1. What are substantive tests? Discuss.

Substantive Procedure is an audit procedure used to detect material

misstatements at the assertion level. Substantive Procedures comprise:
Tests of Details (of classes of transactions, account balances, and disclosures), and
Substantive Analytical Procedures
2. Discuss the substantive tests of the revenue cycle. Provide some examples
Revenue Cycle Risks and Audit Concerns
In general, the auditor’s concerns in the revenue cycle pertain to the potential for
overstatement of revenues and accounts receivable rather than their understatement.
Overstatement of accounts can result from material errors in the processing of normal
transactions that occur throughout the year. In addition, the auditor should focus attention on
large and unusual trans actions at or near period-end.
Testing the Accuracy and Completeness Assertions
Accuracy assertion pertains to management assertions that all transactions were recorded at
the appropriate amount while completeness assertion says that all transactions that should
have been recorded have been recorded. In the Revenue Cycle audit, accuracy and
completeness assertions states that all sales transactions were recorded accurately and
completely
Review Sales Documents and Balances for Unusual Trends and Exceptions
A useful audit procedure for identifying potential audit risks involves scanning data files for
unusual transactions and account balances. For example, scanning accounts receivable for
excessively large balances may indicate that the company’s credit policy is being improperly
applied.
Review Sales Invoices and Customer Master Data for Missing and Duplicate Items
Searching for missing and/or duplicate transactions and data entries is another important test
that helps the auditor corroborate or refute the completeness and accuracy assertions.
Duplicate and missing transactions in the revenue cycle may be evidence of over or understated
sales and accounts receivable.
Testing the Existence Assertion
Existence assertion pertains to management assertions that the assets, liabilities and equity
balances exist. For the revenue cycle audit, existence assertion declares that the customer
balances recorded in the system really exist.

Send Confirmation to Customers to Confirm Balances

 One of the most widely performed tests of existence is the confirmation of accounts receivable.
This test involves direct written contact between the auditors and the client’s customers to
confirm account balances and transactions.
Testing the Valuation and Allocation Assertion
Valuation and Allocation assertion pertains to management assertions that the assets, liabilities
and equity balances are included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are appropriately recorded. For the revenue cycle
audit, valuation and allocation assertion states that the customer balances recorded are in their
proper values.
Aging Accounts Receivable
The auditor’s objective regarding proper valuation and allocation is to corroborate or refute
that accounts receivable are stated at net realizable value, this objective rests on the
reasonableness of the allowance for doubtful accounts, which is derived from aged accounts
receivable balances. To achieve this objective, the auditor needs to review the accounts
receivable aging process to determine that the allowance for doubtful accounts is adequate. As
accounts age, the probability that they will ultimately be collected is decreased. Therefore, as a
general rule, the larger the number of older accounts that are included in a company’s accounts
receivable file, the larger the allowance for doubtful accounts needs to be to reflect the risk.
For example, you are an auditor and your senior give you the revenue cycle for testing. And you
will have some questions about what should you do in control testing and what should you do
in substantive testing.
Basically, you will have to start with the control test by testing all significant controls or key
control related to the revenues.
These testing just to confirm whether the control over the revenue cycle is working or not. It is
not to confirm whether the revenue transactions, amount and classification is correct. Two
things different right?
Now once you performed and conclude that the control over the revenue cycle is working
properly, then it is the time to considers substantive testing.
The substantive testing here is to confirm whether the revenue that records in the income
statement is correct or not. I said correct or not here is just to give you the simple words. In
revenue testing, you might confirm many areas like:
 Testing to confirm cut off
 Confirm the total amount (total sales amount or revenue) by vouching and analytical review
with the cost of sales or inventories.
 Customers confirmation (AR confirmation)
 Check revenue recognition

3. Discuss the substantive tests of the expenditure cycle. Provide some examples.
Expenditure Cycle Risks and Audit Concerns
Taking the narrowest attest-function view, external auditors are concerned primarily with
the potential for understatement of liabilities and related expenses. Substantive tests of
expenditure cycle accounts are therefore directed toward gathering evidence of
understatement and omission of material items rather than their overstatement
Testing the Accuracy Assertion
Accuracy assertion pertains to management assertions that all transactions were recorded
at the appropriate amount In the Expenditure Cycle audit accuracy states that all expense
transactions were recorded accurately
Review Purchasing Documents and Balances for Unusual Trends and Exceptions
A useful audit procedure for identifying potential audit risks involves scanning data files for
unusual transactions and account balances. For example, scanning accounts payable for
excessively large balances may indicate abnormal dependency on a particular supplier
Testing the Completeness Assertion
Completeness assertion says that all transactions that should have been recorded have been
recorded. In the Expenditure Cycle audit, completeness declares that all expense
transactions were completely recorded.
Searching for Unrecorded Liabilities
The search for unrecorded liabilities involves matching the records used by the warehouse
department such as a receiving report to indicate receipt of inventory with the billing
invoice from supplier which is used to record liabilities. A receiving report with no
matching billing invoice might indicate that a liability was not recorded.
Testing the Existence Assertion
Existence assertion pertains to management assertions that the assets, liabilities and equity
balances exist. For the expenditure cycle audit, existence assertion declares that the vendor
balances recorded in the system really exist.
Examine Subsequent Payments to Suppliers
This test involves scanning the payments made in the subsequent period and check if the
payables recorded in the last period were paid.
Testing the Valuation and Allocation Assertion
Valuation and Allocation assertion pertains to management assertions that the assets,
liabilities and equity balances are included in the financial statements at appropriate
amounts and any resulting valuation or allocation adjustments are appropriately recorded.
For the expenditure cycle audit, valuation and allocation assertion states that the customer
balances recorded are in their proper values.
Send Confirmation to Vendors to Confirm Balances
One of the most widely performed tests of existence is the confirmation of accounts payable.
This test involves direct written contact between the auditors and the client’s vendors to
confirm account balances and transactions.