Tests Of Controls

Question 1

Tests of controls

Answer 1

Tests of controls are performed to obtain audit evidence about the operating effectivnesss of controls in preventing, or detecting and correcting, material misstatements at the assertion level

They test the control
Of:
Exists
Is properly designed
Has operated throughout the period

Question 2

Tests of controls start with:

Answer 2

Observe
Examine
Inspect
Review
Compare
Verify 
Agree
Enquire
Test

Question 3

Sales systems test example

Answer 3

Assertion: occurrence and existence

Control objective: ensure recoded sales represent goods provided

Controls: sales are recorded only if there is an approved sales order form

Tests of controls: for a sample of sales invoices ensure that there is a related sales order from that has been authorised

Second example:

Assertion: completeness

Control objective: ensure that all revenue is recorded

Controls: accounting for numerical sequences of invoices

Tests of controls; reverie and test entity’s procedures for numerical sequences of invoices and inspect invoices to confirm they are sequentially numbered

Question 4

Purchase system tests example

Answer 4

Assertion: occurrence and existence

Control objective: ensure that recorded purchases represent goods received

Controls: purchase orders and grns are matched with the suppliers invoices

Tests of controls: examine a sample of invoices from suppliers to ensure it has been matched to payables

Example 2:

Assertion: completeness

Control objective: ensure that all purchase transactions that have occurred have been recorded

Controls: accounting for pre numbered purchase orders and grns

Tests of controls: review entity’s procedures for accounting for pre numbered documentation’s and inspect a sample
Of grns for sequential numbering

Question 5

Payroll systems tests example

Answer 5

Assertion: occurrence and existence

Control objective: ensure thag payment is made only to genuine employees of the entity

Controls : employee numbers assigned to each employee in the payroll master. Only employees with valid employee numbers are paid.

Tests of controls: review and test procedures for entering and removing employee numbers from the payroll master file

Example 2(
Assertion: completeness

Control objectives: ensure that all payroll costs are recorded for work done by employees

Controls: regular reconciliations of payroll records and employee costs recorded in the general ledger

Tests of controls: review a sample of reconciliations to ensure they are properly carried out. Reperform a sample of reconciliations

Question 6

Inventory system

Answer 6

The inventory system can be very important in audit because of the high value of inventory

Most of control testing relating to inventory is covered in the sales and purchase testing

Auditors will primarily be concerned at this stage with ensuring that the business keeps track of if it’s inventory:
How inventory movements are recorded
How inventory is secured
Valuation of inventory- extensive tests at the substantive resting stage

Question 7

Bank and cash systems

Answer 7

Objectives:
All monies received are recorded
All monies received are banked cash and cheques are safeguarded against loss or theft
All payments are authorised, made to correct payees and recorded
Payments are not made twice for the same liability

Question 8

Revenue and capital expenditure

Answer 8

It is important to classify Rev she and capital expenditure correctly, otherwise profit and assess will be over or under stated

There is a risk of miss classification between revenue and capital expenditure

Auditors must investigate controls in place to prevent misclassificarion of capital and revenue expenses. If this is overlooked, there is a risk that financial statements might be materially misstated