Substantive Testing

Substantive Testing

Audit procedures designed to detect material misstatements at the assertion level in financial statements, including analytical procedures and detailed tests of transactions, account balances, and disclosures.

For example, to test the existence assertion for accounts receivable, an auditor might send confirmation requests to a sample of customers asking them to verify balances owed. For inventory valuation, substantive testing might include comparing inventory costs to vendor invoices and subsequent sales prices to verify that inventory is properly valued at the lower of cost or net realizable value.

Substantive procedures complement control testing in the audit process. They fall into two categories: analytical procedures (evaluating financial information through analysis of plausible relationships) and tests of details (examining transactions, balances, and disclosures). The nature, timing, and extent of substantive procedures depend on risk assessments and control testing results, with higher risk areas requiring more rigorous testing. Even when controls are deemed effective, some substantive testing remains necessary for material account balances. These procedures provide direct evidence about financial statement assertions regarding existence, completeness, rights and obligations, valuation, presentation, and disclosure.