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Audit procedure
Auditing
Can anyone explain the difference between 1. Test of Control 2. Test of Details 2. Substantige analytical procedures In simple terms to understand
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Consider this example: Payment of Rent (a)Test on Controls: In a company you are not allowed to pay rent on a random basis. The company has to design a procedure which needs to be followed for payment of rent. E.g. Step 1: Get an Invoice from an owner Step 2: Invoice to be checked by the cashier Step 3: Issue a cheque for payment. Now an Auditor should ensure that the company is following this procedure every time a payment for rent is made. This he can do by observing whether the cashier actually checks the invoice or see if cheque is issued. (b)Test of Details: The auditor may insist the management to provide a copy of Rent Agreement to check whether the amount of rent was properly paid. The auditor can also obtain a copy of invoice and study it in depth to ascertain various factors like date of invoice, name of the party issuing invoice. This is test of details. (c) Substantive Analytical Procedure: This is basically doing ratio analysis. Say the rent per month is 1.5 lacs. So the auditor may try to estimate the rent per year and match that amount appearing in the FS. i.e. 1.5 lacs * 12 months. This is analytical procedure.
Test of controls These are the process designed, implemented, and maintained to provide reasonable assurance about the achievement of the entityâ??s objectives with regard to- The reliability of the entityâ??s financial reporting The effectiveness and efficiency of its operations Its compliance with applicable laws and regulations; and Safeguarding of assets, and compliance with applicable laws and regulations.
Tests of details are procedures such as inspecting lots of invoices and tracing them to various accounts, tracing cash received and paid form the cash book to the proper account etc. Detailed transactions are verified. Tests of details are used by auditors to collect evidence that the balances, disclosures, and underlying transactions associated with a client's financial statements are correct.
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