I repeat, a test of control tests controls, not amounts in the FS. Enquiry and confirmation. For example, ask the credit controller about the way in which customers are encouraged to pay and ask how these customers are identified and how often they are followed up.
This is a relatively weak source of evidence because the credit controller might exaggerate his or her efforts. For example, the credit references or notes made by the credit controller of conversations.
Recalculation and reperformance. For example, ensuring that the aged receivables analysis seems to be accurate. Even when internal control systems are very good, the auditor will always carry out tests on the figures in the FS. The work has to address all the assertions made by each material figure. For example, valuation, completeness, existence etc.
These tests are substantive tests and consist of:. So, staying with receivables, the auditor would calculate the receivables collection period. If this were not too large and broadly in line with previous periods, the auditor would have gained some evidence about valuation ie most debts not very old. The auditor's tests of the accuracy of monetary amounts of transactions and account balances are known as substantive testing. Substantive testing is very different from testing controls.
Substantive tests verify whether information is correct , whereas control tests determine whether the information is managed under a system that promotes correctness. A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to prevent or detect material misstatements.
These tests are required as confirmation to maintain the declaration that the financial records of an entity are complete, applicable, and correct. Step: It is the second step in audit testing. The objective of the test of controls is to obtain audit evidence that the internal controls are effective in preventing or detecting material misstatement.
On the other hand, the test of details is to gather audit evidence to form a basis of opinion. We only perform test of controls when we assess that the control risk is low and it is effective to reduce the risk of material misstatement. However, we will always need to perform test of details in order to obtain sufficient appropriate audit evidence if the substantive analytical procedure is not applicable or not sufficient.
The result of the test of controls determines the nature, timing and extent of the test of details while the result of the test of details determines the audit conclusion on relevant assertions of account transactions and balances. Test of controls is based on the control risk, e. On the other hand, the test of details is based on the detection risk, e.
This is due to there are some difference below: Difference between walkthrough and test of controls Walkthrough Test of controls To understand accounting system and controls To test effectiveness of internal controls Perform on a single transaction Perform on a sample of transactions to obtain sufficient evidence Look at the transaction from the begin to the end to make a full cycle Only look at a number of incidents that internal controls are being applied Need to perform the walkthrough, even though the control risk is high, to obtain evidence of risk assessment No need to perform the test of controls when the control risk is high Perform during risk assessment to assess the risk of material misstatement Perform after risk assessment to respond to risk of material misstatement.
Test of Controls. Test of Details. Always need to perform if analytical procedure is not applicable or not sufficient. Determine nature, timing and extent of the test of details. Test of controls. Perform on a sample of transactions to obtain sufficient evidence. Look at the transaction from the begin to the end to make a full cycle. Only look at a number of incidents that internal controls are being applied.
Need to perform the walkthrough, even though the control risk is high, to obtain evidence of risk assessment. No need to perform the test of controls when the control risk is high.
Perform during risk assessment to assess the risk of material misstatement.
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