Audit Tests – Types, Advantages &

Disadvantages

TYPES OF AUDIT TESTS

There are various types of audit tests:

• Facilitated meetings • Vouching & Verifying

• Interviewing • Process mapping
• Questioning • Process tracing
• Observation and Inspection • Surveys
• Documentation Review • Scanning
• Confirmation/Representation • Reconciliation
• Analytical review • Recalculation & Valuation
• Data Analysis

The following table defines these types of tests which might be applied to validate
process measures and controls and provides some of the advantages and
disadvantages of each approach:

Test Description Advantages Disadvantages

Facilitated Meetings • Facilitates immediate • The success of the focus

sharing of ideas and group method is highly
Inquiry procedures synthesis of different dependent on the ability
involve discussions with opinions. of the facilitator to focus
process owners, process • Gains group support for the group on the
staff and those key the final decision. achievement of the
stakeholders affected by • Participants have time meeting objectives.
the process - for example, to think through their • An individual may
customers and suppliers. contribution towards conform to group
With focus groups, many answers. answers due to real or
of these people can • Auditee shares in the imagined peer pressure.
participate in an active decision making • Significant time
interchange of ideas and process. investment required by
issues. Example: A management.
facilitated group of
purchasing, accounts
payable and
manufacturing
departments may be an
appropriate session to
gain an understanding of
the purchasing cycle
processes.

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Test Description Advantages Disadvantages

Interviewing • Direct interface with • Issues conveyed may be

personnel involved in
Inquiry procedures the business process -
involve discussions with facilitates greater
process owners, process understanding of the
staff and may also business.
involve those key • Interviewers have the
stakeholders affected by chance to probe for
the process - for further details.
example, customers and • Effective way to identify
suppliers. opinions, causes and
possible solutions to
An example is developing problems.
an understanding of • Clarification of
environmental questioning is possible
management controls before responding.
over emissions of a • Interviewee builds
power station through rapport with
discussion with the plant respondents.
manager of the facility. • Non verbal messages
are received and noted.
merely a one-sided
perception of
management and not
actual business practice.
• Interview style needs to
be matched to auditee -
structured, casual or
flexible - to be effective.
• Data can be difficult to
obtain, organize and
analyze.
• Interviewers must be
trained to elicit valuable
information - this
involves the use of
open-ended questioning
versus closed ended
questioning.
• Unskilled interviewer
can make respondent
uncomfortable or
defensive.

Questioning • Builds on previously • Potential to alienate the

Questioning is probably
the most pervasive
technique used by the
auditor who is reviewing
operations. This type of
testing may involve
suggesting a viewpoint of
the process to gauge
management reaction - • Attempts to identify
"pointed interviewing".
An example may be
asking management to • Can be an efficient
explain an unusual
fluctuation or error noted
in an audit test.
accumulated knowledge auditee through overly
of the auditee and aggressive questioning.
attempts to provide
management with
interpretation of issues
with an opportunity for
them to provide their
viewpoint of the
process.
"root causes" of
identified errors or
issues.
technique in obtaining
information from
management, which
may otherwise have not
been volunteered to the
audit team.

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Test Description Advantages Disadvantages

Observation and • Tends to provide a • Tests typically need to

Inspection greater understanding be corroborated with
of the business through other procedures.
Observing involves a audit involvement with • Potentially time
careful, knowledgeable operational personnel. consuming.
look at documents • Information collected • Difficult to record data
processed, activities and reflects actual behavior. and observe large
assets. It means a visual • Information collected is numbers of people or
examination with a current, not activities.
purpose, a mental retrospective. • Random observation
comparison with may not provide an
standards. adequate evaluation of
the process due to
Example: sighting fluctuations in volume or
employees recorded on a activity.
firm's payroll, or • Workers may alter their
observing quality control behavior if they know
inspection processes on a their work is being
production line. reviewed.

Documentation • Unobtrusive. • A skilled auditor is

Review • Highly valid as data is
This involves a review of
existing reports and • Strong base to build
documents to identify
controls, to understand
the business or process,
and to provide evidence
in supporting audit
conclusion.
Examples include
reviewing environmental
compliance manuals, key
business contracts,
operational/ procedural
documentation or
company or committee
minutes.
quantifiable, historical
and objective.
questioning upon.
• Auditors may incorrectly
• Risks may be
needed to apply
historical documents to
the current situation and
to identify areas where
interpretation is
required of the
document.
assume that procedural
manual documentation
as provided is available
to and actually used by
intended users.
misinterpreted without
involving client
personnel in the review
or corroborating the
results through other
types of audit tests.

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Test Description Advantages Disadvantages

Confirmation/ • Usually viewed as • Confirmation and

Representation
• May be a useful tool to
A confirmation or
representation is
frequently prepared by
the auditor, completed by
the relevant party, then
delivered directly back to
the auditor.
Confirmations and
representations may be
obtained either
externally or internally.
reliable audit evidence.
evaluate extent to
which relevant party "is
prepared" to formally
confirm or represent. • Confirmations need to
For example,
management may state
in an interview that
controls are sufficient
but may be reluctant to
sign a document that
represents this.
representations should
be corroborated with
other information gained
through alternative
audit testing.
be obtained from
relevant and
appropriate persons.

An example may be
obtaining
representations from an
insurance agent that
they had complied with
certain agent policy
conditions, or obtaining a
representation from
management regarding
their opinion of controls
over the audit area.

Analytical review • Sound basis for • Lack of availability of

Comparison of inter-
relationships among sets
of data, and the
comparison of these
relationships with some
pre-defined expected
relationship may be
referred to as analytical
testing.
Analytical tests include:
• trend analysis - such
as fluctuation
analysis;
• benchmarking - to,
for example,
industry averages,
pre-determined
budgets or
standards;
• ratio analysis - of
either financial ratios
or process related
ratios; and
• modeling techniques
such as
reasonableness tests
or frequency
distribution analysis.
determining the appropriate and reliable
reasonableness of data may limit the
historical or forecast ability to develop
data. effective analytical
• Facilitates strong procedures.
understanding of • Unstable operating
business activities and environments create
relationships and increasing difficulties in
provides a structured predicting relationships.
basis for identification
of areas requiring
further analysis.
• Can be used effectively
as an audit test to
assess the need for
more detailed audit
testing.
• Can be used in initial
stages of the audit to
identify problem areas
to focus audit reviews/
testing.

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Test Description Advantages Disadvantages

Data analysis & • Provides a more • Significance of

exception tests scientific and rigorous exception items
approach than scanning identified needs to be
Analysis and query of type procedures. evaluated in the overall
historical data files to • Used effectively to business context.
identify trends, problems quantify the • Data required may not
areas, exceptions, etc. significance or be available in a readily
incidence of a certain usable format and may
Examples: event or non-event. become costly to
• Stratify a datafile to • Data analysis can be "manipulate."
identify types of used to understand the
codes & related volume or magnitude of
quantities; certain events or
• Stratify a datafile to values, which may
identify frequency of assist in further refining
payments by and limiting audit
amounts in selected testing.
intervals; • Sample file can be
• Identify duplicates or selected automatically.
gaps; • Efficient, accurate
• Create an aging method of analyzing a
summary of large amount of data.
receivables or • Ideal application for
identify debtors who statistical sampling
exceed their credit and/or CAATS.
limits.

Vouching & Verifying • May be the most • Method and

efficient and effective reasonableness of
Tests to prove that audit procedure to sample selection of
recorded events or verify a particular items to vouch has a
values took place management assertion. significant bearing on
through examination of • Provides "hard" audit the appropriateness of
supporting documents or evidence of certain conclusions which may
systems. Detailed infractions or errors. be drawn. Particular
examination of a set of • Provides "hard" audit consideration must be
worker's compensation evidence that stated made of whether to
files for evidence of controls are operating select vouching samples
doctor's certificates for effectively. based on a statistical
certain dates of work selection of sample sizes
absence is an example of and items or to
a vouching test. An judgmentally select
example of verifying may items for review.
be verifying the propriety
of charges made by
contractors to certain
construction projects.

Process mapping • Provides a clear • May be difficult to

documentation trail to determine the proper
Process mapping analysis support an evaluation of level of detail to process
may be used as a test of controls or processes. map.
business practices. In • Provides a complete • May not meet
particular, where the technique for assessing requirements if a
completeness of controls a process. structured detailed
or logic of business • Readily understood by flowchart is required.
procedures are being the client. • Process mapping
assessed, process analysis can be time
mapping provides a tool consuming.
to identify weaknesses or
inefficiencies. This macro
type evaluation is an
audit test - an example
may be assessing a
process map of an

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accounts payable
function for excessive
authorization controls.

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Test Description
"Walk-through"
Tracing procedures
beginning with original
documents and following
their lifecycle through the
process. An example
may be performing a
walk-through of daily
shipping document
handling with a goods
receiving department to
verify that processed
mapped controls exist.
Surveys
Surveys are commonly
used to gauge
perceptions of a business
activity. For example, a
survey of a pension fund
administrator's
customers may provide
valuable process
information as to
customer perception of
claim handling efficiency,
new member processing
and retiring benefit
procedure efficiency.
Scanning
A less detailed procedure
which is intended to
detect the unusual. The
effectiveness of scanning
depends on the auditor's
ability to identify the
"unusual" items and sift
through large quantities
of data to flag unusual
items. An example may
be reviewing the check
register of a company
location for unusual
payees and/or unusual
payment amounts.
Advantages Disadvantages
• Process tracing may be • Workers may alter their
used to verify that behavior if they know
controls exist to ensure their work is being
transactions are reviewed.
complete. • Sample selected for
• May uncover process testing may be too
errors not identified subjective and not
through other audit reflective of trends in
steps. the business process.
• May be used to confirm
process understanding
gained through process
mapping.
• Efficient and • Requires time and
confidential method of technical skills to
obtaining information. develop an effective
• Reaches a large group survey instrument.
in limited time. • Questionnaires should
• Responses are be cleared by
quantifiable. management first.
• No special training • Risk of low return rates.
needed to administer. • Risk of unintended
• Questionnaires can be and/or inappropriate
developed based on the responses.
company's procedural • May not get at causes of
manuals or standards of and solutions to
conduct to gain comfort problems.
over management • Respondents'
controls in certain understanding of
areas. questions cannot be
clarified.
• Inappropriate sampling
selection risks apply.
• Cost effective method • May not be effective if
of identifying unusual unusual items are
items. difficult to identify or
• A trained auditor can auditor is inexperienced
detect unusual items at spotting unusual
very efficiently and items.
search for correlations • Likelihood of not
or notice consistencies detecting errors
in the data previously increases with the
unrecognized. volume of data.
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Test Description Advantages
Reconciliation • May provide valuable
A specific purpose audit
test designed to analyze
variances between two
sets of similar
information. Example:
Preparing or reviewing a
reconciliation of
differences between a
physical stockcount and
company inventory
records.
Recalculation & • May provide the most
Valuation tests
Amounts or values are
recalculated by the
auditor to verify their
accuracy or to assess the
reasonableness of the
final valuation.
Disadvantages
• Time consuming.
insight as to business • Root causes may not
issues and risks necessarily be identified.
underlying the process.
For example, a detailed
book to physical
analysis may identify
problems in goods
dispatch and inventory
production recording
and monitoring
processes. It may
disclose incidence of
fraud.
• Important to view the
efficient method to calculation in terms of
evaluate the outcome of total audit risk - for
a certain process. example, recalculation
of interest income may
not be useful if one-third
of loans will never be
collected.
• Recalculation may be
complex and time
consuming.
• May require assistance
of outside experts,
particularly where a
valuation is being
assessed - for example
the internal auditor's
assessment of accuracy
of iron ore stockpile
inventory recording
processes.
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