a file of test transactions and run through the system to determine that all errors are identified.
Review the resolution of the suspense account items performed throughout the period to determine that they were resolved properly.
When performing tests of transactions, you will have to address issues related to the extent of testing: how many items to test. Suggestions for considering the extent of tests were provided earlier in this chapter.
Before performing your tests of transactions, you also should define what you will consider a control procedure error. In instances in which the evidence of performing the procedure is documented (e.g., an initial or a signature), the lack of documentation (a missing signature) should be considered an error in the operation of the control. That is, in order for a documented control to be considered properly performed, both these points must be true:
The documentation indicates that the control procedure was performed.
Your reperformance of the procedure indicates it was performed properly.
Reconciliations
Reconciliations are a common control procedure; examples are bank reconciliations or the reconciliation of the general ledger account total to a subsidiary ledger. In some instances, a well- designed reconciliation can provide an effective control over most of a processing stream. Testing the effectiveness of a reconciliation is similar to tests of transactions.
Review documentation that the test was performed on a timely basis throughout the period.
Reperform the test to determine that all reconciling items were identified properly.
Investigate the resolution of significant reconciling items.
Observation
You may be able to observe the application of some control procedures, such as computer input controls like edit checks. A physical inventory count also lends itself to observation as a means of assessing effectiveness. For a control performed only occasionally, such as a physical count, it may be possible to observe the control each time it is performed. For controls that are performed continuously for large volumes of transactions, you will need to supplement your observations with other tests, such as:
Inquiry
Test of entity-level controls
Evaluating Test Results
The results of your tests of activity-level controls should support your conclusion about their operating effectiveness. If your tests revealed no deviations or exceptions in the performance of control procedures, then you should be able to conclude that the control is operating effectively (assuming that the scope of your test work, as discussed earlier in this chapter, was sufficient).
When your tests of operating effectiveness uncover exceptions to the company’s prescribed control procedures, you should determine whether additional tests are required to assess operating effectiveness. A control testing exception is not necessarily a control deficiency. You may determine that the exception was an isolated instance of noncompliance with the established control procedure. However, if you do conclude that a testing exception is not a control deficiency, then you should perform and document additional test work to support your conclusion. In most instances, control testing exceptions usually are not considered to be isolated instances of noncompliance.
For example, when your test work reveals deficiencies in either the design or the operating effectiveness of a control procedure, you will need to exercise your judgment in order to reach a conclusion about control effectiveness.
Ultimately, you should consider that you are making a conclusion about the effectiveness of internal control as a whole. When you evaluate activity-level controls, you should consider the effectiveness of the entire information-processing stream, not individual control procedures in isolation.
Examples of Evidential Matter That May Support the Specific Assertions Embodied in Financial Statements
Another approach is a source list of procedures or evidential matter to be used as a resource in developing audit programs. Exhibit 12.3 indicates what this approach might look like for some common financial statement components. Usually such source lists present either evidential matter or procedures but, to avoid repetition, not both. For example, if the evidential matter is minutes of board meetings, the procedure is to read the minutes. Or if the procedure is to inspect a broker’s advice, the evidential matter is the broker’s advice.
Another approach is to use standardized audit programs developed for common components of financial statements. This approach is not illustrated here. Many auditors prefer source lists to packaged programs because of a concern that standardized programs promote routine application and do not encourage exercise of judgment.
Exhibit 12.3 Source List of Procedures or Evidential Matter
| Elements of financial statements | Existence or occurrence | Completeness | Rights and obligations | Valuation or allocation | Presentation and disclosure |
| Cash | Bank confirmations | Bank reconciliations | Bank confirmations | Foreign currency exchange rates from newspapers, and so on | Confirmation of restrictions on bank balances |
| Cash counts | Interbank transfer schedules | Contractual agreements relating to escrow funds, compensating balances, sinking funds, and so on | |||
| Certificates of deposit and savings account books | Subsequent cutoff bank statements Review of controls over cash receipts and disbursements | ||||
| Marketable securities | Security counts | Analyses of general ledger account activity | Certificate of ownership |
Broker’s advices and documents supporting purchases of securities
|
