Substantive implies that you do “manual” checking, if you are going to do just analytical procedures you can get away with variance analysis, etc. However, substantive means you are going to review actual documents, check the existence of the assets, etc.
Substantive procedures (or substantive tests) are those activities performed by the auditor to detect material misstatement at the assertion level.
The different assertions of balances are completeness, existence, rights + obligations and valuation + allocation, those for transactions are occurrence (validity), completeness, accuracy, cut-off and classification.
Management implicitly assert that account balances and underlying classes of transaction do not contain any material misstatements: in other words, that they are materially complete, valid and accurate. Auditors gather evidence about these assertions by undertaking activities referred to as substantive procedures.
For example, an auditor may: physically examine inventory as evidence that inventory shown in the accounting records actually exists (existence assertion); inspect supporting documents like invoices to confirm that sales did occur (occurrence); arrange for suppliers to confirm in writing the details of the amount owing at balance date as evidence that accounts payable is a liability (rights and obligation assertion); and make inquires of management about the collectibility of customers’ accounts as evidence that trade debtors are accurate as to its valuation. Evidence that an account balance or class of transaction is not complete, valid or accurate is evidence of a substantive misstatement but only becomes a material misstatement when it is large enough that it can be expected to influence the decisions of the users of the financial statements.
Fundamentally, analytical procedures and substantive analytical procedures, don’t differ at all. The difference between the terms actually refers to the timing of these procedures i.e. when they are performed.
Analytical procedures are used at various stage be it at planning stage, sample identification stage (identifying odd ones out from the population), during substantive testing or finalization stage. When analytical procedures are used at substantive testing stage, they are referred to as Substantive Analytical Procedures.
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Analytical Procedures would mostly include analysis of various ratios and trends with respect to different relationship that persists between different ratios and balances (for example Gross Profit to Cost and so on). Analytical procedures also include budget variance and industry wide ratio analysis. Any fluctuations and abnormalities in data set obtained would be investigated. Ofcourse, the battery of procedures at substantive procedure stage would exceed those at planning and review stage.Analytical Procedure is the analysis of ratios of a company. For e.g.:
– comparison of current year with last year
– comparison of current year actual with budgets
– comparison of entity ratios with industry practices
– month to month comparison and etc.
Analytical procedures could be used at various stages of audit i.e.
– Understanding and Risk assesment Stage
– Planning the audit
– Testing
– Review
Whereas, when analytical procedures are performed as substantive procedures for testing details by auditors, they are specifically called substantive analytical procedures.
They are not both “analytical”, but “substantive” and “analytical”. Substantive procedures are reviews of documents for a “substantial portion” of account activity, while analytical procedures include controls test and test relying on mathematical relationships reflectinb accounting mechanics, contractual provisions [debt times interest rate], or business capabilities [production per machine hour or day].
Substantive analytical procedures involve setting an expectation for testing purposes. For example, we might set an expectation in analyzing sales invoice detail by saying we expect that the sales amounts on the invoices will follow the pattern predicted by Benford’s Law. For substantive analytical procedures we then investigate and explain differences between our expectation and reality.
For “general” analytical procedures, we test relationships in financial data. The most typical example is a simple ratio analysis. An example would be something like a three year analysis of the current ratio…or inventory turn-over. We typically do not have expectations for general analytical procedures, or at least have no formal requirement to document them.
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