary consideration given to overdue receivables, followed by a random selection of customers having smaller receivable balances. Since the information obtained through confirmations comes from a third party, it is considered to be of higher quality than any information that an auditor could have obtained from the client company's internal records. The Difference Between Positive and Negative ConfirmationsThere are two forms of confirmation, which are noted below. Positive ConfirmationThis is a request to provide a response to the auditor, whether or not the customer agrees with the receivable information listed in the confirmation. Negative ConfirmationThis is a request to contact the auditor only if the customer has an issue with the accounts receivable information contained within the confirmation. This is a less robust form of evidence, since there is an inclination by customers to not contact the auditor, which leads to the presumption by the auditor that customers agree with the presented accounts receivable information. Alternative Audit ProceduresIf customers do not return confirmations to the auditor, the auditor may go to considerable lengths to obtain the confirmations, given the high quality of this form of evidence. If there is no way to obtain a confirmation, then the auditor's next step is to investigate subsequent cash receipts, to see if customers have paid for those invoices that were not confirmed. This is a strong secondary form of evidence that the accounts receivable outstanding at the end of the reporting period being audited were in existence at that time. Dealing with Confirmation VariancesIf the information received from a customer varies from the receivable amount listed in the company's receivable report, the auditor usually asks the company to reconcile the difference, which the auditor can then take further action on, as necessary. What is the purpose of subsequent events review?The objective of the former is to identify any events, favorable and unfavorable, that occur between the date of the financial statements and the date of the auditor's report while the objective of the latter is to identify any unrecorded liabilities as at year-end to address the completeness of liabilities.
What is Subsequent testing in audit?ISA 560, Subsequent Events outlines the auditor's responsibility in relation to subsequent events. For the purposes of ISA 560, subsequent events are those events that occur between the reporting date and the date of approval of the financial statements and the signing of the auditor's report.
What is a subsequent event in audit process?A subsequent event is an event that occurs after a reporting period, but before the financial statements for that period have been issued or are available to be issued. Depending on the situation, such events may or may not require disclosure in an organization's financial statements.
What is the purpose of substantive testing?Substantive testing is known as the phase of an audit where the auditor gathers samples to identify any material misstatements in the client's accounting records or other information. This proof is required to support the judgment that a company's financial records are complete, relevant, and accurate.
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