Auditors may find the risk of material misstatement in an organization’s financial records. Test of details is a substantial procedure where an auditor detects the error in the imbalance of the account ledger.
It helps the auditing firm to dive into the details of financial transactions, account balances, and disclosures with a client. Here, the auditor will check if the accounting entries are passed properly and validate the transaction against the company’s policies.
Read on to understand more about these audit tests that professionals carry on to assess risk.
Table of Contents
Types of Audit Tests
There are two main types of audit tests that an auditor carries to understand the internal control of the sales cycle.
Test of Controls
This process evaluates the company’s internal audit process to prevent or detect risks associated with financial calculations.
There are four main types of test controls:
1. Inquiry
It involves asking the company and understanding the standard control procedures followed by the internal audit team.
2. Observation
In this process, the external auditors will check if the company adheres to the rules and regulations of the risk assessment process. The International Auditing and Assurance Standards Board (IAASB) has set international standards for auditing and quality control for organizations.
3. Inspection
This step examines physical evidence for control procedures like bank statements and some sample financial records from the company.
4. Re-performance
The final step is a time-consuming process. It is usually required in case of high-level discrepancies found in the auditing procedure.
A test of control is applied only to support control risk assessment.
Test of Details
This is a substantial procedure that uses mathematical calculations to find the main source of error in a financial statement.
The purpose of these tests is to determine whether a company maintains accurate accounts of financial transactions or not.
In this process, the auditors select a sample of transactions or records and match it with the general accounting ledger of the company. As an auditor, you are expected to take a call if you require only a test of details or also want to apply analytical procedures.
The steps to perform a test of details include the following:
1. Vouching
Here, the auditor will check the source documents of transactions and verify the sales invoice with the main accounting system.
2. Tracing
This process is the exact opposite of vouching. Here, the auditors will pick a sample of records and trace the accounts in the general ledger. They will use identifier numbers to check if the transactions are mentioned in the main financial records.
3. Circularizations
Here, the auditors cross-verify your purchase details with third-party entities like banks, and creditors. It is one of the most effective pieces of evidence that can verify the internal audit procedures of a company.
4. Checking Terms of Contract
Auditors will check and read the contract agreements with a company’s vendors. It will help them get an overview of the expected payments and balances for purchases.
Final Thoughts
Auditors can choose the right way to do the test of details according to the nature of the organization and the risks associated with the financial statements.
By studying sample documents, auditors can form an opinion if the rest of the financial records of a company are up-to-date and free from errors.
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