Audit testing procedures

Example: Audit testing plan: control testing

• the audit objective is to gather evidence as to the effectiveness of operation of the control over the approval of credit advices.
• the tolerable level of exceptions is 3%. i.e. provided the estimated rate of deviation in the population does not exceed 3%, then the auditor will continue reliance on the control procedure.
• the population is defined as the client's copy of all credit advice forms issued to customers during the financial year.
• an exception, which in control testing is a deviation from control procedures, is defined as any credit advice issued to a customer during the financial year for which there is not a corresponding Request for Credit (RFC) form signed as "approved" by either one of the two authorized employees (Beta and Gamma) in the client's credit control section.
• credit advices of $10,000 or greater are required to be authorized by Beta.

• the approximate percentage of the number of RFCs approved by the more experienced employee (Beta) was 65%, with the remaining 35% approved by the less experienced Gamma.
• the auditor estimates that approximately 10% of the credit advices issued during the year were for a sum of $10,000 or greater and that the remainder were for less than $10,000.
• approximately 6,500 credit advices were issued during the year, summarized as follows:

  Value of credit advice	Authorized by:	Proportion of popn	Approximate number of credit advices
  > $10,000	Beta	10%	650
  < $10,000	Beta	55%	3,575
  < $10,000	Gamma	35%	2,275
  Total		100%	6,500

• credit advices for > $10,000 approved by Beta and credit advices < $10,000 approved by Gamma have a control risk of moderate, and
• credit advices for < $10,000 approved by Beta have a control risk of low.

Based on the two different levels of control risk, the population may then be split into two strata. Using the sample size table as a guide, the following testing plan may be prepared.

Assuming the client's copies of the credit advice forms are sequentially numbered, then using random number tables, the auditor will randomly select credit advices until 25 have been selected from stratum 1 and 10 from stratum 2. If, during this exercise, more than 10 random numbers are selected that relate to stratum 2, the excess random numbers are ignored.

After selecting the 35 credit advices, the auditor performs the appropriate tests of control.

Audit testing procedures, index page

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