Wednesday, September 22, 2021

What is the Substantive Audit Approach

An audit approach defines the strategy that auditors use to conduct an audit. Usually, auditors use a specific audit approach for every audit assignment based on several factors. Among these approaches, some may apply to clients or engagements in different industries. One of these includes the substantive audit approach, also known as the vouching approach.

What is the Substantive Audit Approach?

The substantive audit approach is a strategy that auditors use that primarily focuses on substantive procedures. This approach requires auditors to perform more work. However, it also allows them to test the subject matter in more depth. The substantive audit approach is the opposite of the system-based audit approach, which relies on internal controls.

Auditors use the substantive audit approach to verify balances and transactions in more detail. Usually, auditors assess the client’s internal control systems first. If they believe they cannot rely on the systems in place at the client, they will choose the substantive audit approach. In other words, this approach is beneficial when auditors believe the client’s internal control systems to be inefficient.

How does the Substantive Audit Approach work?

As mentioned, the substantive audit approach begins with an assessment of a client’s internal control systems. Usually, auditors do so to decide on the audit strategy to use. If a client’s internal control systems are reliable, auditors will prefer the system-based approach to audits. On the other hand, if they can’t trust those systems, they will use the substantive audit approach.

The substantive audit approach requires more work from auditors. Since auditors cannot rely on the client’s internal control systems, they will seek to cover the audit risks through substantive procedures. These procedures primarily include a test of details and substantive audit procedures. With this approach, auditors will select a larger sample of events and transactions and test them.

The substantive approach to audits focuses on testing balances and transactions in detail. It is why it is also known as the vouching approach to audit. This approach may apply to both internal and external audits. Auditors perform thorough vouching by looking at supporting documents for all items tested. In case the client's internal controls are inefficient, this approach can be highly effective.

What are the advantages and disadvantages of the Substantive Audit Approach?

The substantive approach to audits allows auditors to test balances and transactions in detail. By doing so, they can cover a significantly higher portion of audit risks compared to other approaches. However, that is still subject to sampling risks. This approach is also one of the traditional approaches to audit and is easy to understand. Substantive audits are beneficial when auditors can’t rely on the client’s internal controls.

The substantive audit approach has some drawbacks, though. The primary one of these includes more work performed by auditors. Since this approach focuses on larger volumes of testing, it significantly increases auditors' workloads. Similarly, the substantive audit approach is not risk-focused. Some auditors consider it outdated due to the number of better alternative audit approaches available.

Conclusion

The substantive audit approach is a strategy that auditors use when the client's internal control systems are unreliable. This approach focuses on a higher volume of testing and vouching. Due to this, auditors will perform more work to cover the audit risks associated with an audit engagement. However, this approach is more traditional, and there are better alternatives available.

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