Tests of controls definition
/What are Tests of Controls?
A test of controls is an audit procedure to test the effectiveness of a control used by a client to prevent or detect material misstatements. The intent of these tests is to decide whether the controls are adequate for the detection and prevention of material misstatements.
A test of controls is made irrespective of the dollar amount of the underlying business transaction. The main point of the test is to see if a control functions properly, so the dollar amount of a transaction is not of consequence to the goal of the test.
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The following are general classifications of the different types of tests of controls:
Reperformance Classification
Auditors may initiate a new transaction, to see which controls are used by the client and the effectiveness of those controls. This is one of the more reliable ways to test controls, since the auditor can see how controls work in real time, as the transaction is processed by the client’s accounting system.
Observation Classification
Auditors may observe a business process in action, and in particular the control elements of the process. This is a slightly more passive test than reperformance, since it involves an observation of an actual client transaction, rather than a transaction initiated by the auditor.
Inspection Classification
Auditors may examine business documents for approval signatures, stamps, or review check marks, which indicate that controls have been performed. If the inspection approach is used, a test of controls is typically conducted for a sample of documents related to transactions that occurred throughout the year. This means that the auditor must pick a random sample of transactions for a detailed review. Doing so provides evidence that the system of controls has operated in a reliable manner throughout the reporting period.
How Tests of Controls are Used
Depending on the results of this test, auditors may choose to rely upon a client's system of controls as part of their auditing activities. If the auditors encounter an error in a test of controls, they will expand the sample size and conduct further testing. If additional errors are found, they will consider whether there is a systematic controls problem that renders the controls ineffective, or if the errors appear to be isolated instances that do not reflect upon the overall effectiveness of the control in question. If the auditors conclude that controls are weak, they will enhance their use of substantive testing, which usually increases the cost of an audit.
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