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Principles
The level of assurance to be obtained from substantive procedures depends both on the risk assessment and on the level of reliance on internal controls.
However, irrespective of the assessed risk and level of reliance on internal controls, the auditor should design and perform substantive procedures for each material item. This is because risk assessment is judgemental and the auditor may not have identified all risks, and there are [link title="inherent%20limitations%20to%20internal%20controls" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FInternal-control.aspx%23Inherent-limitations-of-internal-controls" /]
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When the auditor determines that an assessed risk at the [a-glossary term="audit%20assertions"]assertions[/a-glossary]
level is a significant risk, (s)he should perform substantive procedures specifically responsive to that risk. When the approach to a significant risk consists only of substantive procedures, these should include tests of detail.
Nature of substantive procedures
There are two categories of substantive procedures:
- Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time.
- Tests of details are ordinarily more appropriate to obtain audit evidence for certain assertions, including existence, eligibility and valuation.
Depending on the audit evidence to be obtained, the auditor may decide to use a combination of tests of details and analytical procedures.
Timing of substantive procedures
Substantive procedures may be performed either at an interim date or at period end. When substantive procedures are performed at an interim date, the auditor should perform appropriate substantive procedures, combined with tests of controls unless the auditor deems it unnecessary, in order to cover the remaining period and reduce the risk that deviations at period end are not detected. If deviations are detected at an interim date, the auditor should modify the risk assessment and consequently the nature, timing and extent of substantive procedures covering the remaining period.
Extent of substantive procedures
The extent of substantive procedures refers to the choice of the nature and size of the sample in order to address all the significant risks in all the relevant audit assertions. The extent of substantive testing is determined when building the audit approach. Depending on the materiality level and the [link title="combined%20assessment" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FAssurance-model.aspx" /]
of inherent risk and control risk, the extent of substantive procedures will be either minimum, standard or focused (with reliance based only broadly on substantive tests).
In cases where the auditor has decided not to rely on internal controls, when performing substantive procedures (s)he cannot assume that the controls relating to the item are operating effectively or that the data are reliable. Unreliable or untested internal controls should require the auditor to check the reliability of the data processed and adjust the extent of substantive testing accordingly.
Instructions
Main areas for which substantive audit procedures may be undertaken when testing for [link title="compliance%20with%20applicable%20laws%20and%20regulations" link="%2Faware%2FCA%2FPages%2FConcepts%2FObjectives-of-compliance-audit.aspx" /]
:
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Legal Base For any "significant Union action", the existence of the required legal base (e.g. the TFEU; Financial Regulation; Interinstitutional Agreement; Decision; Regulation; Directive). Selection Procedure – direct expenditure (where applicable)- Compliance with the regulations on calls for tender.
- Respect of the principles of proportionality, transparency, equal treatment and non-discrimination as laid down in the Financial Regulation.
- The coherence and consistency of the contracts and any amendments with the selection procedures (call for tender, evaluation report, recommendations for selection, etc.).
Selection Procedure – grants (where applicable) Call for proposals, eligibility criteria, evaluation committee recommendation and authorising officer decision. Financing decision, budgetary and legal commitment- The adoption of the financing decision before any budgetary commitment.
- The existence of the budgetary commitment prior to a legal commitment.
- The grant agreement includes the elements required and is dated and signed by the duly authorised official.
Payment authorisation- Payment in accordance with the specifications of the related budgetary commitment (supporting documentation) and paid by the regulatory deadline.
- The amount of the payment is correctly calculated and in line with the legal and contractual provisions (e.g. regarding co-financing rate, exchange rate, eligibility of costs declared, etc.).
- The payment instruction refers to the correct recipient (name and bank account).
- The payment was actually processed (bank statement).
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- Claims exist and eligibility requirements are satisfied.
- Project receipts (including interest on pre-financing) are correctly declared and calculated; cofinancing requests are correctly calculated.
- Respect of contractual provisions (e.g. regarding subcontracting, payment delays, allocation funds within the consortium, etc.).
- Contractually agreed deliverables.
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