Before conducting an audit test, you need to conduct an excellent audit plan, to begin with. That may possibly identify the business risk, materiality and asses the need to include an expert and in this case, the need to include an external auditor.
Generally, Audit test procedures are prevalently used in any organization. The tests majorly determine the effectiveness in which finances have been used in an organization. A recent trend in auditing is the application of computer software’s applications in the auditing process that has hastened the effectiveness of the process. Different company’s bank on different audit tests such as
Different Types of Audit Test
1- Audit Substantive tests
Majorly, Substantive procedures are performed by the Auditor with the main aim of detection of material fraud or monetary misstatement at different assertion level in a company. The audit procedures investigate financial statements with supporting documentation to see if they are error free. Forms of substantive tests that an auditor may use include
- The issuance of bank confirmation which tests end cash balances. Majorly, confirmation letters are sent by the external auditor to suppliers to ascertain if the payables and receivable’s information provided by the suppliers match the one recorded in the financial books of account.
- The external auditor may decide to personally contact the customers to verify if the amount paid by the customers is the same as the amount recorded in the financial books of accounts.
- By physically matching the fixed assets value to the fixed assets records in the financial books of accounts, one can develop an effective substantive test. Fixed assets such as Land, furniture, and vehicles may either depreciate or appreciate with time thus the physical value recorded at the time of purchase will not be the same in different accounting periods. An External auditor can thus predict the right amount to be debited in the financial records.
Evidence for a substantive test of the transaction include:
- The verification of the process of recording cash receipts transactions and sales
- Inspection to ascertain whether the recorded sales transaction exists and some of the existing sales are recorded
2- Risks Assessment tests
The tests are conducted with an aim of understanding how a business relates to the environment. Majorly, the procedures are conducted with an auditor intention to get the knowledge of internal control. There are different tests methods through which an auditor can follow up risks. Some of the common methods include:
- Interviewing the employees and the recognition of the nature of your company and management. This will aid in the inspection process of the company’s records
- You may also choose to observe the employees at work. You may choose to observe the process of physical counting of inventory by your staff members. Some auditors may prefer to visit the business company’s locations which seem to be more effective as it provides you with an opportunity to view the differential between what’s recorded in the books and the actual value on the ground.
- Paperwork analysis coupled with the understanding of different processes may aid the auditor in assessing the auditing risks. Common analytical procedures that an auditor may bank on include; Trend and Ratio Analysis. An auditor may also just scheme through the paperwork and based on his auditing experience determine if some given figures provided make sense and are reasonable.
3- Tests of Detailed Balances
This type of audits tests aims at ending the general ledger balances for the statements of financial position of the Business and the Trading profit and loss account of the business. A lot of weight is normally put on the balance sheet in the test of detailed balance. This is due to the fact that the balance sheet provides the financial position of the business during a given time and you can inspect and test the money value correctness of the Debit and Credit accounts. However, this tests bank’s majorly on results from other types of audit tests such as substantive tests and the substantive analytical procedures. Some of the evidence for the tests of detailed balance include
- A customer confirmation balance for accounts receivable
- A physical inspection of the inventories.
4- Dual Purpose Tests
This type of test checks on the operating effectiveness of controls and at times it may be used in the detection process of financial errors. Most at times, Auditors design auditing procedures that incorporate both the tests of control and the substantive tests. Despite the Dual purpose tests checking on the effectiveness of control, the tests also provide information on whether a given sales invoice contains the right quantity, the right product type, and price. Some of the examples of Dual Purpose tests of controls include
- Researching on the good management, staff personnel, and supervisory roles
- Conducting a detailed examination of the reports, documents, and the companies files to ensure that everything in the file checks in.
- The tracing of the transaction from their original path up to the books of accounts. This is majorly done through observation, inquiry, and inspection.
- You may decide to re-perform some of the major applications of control by the internal auditor
5- Analytical procedure tests
The analytical procedure tests compare the recorded amount to the expectation which is developed by the auditor. This test procedure is normally conducted during the planning and the completion phase of the audit. The main role of conducting the analytical procedure is to show the possible misstatement and come up with some substantives evidence to bank the misstatement. The procedure usually evaluates financial business information through a detailed analysis of relationships such as trends and ratio. The analyzation process may be conducted through sourcing of information from both financial and non-financial data. Two of the major types of evidence for the analytic procedure include
- The calculation process of the gross margin in both the completing and the planning audit phases
- The prediction process of the ending balance by comparing the accounted balance to the predicted one.
In conclusion, Auditing tests require excellent audit planning. Generally, before conducting the auditing tests, you require to excellently plan and come up with excellent risks assessment procedures for better audit tests.