A test of controls involves examining internal accounting processes and procedures to evaluate their effectiveness in safeguarding assets and promoting reliable financial reporting.
Types of Control Testing:
- Compliance tests assess adherence to established policies for areas like transaction authorization
- Substantive tests analyze control operations such as account reconciliations or IT access restrictions
- Effectiveness tests gauge controls’ general ability to prevent or detect material misstatements
Example:
An external auditor traced documentation for a sample of expense reimbursements under $500 to determine if approvals were properly obtained in accordance with the company’s control system.
Takeaways:
Regular control testing helps mitigate financial reporting risks and boost investor confidence, although emphasis varies annually based on prior deficiencies. Automated processes still require periodic human validation. Non-compliance demands prompt remediation.