Tests of controls
In one sentenceProcedures by which the auditor verifies that internal controls, such as approvals and segregation of duties, actually operate throughout the period.
Simply put
Having a written policy is not enough. In tests of controls the auditor takes a sample of transactions and checks that the control was applied in each one, such as the manager's signature on the purchase order.
If they pass, the auditor relies on the controls and reduces tests of details; if they fail, he expands the examination of the figures.
Worked example
A contracting establishment's policy is that the finance manager approves every purchase order. The auditor examined 25 orders and found two without approval, and his acceptable limit is 5%.
Number of orders examined25
Non-compliant orders2
Deviation rate2 ÷ 25 = 8%
Acceptable limit5%
8% is above 5%: this control cannot be relied on8%
Formula: Deviation rate = number of deviations ÷ sample size
Don't confuse it with
Tests of detailsA purchase order may be unapproved yet have a correct amount, so each test has a different aim.