Question

2. What do we mean by the term substantive analytical procedures? Give an example of how an auditor would perform an analytical procedure for acquisitions? 3. What substantive analytical procedures might an auditor use to perform an analytical procedure for accounts payable?

Answer 1

Substantive analytical procedures are used to obtain evidential matter about particular assertions related to account balances or classes of transactions.

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.

To audit accounts payable, analytical procedures can be performed as a high-level review. This can be done by looking at the trend and ratios of the accounts payable to see if there is any significant fluctuation that we should take note of and make further investigation.

Comparing payable balance at the current year to the previous year is the procedure to test the reasonableness of the changes. We also calculate the ratios of accounts payable’ turnover and account payable days then compare them to the previous year and the industry data.

In normal cases, the ratios shouldn’t be much different from the previous year; hence, we should expect the accounts payable’ turnover and account payable days to stay around the same as the previous year. Therefore, we usually need to investigate further if there is a significant difference in the result.