Doubt in auditing
Sia (B.Com) (108 Points)
04 April 2014
Are Test of Controls and Compliance Procedures the same thing?
Vivek Khakhkhar
(Assistant Audit Manager)
(201 Points)
Replied 05 April 2014
Dear in risk based audit we do two procedures compliance procedures & substantive procedures. In compliance procedure we check internal controls & risk assessment while in case of substantive procedure we do test of details, ananlytical review etc.
CA Saroj Kumar
(Keen to learn something new every moments)
(2588 Points)
Replied 05 April 2014
Complience Procedure :-
Compliance Procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect ·The auditor needs to ensure that internal control exist and that the internal control is operating effectively and being operating continuously throughout the period under audit to ensure that they can be relied upon. ·In summary, by doing Compliance Tests, the auditor can then able to ascertain the existence, effectiveness and continuity of the internal control system.Compliance Procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect ·The auditor needs to ensure that internal control exist and that the internal control is operating effectively and being operating continuously throughout the period under audit to ensure that they can be relied upon. ·In summary, by doing Compliance Tests, the auditor can then able to ascertain the existence, effectiveness and continuity of the internal control system.
Test of Controls: -
Tests of Controls—Compliance Transactions Tests (author’s words):
Compliance tests are designed as tests of internal control procedures or activities to determine:
• The frequency with which the control procedures are performed.
• The quality of the performance of the control procedures.
• The person performing the procedures.
• The design effectiveness of the procedures.
Compliance tests of controls are performed to measure the likelihood of errors occurring and going undetected and to reduce the amount of substantive testing. Compliance procedures consist mainly of observations, inspections and inquiries. Documented evidence of the internal control procedures performed by a client is necessary to evaluate compliance for larger clients with effectively designed internal controls. Examining a foreperson’s approval of hours worked on employees’ time cards, for example, is a compliance test of control. Materiality is measured by the frequency of errors.
Owners or managers of smaller entities may perform key controls that are not documented. In these circumstances, the auditor may assess compliance by making inquiries of an owner or manager and inspecting relevant documentation, and evaluating the owner’s or manager’s responses. Documentation of the owner’s or manager’s compliance should be included in a memo or on a working paper.
Tests of Controls—Substantive Transactions Tests (author’s words):
A substantive transactions test is a test of the accounting system and is normally designed to test for monetary errors. Determining that all entries recorded in the cash disbursements journal are valid by examining supporting documents, or that the extension of sales prices and units on sales invoices are correct, are examples of substantive transactions testing procedures.
Tests of controls are often used as “dual-purpose” tests, i.e., both compliance and substantive tests of transactions are performed. While both may supply sufficient evidence to verify applicable financial statement assertions, we can often be more efficient by performing one or the other. Only a “handful” (10%-20%) of the selected transactions need be tested substantively if we choose compliance tests. If a client has limited internal controls, but has a good accounting system on the other hand, we may perform only substantive transactions tests. For smaller entities, informal substantive transactions tests may be informally performed as systems walk-through procedures.
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