Audit Procedure/Test of controls What is an audit procedure? Audit procedures aim to satisfy audit objectives. The audit procedure helps the auditor to determine whether the control is working as intended or not. The audit procedure instructs the auditor to perform a specific step and tells them how to perform the step in order to achieve the audit objective. How do you formulate an audit procedure/test of control? When formulating an audit procedure, one should remember that you need to have 3 following elements in the test of control: HOW WHAT WHY Explanation: HOW: The how is the verb (action word) that describes the action that needs to be performed. Examples of the "how" is inspect, observe, recalculate, inquire, etc. WHAT: The "what" is the document/physical evidence and/or the action being performed that you are referring to for the specific test. Examples of source documents or physical evidence would include invoices, goods received notes, security guard at the gate, petty cash count, journals, etc. WHY: This describes the reason for performing the test of control. You should look at the objective of control here. The following internal control objectives are important for establishing the reason for performing the test of control: Occurrence and authorization: · Occurrence: all recorded transactions and events actually occurred and pertain to the entity. · Authorisation: All transactions are authorized in accordance with management/entity policies. Completeness and accuracy: . Completeness: All transactions and records have been recorded. . Cut-off: Transactions and events have been recorded in the correct accounting period. . Accuracy: Amounts and other data relating to recorded transactions and events have been recorded appropriately. · Classification: Transactions and events have been recorded in the proper accounts.
Examples: 1. Inspect that invoices are numbered in sequence to confirm that all sales transactions are recorded. · Inspect = HOW = verb · Sequence of invoices = WHAT = Source document . To confirm that all sales transactions are recorded = WHY = reason = completeness. 2. Observe that the receiving clerk physically counts the goods received and compare the quantity, quality and description to the delivery note and purchase order. · Observe = HOW = verb . That the receiving clerk physically count the goods received = WHAT = action or control being performed. . And compare the quantity, quality and description to the delivery note and purchase order = WHY = reason = accuracy. 3. Inspect a sample of orders for the signature of the acquisition manager for proof of authorisation. · Inspect = HOW = verb · A sample of orders = WHAT = Source document . For the signature of the acquisition manager for proof of authorisation = WHY = reason = authorisation. 4. Inquire whether outstanding orders are followed up by the administrative clerk to confirm that all orders are received. · Inquire = HOW = verb . Whether outstanding orders are followed up by the administrative clerk = WHAT = action or control being performed. . To confirm that all orders