Procedures for an Audit
Become familiar with the procedures for conducting an audit prior to taking the auditing and attesting (AUD) test on the CPA exam. Auditors use substantive testing, also called substantive test of details, which is the process of gathering evidence to determine the extent of misstatement in the client’s accounting records.
Tests of controls are audit procedures designed to verify whether a company procedure is being applied consistently. These procedures test how effective the control is in detecting and preventing material misstatements in the financial statements.
CPAs should consider using generalized audit software to perform audit procedures on a client’s data. The advantage is that the CPA can test the customer’s data without having to gain a great deal of knowledge about the company’s hardware or software. Generalized audit software tests whether the company’s computer system is producing the desired output.
Suppose that a large company sends out thousands of invoices a month. The firm offers discounts to customers based on the dollar amount of the purchase. Each invoice over $500 offers the client a 10 percent discount if he pays within 10 business days. Invoices over $500 list the discounted total owed as well as the full price.
Generalized audit software could be used to test the month’s invoices and determine whether the discount was properly offered for all invoices over $500. This test doesn’t require any special knowledge about the company’s hardware of software. Most important, this specialized audit software may save the CPA firm time and costs on the audit.
Internal audit work and test of controls
Tests of controls are audit procedures designed to test the effectiveness of internal controls. Internal controls are designed and implemented to reduce the risk that the financial statements will be materially misstated.
Physical inspections of assets as well as observation are test-of-control procedures. Reperformance is another test of controls. As the name implies, reperformance means that the CPA performs the procedure of the control himself to determine whether the control operated effectively.
Suppose the company owns stock and recorded dividend income on stock holdings. The CPA would verify the dollar amount of dividends declared for the year and then multiply that amount by the number of shares owned.
If the client owned 100 shares of common stock and the dividends-paid-per-share is $5, the CPA would multiply 500 shares x $5 = $500. He’d then compare the $500 with the dividend income that the client posted for that investment.