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Difference between substantive analytical

procderure and analytical procedures


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, dont 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.
.
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
Benfords 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 ratioor 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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