What is the Audit Test of Controls?

Key Takeaways

  • Audit testing’s primary goal is to examine and confirm the efficacy of a company’s controls to record its financial transactions. It tests the financial accounts and finds any errors, omissions, or significant inaccuracies.One type of Audit test is the Test of Equities which focuses on the general ledger end balances, which are ultimately carried over to the balance sheet, the public face of the business’s finances.It focuses on the general ledgers’ ultimate balances, carried forward to the balance sheet, the company’s financial picture for the general public.A process used by auditors to determine the accuracy with which transactions are recorded by performing an audit test on a sample of a similar group of transactions.

Purpose of Audit Test of Control

The main purpose of audit testing is to check and verify the level of effectiveness of controls followed by an organization while recording its financial transactions. It ensures that it tests and detects any error, omission, or material misstatements in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. Once an auditorAuditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws.read more carries out testing, based on results, he may decide to further take some samples for testing or rely on clients’ internal controls.

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Example of Audit Test

Let take an example.

AM Inc., a US-based company, is engaged in manufacturing and producing certain antique pieces. Now, apart from this main objective, the company deals in accepting security deposits from various vendors, customers, and the common public for an interest in return.

For people from whom the company has accepted deposits in any year, the average ranges from 10,000 to 12,000 at any given time. During the audit, the auditor decides to undertake the audit of the security deposit on a sample basis. Therefore, he selects a sample of all deposit holders having a deposit of more than $10,000 at any given point in the year. Based on such a test, the auditor may give his opinion on the aspect of security deposits.

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  • Auditing I: Conceptual Foundations of AuditingAuditing II: The Practice of Auditing

Types of Audit Test

#1 – Risk Assessment

Undertaken to identify and understand risks, the company entails considering the environment within which it operates.

#2 – Test of Control

It aims to test the effectiveness of internal controlsInternal ControlsInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more carried out by the company. The auditor undertakes a detailed examination of controls.

#3 – Substantive Test – Transactions

The main aim of this test is to identify whether any fraud, error, or material misstatement exists in the organization.

#4 – Substantive Test – Procedures

It is similar to the test discussed above; however, this one aims at evaluating the financial statements by carrying out a detailed study of the relationship of actually recorded amounts with the expected. It involves financial as well as non-financial data.

#5 – Test of Balances

It focuses on the end balances of the general ledgersGeneral LedgersA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. read more, which are eventually carried forward to the balance sheet, which is the face of the company financials.

Advantages 

  • It helps an audit select a few samples from a large group of transactions. Thus, it reduces the volume of work involved.

  • Saves a lot of time;Eventually saves his workforce and labor to be employed.Saves on cost on account of lesser time involved and low workforce associated;From the auditors’ point of view, he shall be able to take up more clients.Improves efficiency, as auditing similar voluminous transactions can be tiring.The testing sample will give him comfort about the overall control over systems in an organization.Samples are selected randomly, and thus, there is no control by management board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals.

  • read more accounting staff, or any other person. Thus they remain alert and careful while posting financial transactions at each stage.It can help the auditor assess the fairness of the preparation of the financial statements.

Disadvantages

  • The audit test selects sample transactions for testing, and it is very well possible that any transaction about fraud may get left out.The auditor’s responsibility increases as he needs to be sure that the sample covers all the aspects of transactions being carried out by the organization, and he leaves no stone unturned to check on any undetected errors or frauds.Audit Testing may work where the volume of transactions is very high. It will make no sense to follow audit testing from organizations operating on a small scale.It is possible that since the management, board, and accounting staff knows’ that audit shall be done using a sample testing method, they may remain careless in the hopes that any fraud or error may not get caught by the auditor.The auditor may leave complicated transactions out of its sample and only focus on simpler transactions to ease his work.Risky to be done in case there are no or weak internal controls.

Conclusion

An audit test is a procedure adopted by an auditor to test a sample of a similar group of transactions to conclude the fairness with which the transactions are recorded. It involves undertaking tests in five ways to arrive at a wholesome picture of the effectiveness of internal controls and whether there are any errors, omissions, or material misstatements while preparing the organization’s financial statements.

This article has been a guide to what is Audit Test and its definition. Here we discuss the audit test of control with types, examples, and benefits. You can learn more about accounting from the following articles –

Inquiry, observation, examination, re-performance, and computer-assisted audit techniques (CAAT), which entail testing massive amounts of data using computer algorithms, are the five test methods that auditors may utilize.

The service organization uses five key approaches to go through and test each control that is in place. These techniques are ranked from least complex to most complex: investigation, observation, scrutiny of the evidence, repeat performance, and computer-assisted auditing (CAAT).

Audit testing’s primary goal is to examine and confirm the efficacy of a company’s controls to record its financial transactions. It tests the financial accounts and finds any errors, omissions, or significant inaccuracies.

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