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Substantive procedures are performed to detect material misstatements in significant accounts at the end of the period. These procedures can be classified into substantive analytical procedures and tests of details.
Substantive Analytical Procedures
Substantive Analytical Procedures
Substantive analytical procedures involve developing an independent expectation of the account balance and comparing it to the recorded amount. Examples include:
Comparing revenue and accounts receivable ratios to prior years and industry norms.
Analyzing the aging of accounts receivable to assess collectability.
Evaluating sales returns and allowances for patterns of misstatement.
Tests of Details
Tests of Details
Tests of details directly verify transactions and balances. These tests are designed to address relevant assertions such as existence, completeness, valuation, and cutoff.
1. Revenue (Sales)
1. Revenue (Sales)
2. Accounts Receivable
2. Accounts Receivable
Confirmation of Accounts Receivable
Confirmation of Accounts Receivable
Positive Confirmations: Sent to customers requesting a response whether they agree with the balance.
Negative Confirmations: Sent to customers requesting a response only if they disagree.
Alternative Procedures: If no response is received, auditors check subsequent cash receipts, examine customer orders and invoices, or review correspondence.
Positive confirmation
Positive confirmation
Negative confirmation
Negative confirmation
Additional Procedures
Additional Procedures
Reviewing Cutoff Transactions: Ensuring revenue and receivables are recorded in the correct period.
Assessing Collectability: Examining customer payment history and discussions with credit managers.
Evaluating Contract Terms: Reviewing agreements for hidden obligations or side agreements.
By performing these substantive procedures, auditors provide reasonable assurance that the revenue and accounts receivable balances are fairly stated at the end of the period​.
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