Substantive testing is a key phase in the internal audit process where auditors perform detailed procedures to detect material misstatements in financial accounts. These procedures aim to obtain direct evidence regarding the accuracy, completeness, and validity of transactions. Substantive testing is used in addition to control testing and becomes especially important when internal controls are found to be weak or ineffective.
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Common substantive procedures include:
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Analytical procedures – Comparing actual results to expectations
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Inspection – Reviewing invoices, contracts, and receipts
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Confirmation – Requesting verification directly from third parties
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Recalculation – Recomputing figures to test mathematical accuracy
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Observation and inquiry – Asking relevant staff and observing physical assets
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In accounts receivable audits, auditors often use confirmation letters to verify outstanding balances. There are two types:
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Positive confirmation – The customer must respond, whether they agree or disagree with the stated balance.
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Negative confirmation – The customer only responds if the balance is incorrect.
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Practical Example: An internal auditor at a wholesale electronics company runs substantive tests on revenue and receivables. After identifying inconsistencies in aging reports, the auditor sends positive confirmations to a sample of 30 customers with balances over $20,000. Five customers reply with differences due to unapplied discounts and shipping errors. In addition, the auditor recalculates invoices and compares them to shipping records, uncovering that 8% of sales were recorded before delivery, violating the occurrence assertion.
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The audit findings prompt management to review revenue recognition timing and enforce tighter reconciliations. Substantive procedures thus provide strong audit evidence and help internal auditors identify errors, strengthen reporting reliability, and recommend process improvements.