Test of details as the name suggests is detailed testing by the auditors for collection of audit evidence that the balances, underlying disclosures, and the transactions associated with the financial statements are correct.
In other words, these are the primary responses of an auditor to check for the risk of material misstatement in the financials.
There is no set definition for a test of details in the audit standards. It is only mentioned that it is one of the two substantive procedures with the other one being substantive analytics. Some of the examples of the test of details are:
- Vouching of invoices
- Bills tracing that are sent to receivables
- Checking for liabilities that are yet to be recorded in accounts payable section
- Performing tests in bank reconciliations by examining the previous statements
- Sending out bank confirmations to verify the balances
- Checking the customer contracts to verify the receivable balances
The test of detail is just going deep into the transaction’s details. On the other hand, substantive analytics are much broader in perspective.
Selection of Procedures – Test of Details
The main thing to do when selecting the appropriate procedures to be performed is to pay attention to the nature of the risk. When auditors do this, they are able to determine the nature, timing, and extent.
1) Nature of Evidence
If an auditor finds reasonable evidence that the receivables figure is understated or overstated, one of the evidence he can use is the confirmation of receivables balances by the customers themselves.
This is a third-party confirmation and is more appropriate than evidence from within the organization. The receivables have no reason to respond in a manner that is dishonest, and hence, this evidence is more reliable.
2) Timing of evidence
Whether interim audit procedures should be performed depends on the reliability of the accounting system of the company. If the systems are audited and proved to be reliable, an auditor can place more reliance on the system and hence, has to perform less test of details.
3) Extent of Evidence
If an auditor perceives a company to be of higher risk, he may require more evidence. He may want to audit more information and hence, increasing the test of details to be performed.
Figuring out how to coordinate your audit techniques with risks is one of the most significant things an auditor will do. Utilizing canned audit programs or equivalent to a previous year methodology can prompt huge issues. In this manner, know your risks. At that point structure and perform responsive methodology.
The test of details of balances is intended to demonstrate that the tests of control and the substantive tests related to transactions are all reasonable. The test of control is an audit test. It is intended to quantify the adequacy of the controls.
If, for instance, the test shows that the controls are frail, this will affect the test of details of balances.
Substantive tests of detail are helpful sources of confirmation when a mix of dependence on controls and systematic techniques despite everything, doesn’t give the degree of affirmations which are thought to be significant, or in circumstances which are not usually where a controls-dependent methodology is either not doable or isn’t viewed as practical.
Examples of test of details on wages & salaries account
- Performing proof testing altogether of all payroll balances considering joiners and leavers and any yearly pay rise, contrast any patterns with earlier years and examine the variances and discuss it with top management.
- Take out a sample of employees, recalculate the gross and net pay, and consent to the payroll records to confirm accuracy.
- Re-perform figuring of legal deductions to affirm whether the right deductions during the current year have been incorporated inside the total payroll expense.
The results of the tests of controls and substantive tests of transactions influence the techniques, test size, timing, and things chosen for the tests of details of the figures (i.e., successful internal controls will bring about diminished testing when contrasted with the tests of details required on account of insufficient internal controls).
The consequences of tests of controls additionally influence the public organization auditors to report on internal controls over financial reporting.
There are three types of tests to check for the test of details; the test of controls, the test of transactions, and the test of balances.
Tests of controls are performed to measure the effectiveness of controls. The test of transactions is done to check for the accuracy of the financial statement transactions.
Test of balances are done to check if any material misstatement exists the balances of the financial statements’ accounts.
Written by muhammadzuhair
Reviewed by Sinra