What is Substantive audit approach / Vouching approach?

There are many different auditing methodologies or in other words auditing approaches which can be used by the auditor to conduct an audit engagement. Which audit approach is better or should be used to much extent was (and to some extent still is) dependent on the audit firm.

One of the approaches is vouching approach, also known as substantive approach or direct approach or direct verification approach. It is one of the traditional approaches which was much popular before risk-based audit approach was developed.

In substantive audit approach auditor seeks to verify almost each and every transaction on his own without relying on the information provided by the management i.e. zero reliance is placed on the internal control system of the entity and any information produced by that system. Thus auditor will have to “vouch” for everything by conducting  a detailed examination of financial information underlying financial statements.

Vouching is done by examining the accounting process right from the inception and then observing the accounting process that took place regarding identification of the transaction, measuring the monetary effect of transaction, classification of transaction and recording of transaction. This verification that appropriate measures have been taken by the management on each step in the accounting process is actually vouching process adopted by the auditor.

However, the use and application of this approach is marred by the fact that it utilizes so much resources to conduct and audit and also completely rejecting the entity’s internal control system and the information produced by it is also not the right approach under every situation. Even if we agree on disregarding entity’s control system, still this approach is too demanding towards resources required and thus cause serious cost-benefit issues for audit firms.

As new audit approaches have already been developed which are not only efficient but also effective and helps developing a comfortable working relationship between practitioner and the client therefore, this approach has now became a part of new approaches instead of stand alone auditing approach. Business Risk approach, also known as risk-based approach, is the one that is now a days used by audit firms to complete audit assignments.

Also International Auditing Standards (IASs) emphasizes on understanding the entity and its environment including its internal control system in order to understand the risk of material misstatements at financial statement and assertion levels. And based on such understanding, auditor should design further audit procedures. Which in simple words mean that even International Auditing Standards are also of the view that auditor follows the risk-based audit approach.

1 COMMENT

  1. Hello
    its very helpful for the ACCA students.

    Thanks again

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