Question

What are substantive procedures?

1) Audit procedures designed to detect material misstatements at the assertion level
2) Audit procedures designed to aid testing controls
3) Audit procedures that are applied when internal controls are not functioning as designed
4) Audit procedures applied to gather appropriate relevant and reliable data

Answer 1

Substantive procedures are audit techniques used to detect material misstatements in financial statements, involving tests of details and substantive analytical procedures. They aim to gather relevant and reliable data to support the auditor's opinion on the financial statements' accuracy.

Step-by-step explanation:

Substantive procedures are a vital component of the audit process, designed to detect material misstatements in the financial statements of an entity. These procedures include tests of details related to transactions, balances, and disclosures, as well as substantive analytical procedures, which involve evaluating financial information through analysis of plausible relationships among both financial and non-financial data. The selection and application of these audit procedures vary based on factors such as the auditor's assessment of risks, the nature of the entity's transactions, and the materiality levels applicable to the financial statements under audit.

The primary goal of these procedures is to provide audit evidence that is both relevant and reliable, to support the auditor's opinion on whether the financial statements are free of material misstatement, whether due to fraud or error. Substantive procedures involve a mixture of techniques including inspection, observation, confirmation, computation, and inquiry, to name a few. For example, an auditor may inspect invoices to confirm that recorded sales transactions actually occurred, or perform analytical procedures comparing current year sales figures with those of previous years to detect unexpected variances that might indicate potential misstatements.

Substantive procedures are directly linked to the auditor's assessment of the risk of material misstatement, and findings from these procedures are crucial in forming the foundation for the auditor's report. They allow the auditor to express a professional opinion with reasonable assurance, underscoring the pivotal role these procedures have in maintaining trust and integrity in the financial reporting process.