The management of a client entity impliedly asserts that all account balances underlying the financial statement items are materially complete, valid and accurate. During the substantive testing stage, the auditor, using substantive procedures, gathers evidence in relation to these account balance assertions (and, where the audit approach is in-depth, in relation to underlying classes of transactions).
The nature, timing and extent of the substantive procedures applied is set out in the audit programs. The nature of the substantive procedure refers to the different methods of gathering evidence; timing of the procedures refers to when the procedures are to be performed (e.g. before, on or after balance date); and the extent of substantive procedures refers to how many items are to be selected for examination. (Auditors select for examination, those account balances and transactions they consider to be material, plus a random selection of other account balances and/or transactions.)
Methods that auditors employ to gather substantive evidence include ratio analysis, reasonableness tests, inspection of documentation, vouching of entries in accounting records, and recalculating computations made by the client's employees. In addition to these manual procedures, the auditor also uses computer assisted audit techniques (or CAATs) to gather substantive evidence.
In theory, auditors make an evaluation of AR4 based on updated evaluations of inherent, control and detection risks (i.e. IR4, CR4 and DR4). The acceptable level of audit risk AR*4 is also reevaluated. If the achievable level AR4 is less than or equal to the acceptable level AR*4, the auditor determines that the account balance is not misstated; otherwise, if the gathering and evaluation of further evidence cannot reduce the achievable level of audit risk to an acceptable level, the auditor determines that the account balance is misstated. In practice, auditors may not always apply this aspect of audit risk theory, at least consciously [fn].
