Timing of Tests of Controls Definition
Timing of Tests of Controls is an accounting or auditing practise that enables an auditor to embark on auditing procedure to test the standard of a control used by a client entity to avert financial misstatements. This test is conducted to check the controls used by client entities to minimise, prevent or detect material misstatements. Material misstatements are false financial statements that affect economic or financial decisions of users of the financial statements or whoever relies on the statement. This test of controls is often done at a specific period.
A Little More on What is Timing of Tests of Controls
Controls used by clients entities may vary so also are the results. There is also a classification of tests of controls according to their procedures. However, auditors can decide to utilize a particular test of control result or otherwise when engaged in auditing activities. The general classification of tests of controls are;
- Observation- it is a situation whereby auditors note control processes and elements.
- Inspection- auditors use this approach to ascertain that controls have truly been performed. This approach include the examination of stamps, signatures and documents that attest to the ue of controls.
- Reperformance- this test of control involve the use of new proceedings by auditors to check the effectiveness of controls used by client entities.
The major purpose of audit tests or test of controls is to examine whether a control functions properly. Auditors do this through sufficient audit evidence and they can now conclude whether a control is appropriate and financial statements (FS) free of material misstatement.
However, if auditors notice an error in the test of controls, the controls are ineffective or inappropriate. Hence, a modified audit option must be developed or initiated so that financial statements can be free of material misstatement.
There are three major events that can cause material misstatements to appear in published financial statements. First is if there is an initial error in the test of control, this is called inherent risk. The second id control risk which occurs if the client entity fails to identify, prevent or control the error made in the first place, material misstatements can materialized in published financial reports. The third event is detection risk and this applies to an auditor’s failure to detect error during an audit.
A good internal control system and the work auditor carries out can help to prevent error that has occured from appearing in published financial statements.
However, once material misstatements appear in published financial reports, the auditor needs to investigate the operation and design of the internal control system and also access evidence regarding the misstatements of the FS.
There are certain controls measures that can be used to prevent the appearance of material misstatements on financial reports. This include checking credit references on new customers and the establishment of a credit limit by the client entity. The analyses of aged receivables and follow up on payments that were delayed can also be used to control material misstatements.
However, before any of these controls can be used, it is important that auditors observe or test their operations so as to know how effective or appropriate the controls would be. There are ways through which auditors test the operation of controls. The major three ways are through observation, inspection and reperformance. These techniques help to test the procedures or operations of a control, they are called tests of control.
Auditors are expected to inspect credit references in client’s files to ensure that every customer was investigated. Auditors also observe places where the credit limit has been breached or whether amounts that exceed the limit are rejected or not.
References for Timing of Tests Controls
Academic Research on Timing of Tests of Control
Tests of control in the audit risk model: effective? Efficient?, Blokdijk, J. H. (2004). International Journal of Auditing, 8(2), 185-194.
Auditing control performance of interconnected areas utilizing the components concept and its decomposition and evaluation techniques. I. Audit technology and field …, Cohn, N. (1988). IEEE transactions on power systems, 3(2), 581-587.
The effect of audit quality on earnings management, Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). Contemporary accounting research, 15(1), 1-24.
The effects of auditor change on audit fees: Tests of price cutting and price recovery, Simon, D. T., & Francis, J. R. (1988). Accounting Review, 255-269.
Minimum cost quality control tests, Knappenberger, H. A., & Grandage, A. H. E. (1969). AIIE Transactions, 1(1), 24-32.
Incorporating test and control product variability in degree of difference tests, Young, T. A., Pecore, S., Stoer, N., Hulting, F., Holschuh, N., & Case, F. (2008). Food quality and preference, 19(8), 734-736.
The effects of the interactive use of management control systems on product innovation, Bisbe, J., & Otley, D. (2004). Accounting, organizations and society, 29(8), 709-737.
Organizational slack and risk-taking behaviour: tests of product pricing strategy, Moses, O. D. (1992). Journal of Organizational Change Management, 5(3), 38-54.
An analysis of unit tests of a flight software product line, Ganesan, D., Lindvall, M., McComas, D., Bartholomew, M., Slegel, S., Medina, B., … &Montgomery, L. P. (2013). Science of Computer Programming, 78(12), 2360-2380.
Minimum cost multivariate quality control tests, Montgomery, D. C., & Klatt, P. J. (1972). AIIE Transactions, 4(2), 103-110.