AUDIT TESTING

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 OBJECTIVES
• Tests of controls

• Substantive tests
– Directional testing
– Tests of detail
– Analytical review

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 TESTS OF CONTROL
An audit procedure designed to evaluate the
operating effectiveness of controls in
preventing, or detecting and correcting,
material misstatements at the assertion
level.

ISA 330

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 WHEN TO TEST CONTROLS
• Required by risk assessment

• Substantive procedures will not provide

sufficient evidence

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WHICH CONTROLS TO TEST?
• Only test those controls on which reliance will be
placed.

• Can rely on evidence from prior years:

– Controls have not changed in the year
– Tested at least once every three years
– Some controls tested every year
– Controls over significant risks tested every year.

• Use judgement to determine whether

appropriate to rely evidence from prior years.
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 TESTING PROCEDURES
Obtain audit evidence about:
• How the controls were applied at relevant
times
• The consistency of application
• Who applied them
• The means by which they were applied

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 EXAMPLE PROCEDURES
• Enquiries
• Inspection of documents
• Examination of evidence of management
review
• Reperformance of control procedures

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 DEVIATIONS
An event in which a control has not been applied correctly,
regardless of whether a quantitative error has occurred:

Determine:
– Reason for control not functioning
– Is the departure an isolated incident?
– Verify explanations received
– Implications

Report significant deficiencies to management on a timely

basis.

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 SUBSTANTIVE TESTS
An audit procedure designed to detect
material misstatements at the assertion
level. Substantive procedures comprise:
– Tests of details
– Substantive analytical procedures

ISA 330

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 DIRECTIONAL TESTING
• Based on double entry book keeping.

• Test:
Debits Overstatement
Credits Understatement

• Relies on trial balance being tested

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 TEST OF DETAIL
The examination of the transactions and
balances of the business, together with
documentary and other evidence of
sufficient validity to satisfy an auditor that
such transactions and balances are in order,
having been properly authorised, and are
correctly recorded in the accounting records.

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 TESTS OF DETAIL
Advantages
• Generally low level of experience and judgement
required
• Ensures good understanding of system
• Can aid understanding of the business as a whole.
• Errors detected are actual errors.

Disadvantages
• Time consuming
• Boring
• Limited assurance on items that have not been tested.
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 ANALYTICAL REVIEW
Evaluation of financial information through
analysis of plausible relationships among
both financial and non-financial data.
Analytical procedures also encompass the
investigation of identified fluctuations and
relationships that are inconsistent with other
relevant information or that differ from
expected values by a significant amount.

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 ANALYTICAL REVIEW
• Analysing the relationship between financial data

• Analysing the relationship between financial and non

financial data.

• Comparing information for the latest period with the

corresponding information for earlier periods, other
comparable enterprises or industry averages.

• Comparing actual data with predictions derived from

the analysis of known or expected relationships
between items of data etc.
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FACTORS INFLUENCING USE
• Nature of entity and its operations.
• Risk and materiality.
• Results of previous years tests.
• Availability of data
• Reliability of information.
• Plausibility and predictability of relationships.
• Other audit evidence.
• Cost effectiveness.
• Ability and experience of staff

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 PROCEDURES
• Establish expectation
• Perform calculations and obtain data
• Investigate variations
• Substantiate explanations
• Conclusion

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 ADVANTAGES AND
DISADVANTAGES
Advantages
• Gives assurance over the total figure.
• Cost effective.

Disadvantages
• Requires experience, judgement and a thorough
knowledge of the enterprise.
• Variations may be hidden by compensating errors.
• Comparative information may not be available.
• Error is estimated, not actual.

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