Substantive Procedures
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Substantive procedures are a core audit concept, and a heavily tested topic on the AUD section of the CPA exam.
What are substantive procedures?
Substantive procedures are the core tasks an auditor performs to detect material misstatements in a company's financial statements. Their purpose is to provide sufficient evidence that the financial statements are free of material error or fraud.
What are the two types of substantive procedures?
- Substantive analytical procedures — evaluating financial information by analyzing relationships among financial and non-financial data
- Tests of details — specific tests of transactions, balances, and disclosures
Example: You're auditing a small software firm that generates revenue primarily through software licenses. As part of your substantive procedures, you select a sample of software license agreements executed during the year and corroborate their details against recorded sales in the financial statements. If a discrepancy turns up — say, revenue is recognized before the license agreement actually permits it — you've caught a material misstatement.
Substantive procedures are where the auditor directly tests the numbers themselves — either by analyzing relationships in the data or by testing individual transactions and balances — to gather the evidence needed to conclude the financial statements are free of material misstatement.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.