What is an Audit Test?

An audit test is a sample taken from a larger population, with the intent of testing the sample for certain characteristics, which are then extrapolated to the entire population. For example, if a sales tax audit uncovers $100 of unremitted sales tax in an audit test of 1% of all billings to customers, the $100 outcome is extrapolated to estimate that the entire population of billings contains $10,000 of unremitted sales taxes. Audit tests can greatly reduce the amount of work required by an auditor in the conduct of an audit.

Tests of Controls

These procedures test the effectiveness of a control in preventing or detecting a material misstatement. Depending on the results of this test, the auditor may choose to rely upon a client’s system of controls as part of the audit plan. However, if the test reveals that controls are weak, the auditor will enhance the use of substantive testing (see next), which typically increases the cost of the audit. A test of controls is made, irrespective of the dollar amount of the underlying business transaction; the main point of the test is to see if a control functions properly, so the dollar amount of a transaction is not of consequence to the goal of the test.

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Substantive Tests

Substantive tests are intended to create evidence to support the assertion that there are no material misstatements in regard to the completeness, validity, and accuracy of a client’s financial statements. The procedures include the following categories of activity:

Testing classes of transactions, account balances, and disclosures.
Agreeing the financial statements and accompanying notes to the underlying accounting records.
Examining material journal entries and other adjustments made during the preparation of the financial statements.

Compliance Tests

A compliance test is an audit that determines whether an organization is following its own policies and procedures in a particular area. This test can also be conducted to see if a client is properly following the relevant laws, regulations, and applicable accounting framework. An auditor engages in compliance tests in order to be assured that the evidence being reviewed as part of an audit is valid. The activities commonly used in a compliance test are as follows:

Asking employees about their duties
Observing employees in the conduct of their duties
Reviewing documentation to see if procedures have been followed

Dual-Purpose Tests

These procedures are used as both a test of controls and a substantive test. They improve the efficiency of an audit, since two tests are being combined into one procedure, where separate procedures are applied to a common sample of transactions. This approach includes a preliminary judgment that there is an acceptably low level of control risk, since the test of controls does not precede any substantive tests. The calculated sample size for this type of test is typically the larger of the samples that would have been designed for two tests if they had been conducted individually. When the two sample sizes are quite different, the auditor can first select the larger sample and then make a smaller selection of items from that sample for use as the smaller sample.