1. © OECD
A joint initiative of the OECD and the European Union, principally financed by the EU
Tirana, 10-12 September 2014
Workshop System Based Auditing
11. Test of controls

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4. 11.1 Audit procedures: types of procedures left
•Tests of controls
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•Substantive procedures:
Substantive analytical procedures
Tests of detail
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5. 11.2 Purpose of test of controls
Reduction of control risk can be justified only with evidence that the controls are functioning.
7 basic types of evidence
•Physical examination
•Confirmation
•Documentation
•Observation
•Accuracy
•Analytical evidence
•Client inquiry
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6. 11.3 Audit procedures for testing controls
•Physical examination
•Evidence obtained from the inspection of assets
•Confirmation
•Written evidence from third parties
•Documentation
•Evidence obtained from the examination of internal written records
•Observation
•Visual evidence obtained by the auditor by inspecting client activities
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7. 11.4 Audit procedures for testing controls
•Accuracy
Evidence obtained by verifying totals,
•Client inquiry
Evidence obtained by clients personnel or management
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8. 11.5 Hierarchy of evidence reliability
Best
•Physical evidence
•Confirmation
•External documentation
•Test of accuracy/reperform
Good
•Observation
Weak
•Internal documentation
•Client inquiry
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9. 11.6 Extent of procedures
•Reliance on evience of prior audit – every 3rd year
•Controls related to significant risks – evidence of current year
•Less than entire audit period – evidence that controls were working at end of the year
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10. 11.7 realionshiop tets of controls and obtaining understanding process
Overlap between the two:
=> physical evidence, client inquiry, observation are used procedures
Differences:
•Obtaining understanding covers all controls: testing of controls thios econtrols where tehre were doubts
•Obtaining understanding covers only one or few transactions; test of controls more (20-100)
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11.8 Example of number of tests of control
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12. 11.9. Audit procedures If nothing is found, everything is OK! Isn’t it?
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Test control - sample size= 30
No errors found
Two or more errors found
No reliance possible on this key control
Reliance possible on this key control
One error found
Extra Sample sample size = 20
No further errors found
One or more errors found
either
or
Central Limit Theory; http://en.wikipedia.org/wiki/Central_limit_theorem see also http://www.stat.ufl.edu/~aa/articles/agresti_min_binomial.pdf

13. 11.10 Test of controls vs. Substantive tests
Test of controls:
•System Audit & Financial Audit
•Test of internal controls
•Residual Risk
Substantive Testing:
•Financial Audit
•Test of amount
•Detection Risk
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14. QUESTIONS?
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