Substantive Procedures

Substantive procedures are the core tasks an auditor performs to detect material misstatements in a company's financial statements. This is not just a term to memorize; it’s an auditing technique that the CPA exams test extensively, particularly in the AUD section. The purpose of substantive procedures is to provide sufficient evidence that the financial statements are free of material error or fraud. Substantive procedures come in two main types:

1. Substantive Analytical Procedures: These are evaluations of financial information through analysis of relationships among financial and non-financial data.

2. Tests of Details: These are 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 may decide to select a sample of software license agreements executed during the year. You would then corroborate the details of these agreements against recorded sales in the financial statements. If discrepancies arise—say, the financial statements recognize revenue before the license agreement permits—you have caught a material misstatement.