What is the test of controls? (Definition, Purpose Procedures vs. Test of Details).

The “Test of controls” is a kind of audit process that we do in order to assess whether the customer’s inner control works effectively in detecting or preventing dangers of material misinformation at the level of assertion.

 As auditors, we usually try to find the inner controls that can decrease the threats of material misinformation while achieving a clear view of the customer’s inner control. After that, we do the test of controls to achieve the evidence of how the controls operate effectively in exercise prior we can depend on them.

Consequently, we may choose to depend on the controls and decrease some of our important tasks if the customer’s controls perform as intended after achieving the outcomes of the test of controls.

In contrast, if the controls are feeble and not strong in detecting or preventing threats of material misinformation, the threats of control would be higher. At this instant, we will be required to enlarge our substantive tests to decrease the audit threats to a considerable level.

So, In this method, the tests are required as evidence to assist the assertion that the financial records of an entity are accurate, valid, and complete. There are several substantive tests for auditors to use to avoid threats.

  • Observe the period-end physical inventory count
  • Verify the inventory valuation calculations validity
  • Connect clients to verify that accounts receivable balances are right.
  • Verify with professionals that the fair values allotted to assets achieved by a combination of business  are sensible
  • Call producers to verify that accounts payable amounts are right
  • launch a bank verification to test ending cash amounts
  • Call the usurer to verify that loan amounts are correct
  • Objectively compare the fixed assets to record fixed assets
  • Discuss the directors of board minutes to conform the presenceence of legalised dividends

Test Controls Purposes

We can conduct the test controls for evaluation if the two main purposes of test controls are working effectively:

  • Decreasing substantive audit process
  • Achieving Extra audit evidence

Decreasing substantive audit process

The main aim of the test of controls is to decrease the substantive audit process by depending on the customer’s inner controls. It happens when we make sure the customer’s inner controls perform very effectively in detecting or preventing the threats of material misinformation at the level of assertion. 

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It is the condition when we have evaluated that the control danger is small. Therefore, we are required to conduct the test of controls to get evidence to support our estimation. 

Achieve extra audit evidence

It is the condition when we are not able to get maximum and considerable audit evidence if we only conduct the substantive process singularly. Just as, we want to do the test of controls to achieve the additional audit evidence at the level of assertion.

It will occur when the IT system is used by customers to conduct some business transactions, in which no drafts are maintained or generated.

The Test of Controls has four types

  1. Inquiry
  2. Observation
  3. Inspection
  4. Re-performance

1-Inquiry

The Inquiry is the method of an explanation from the customer regarding the control transactions or procedure. Suppose, we might say the customer’s personal information for an explanation about the inventory counting process at the end of the year.

2-Observation

Observation is the method of staring at the process which is being done by the customers. For instance, we are doing this kind of control test by detecting the inventory counting process that is being conducted by the customer’s at the end of the year. It is to believe that the inner control of inventory present and the process are as defined.

Same as an inquiry, the audit evidence which we are collecting to perform an observation is too finite. It is because when the customer’s service providers are aware that they are being looked at, they might attempt to be more industrious in doing the inner control process than first when they were not being observed or looked at.

3-Inspection

Inspection is the procedure of results to support drafts regarding the control process. For instance, we might check or do an inspection on the report of the bank’s reconciliation to believe that it lives and gives as elaborated, such as the reviewer and the preparer are not the same guys.

This kind of test of control may give us strong evidence in comparison to the observation and inquiry. It is because of inspecting the evidence physically that the control processes are in position and conducted by the customer’s personnel. 

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Whereas, we often do the inspection physically on the records sample as it would be inappropriate to do all transactions; therefore, there is risk sampling occurring. Also, when we look at the signature of authorization on assistance drafts, it is not the idea that the person authorized has uniformly and inspected transactions prior to permitting them. 

4-Re-performance

This is the method of re-performing auditors, in it the control process that was taken by the customer such as auditors, we can re-perform the reconciliation process of the bank that was done by the accountant of the customer.

Moreover, the “Re-performance” is the very legal kind of test of controls and gives us the guarantee as compared to other kinds. It is because we collect evidence directly on how the control performs when re-performance is used by us.

The re-performance of the lower side is a very exhausting procedure, as we want to re-conduct all the procedures of the control process that the customers have already executed. Therefore, we are not executing this kind of process on huge samples. 

Test of Controls Examples

We rarely do the test of controls after guessing that the customer’s inner control may decrease the threat of material misinformation at the level of assertion. Here are the test assertions of various audits.

  • The assertions may occur:
  • Classification
  • Occurrence
  • Cut-off
  • Existence
  • Completeness
  • Accuracy
  • Valuation

Etc.

For instance (sales) test of controls

 We conduct the test of controls for sales by examining several assertions via- cut-off, completeness, and occurrence.

Occurrence

We examine occurrence assertion to make sure that there is important inner control in position to go away the danger of exaggeration of sales, both by inflating the actual or sale fictitious invoices sales. At this instant, we may do a test of controls by:

  • Choosing sale sample transactions in the general ledger
  • Vouch the chosen transactions to draft sale invoices, sale orders, and shipping.

Completeness

We examine completeness assertion for making sure that all sales are noted down in the transactions. So, we may execute a test of controls to make sure completeness by:

  • The documents are supported by scans such as shipping, sale invoices, documents, and sale orders.
  • The documents are traced by shipping to sale transactions in the general ledger.
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Cut-off

We test cut-off assertion to ensure that sale transactions have been recorded in the correct accounting period. In this case, we can perform a test of controls to ensure cut-off by:

  • Tracing the shipping date of the document to the sale transaction and date of sale invoice.
  • Review FOB and check terms to make sure they have been legally executed.

Test of Controls vs Test of Details

With all the above tests of controls the examples, the process of audits is the same as the test of details. Whereas, they are not similar; although, they are entirely not the same. There is a different list of both test of details and test of controls:

We do the test of controls to aid to manage danger assessment, however, the test of details means to assist audit. 

  • The aim of the test of controls is to get evidence of audit that the inner controls are very strong in detecting or preventing misinformation material. In contrast, the test of details is to collect evidence of an audit to make an opinion basis. 
  • We just do a test of controls when we judge that the control danger is small, and it has the ability to decrease the danger of misinformation material. On the other hand, we usually desire to do a test of details to get enough considerable evidence of audit if an analytical substantive process is not appropriate.
  • The test of controls results elaborates the time, originality, and lots of the test of details, however, the test of details results defines the conclusion audit on legal assertions of balances and account transactions. 
  • The test of controls is built on threat control. For example, we will not do the test if the control threat would be high. In contrast, the test of details is built on threat detection. For instance, if we want a lower stage of risk detection, we would do lots of tests of details.
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