TEST CHECKING AND TECHNIQUES-PPT.pptx

TEST CHECKING AND TECHNIQUES-PPT.pptx

1. TEST CHECKING AND TECHNIQUES Dr. A. HELDA MARY

2. Test Checking: Test checking in Audit means checking a few transactions selected at random from a large number of transactions. It is also known as “Selective Verification” or “Sampling Process“. It is a substitute for detailed checking. It involves only a partial checking. It is based on a simple theme that

3. If a representative number of transactions, randomly selected by the auditor for test checking is found to be correct, the rest might be correct too.   In simple words in test checking a representative number of entries of each class is selected and checked and, if they are found correct, the remaining entries are also taken to be correct. Test checking is an accepted substitute of detailed checking, which in most of the cases from the economic point of view is unwarranted.

4. Adoption of test checking methods by auditors The decision to adopt testing methods depends entirely on the auditor’s judgement and discretion depending on the individual cases and circumstances.   Test checking should be applied and carried out intelligently and carefully; otherwise, it may lead to dangerous consequences. However, the use of test checking depends much upon the system of internal check in operation and the intelligence of the auditor.

5. Safeguards for the Application of Test Checking While applying test checks the auditor should take the following precautions: As far as possible sample transactions should be selected from every book.   2. The selection of transactions should be so distributed that the work of almost all the clerks of the client is checked.   3. The items should be selected at random.   4. As fraudulent manipulations are common during the first and last months of the period under audit, the entries made during these periods should be checked thoroughly.  

6. In the selection of entries and accounts for applying test checks, care should be taken to check the different portions of the work at each audit.   6. Cash book and pass book should be checked thoroughly.   7. The auditor should select the transactions on his own. He should not consult the staff of the client while selecting the transactions.   If the auditor exercises the above safeguards with care and caution, the results are bound to be encouraging and satisfactory.  

7. Advantages of Test Checking: Test checking enjoys the following advantages:   1. It saves time and energy.   2. If the selection of transactions is done intelligently, test checking is useful and purposeful.   3. The volume of work is reduced. So the auditor can carry on many audit simultaneously.   4. It helps the auditor to arrive at a definite conclusion in regard to the true and fair view of the state of affairs of the concern. 5. It helps in reducing the cost of audit.

8. Disadvantages of Test Checking: Test checking suffers from the following disadvantages:   1. It is not possible to detect all the errors and fraud.   2. The clerks of the client may become careless because they know that their work will not be checked in detail.   3. Under test checking, although the auditor checks the whole of the work through test checking, suspicion and doubt will remain in his mind.   4. It is of no use if proper and effective systems of internal checks and controls are not being adopted in business.   5. It is not suitable for small business concerns.

9. Testing Methods Used During Audit Procedures : There are five core testing methods that auditors use to confirm the facts and answers that a business wants to attain during an audit. The nature of these test methods focuses on everything from asking probing questions to inspecting documents and re-performing calculations.  Each testing method helps the auditor issue a well-informed opinion, based on evidence. Further, it provides the auditor with the information needed to provide qualified conclusions, whether the business is operating optimally, and managing risks properly.

10. These are the five types of testing methods used during audits.   1.Inquiry 2.Observation 3.Examination or Inspection of Evidence 4.Re-performance 5.Computer Assisted Audit Technique (CAAT)

11. Techniques of audit: AUDIT PROCEDURES • Audit procedures are ways of applying techniques to particular phase of an audit. • Generally, the attainment of the audit objectives required the collection of the evidence to support a decision. 4. Kinds of audit techniques • Posting verification • Extension verification • Vouching • Confirmations • Physical examination • Reconciliation • Testing .Analysis of financial statements • Scanning • Documentary examination • Flow charting • Electronic data processing • Inspection • Observation Enquiry • Computations • Management representations • Sampling techniques • Compliance test • Substantive tests • Analytical review • Use of computer- assisted audit techniques

12. Posting Verification – Verification of items by one source to another source – To establish the authencity and consistency of recording process • Extension Verification – Multiplying two or more accounts to prove the accuracy of the total Vouching – An examination of all original evidences – To proving the accuracy of the entries in the books of accounts • Confirmation – To ascertain the correctness of the figures and validity of the client’s record – With the third party Testing – Selection of representative items from the records and examining them for reaching on conclusion about the trend • Analysis of Financial Statement – Uses various Financial Ratios horizontally and vertically Physical Examination – Includes inspection, counting, identification and measurement of quantity – May observe the process of stocktaking • Reconciliation – Reconcile two or more related items if they are not agree or match with each other

13. TESTING – Selection of representative items from the records and examining them for reaching a conclusion about trend of activity. – Items must be sufficiently representative of whole data. • Analysis of Financial Statements – Financial ratios – Horizontal and Vertical comparison – Relationship with Industry averages Documentary Examination – Same as Vouching in nature – To examine the adequacy and reliability • Scanning – Make a wide search to find out which of the entries are regular, consistent and logical Observation – Observe the various policies and procedures or plans followed by the client • Flow Charting – To describe graphically the issue of transactions through different stages

14. Inspection – Arrange an inspection of the client’s office, plant, branches etc. – To obtain the understanding of plant layout, manufacturing processes, product, control and safeguard of inventories etc. – Should inspect before examination and review Enquiry • Computation • Management Representation • Sampling Techniques • Compliance Techniques • Substantive Testing • Analytical Review • Computer Assisted Accounting Techniques Obtaining Management Representation • Important evidence in form of – summary of oral discussions with management – Written representation from management • Should be addressed to the auditor contain Specified information • Its procedure must be agreed with client in early stage of audit.

15. Design of the sample • Audit objectives • Population • Risk and assurance • Tolerable errors • Expecting errors in the population • Sratification Evaluation of the sample • Analyse any errors detected in the sample • Project the errors found in the sample to the population • Assess the sampling Compliance test • Compliance tests are the proceduers desugned to obtain reasonable assurance of the internal control, that it is effective and reliable • These tests include procedures requiring inspections of documents suporting transactions to gain evidence that control have operated properly.

16. Substantive test • Substantive tests are those tests of transactions and balances and other procedures which privides audit evidence as to the completeness, accuracy and validity of the information contain in the accounting records or in the financial statements., like analytical review Methods of substantive test : 1. Inspection of the documents 2. Inspection of assets 3. Direct confirmations 4. Reperformance of computations  

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