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! cSystematic Approach:cc c
a)cCompliance Test:c c
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nternal Control System:cc!c
ii cAccounting Systemcc"c
b)cSubstantive Test:cc"c
2 cirect Verification Approach:cc#c
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Auditing procedure related to examining specified transactions and supporting
documentation
t is part of the testing process used by the auditor to check internal-controls
reliability
t is undertaken to gather evidence so that an audit opinion can be rendered as to
the fairness of financial statement presentation
ncluded in such a test is verifying
transaction amounts and tracing transactions to accounts in the financial statements
Transaction tests are of a much more limited scope than analytical review
n transaction
tests, a selected number of specific transactions are tested to see if controls are performing
properly A resulting error rate for complying with the procedures is established Based on
the rate of error, auditors determine if they can rely on the information developed from
posting or recording transactions The test helps auditors determine the scope of audit work
There are two approaches to audit
! c Systematic Approach
2 c irect Verification Approach
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Systematic testing is ordered, planned, and testing designed to be purposefully methodical
n
its approach Systematic testing also contrasts with exploratory testing which is useful in
initial examinations, where testing time is relatively brief, or when learning general software
behavior
Systematic testing requires an in-depth analysis of the application and the application's
components at a very rough level Some systematic testing approaches include
equivalence class partitioning, boundary value analysis, combinatorial analysis, state
transition testing, basis path testing, etc
t includes

a)c Compliance Test

b)c Substantive Test
c
c  c c
Compliance test means to check whether the operations are according to design or not
Compliance is derived from the word comply which means meet specified standards
Explanation;
An auditor conducts a compliance test to ensure that a company's procedures or mechanisms
adhere to regulatory requirements, industry practices or corporate policies and function as
intended An audit compliance test may cover operational risks, technology systems,

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financial controls or regulatory guidelines An external consultant often may help establish
adequate testing procedures
Manner of furnishing reasonable assurance that internal accounting control procedures are
being applied as prescribed so that the auditor is assured of the validity of underlying
evidence Any exceptions to compliance must be noted Underlying evidence comprises an
examination of the accounts themselves including reviewing the journals, ledgers, and
worksheets
f the compliance tests provide evidence that controls are functioning properly,
the underlying evidence is deemed reliable, and an Auditor can reduce the degree of
validation and analytical review procedures
The following three audit procedures are typically used in conducting compliance tests;
i c
nquiry of personnel regarding the performance of their duties;
ii c bserving personnel actions; and
iii c
nspecting documentation for evidence of performance in conducting employee
functions
Example;
Examining invoices to assure that receiving documents and proof of delivery are attached
when the invoices are presented for payment Tests of compliance should be applied to
transactions throughout the year under audit since the financial statements reflect
transactions and events for the whole year Compliance tests may be conducted on a
subjective or statistical basis

 c
An internal audit compliance test ensures that employees abide by corporate policies and
regulatory requirements in a company's operations A compliance initiative also evaluates
corporate internal "controls" and ensures that they are "effective" and "adequate " (A
"control" is a set of instructions that senior management establishes to prevent losses due to
error or technology malfunction ) An "effective" control provides corrections to internal
problems An "adequate" control clearly lists steps for job performance and decision-
making
System in which auditor handle the transactions
i c
nternal Control System
ii c Accounting System
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nternal Control system includes all polices and procedures adopted by the management in
order to achieve following objective
Systematic measures (such as reviews, checks and balances, methods and procedures)
instituted by an organization to
àc Conduct its business in an orderly and efficient manner,
àc Safeguarding its assets and resources,
àc etection and prevention of frauds and errors,
àc Ensure accuracy and completeness of its accounting data,
àc „roduce reliable and timely financial and management information, and
àc Application of polices, procedures and plans

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Explanation;
„lan of organization and all the methods and measures used by a business to monitor
assets, prevent fraud, minimize errors, verify the correctness and reliability of accounting
data, promote operational efficiency, and ensure that established managerial policies are
followed
nternal control extends to functions beyond the accounting and financial
departments Accounting controls encompass safeguarding assets and the accuracy of
financial records They are designed to give assurance that transactions are properly
authorized and are recorded to allow for financial statement preparation in accordance
with Gaap Further, accounting controls deal with maintaining accountability for assets,
proper authorization to access assets, and periodic reconciliations between recorded
assets on the books and the physical assets that exist Administrative or managerial
controls deal with operational efficiency, adherence to managerial policies, and
management's authorization of transactions Examples are quality control and employee
performance reports Accounting and administrative controls are not mutually exclusive
since some procedures and records falling under accounting control may also be used for
administrative control An essential ingredient in maintaining internal control is the
internal audit function An auditor reports on the adequacy of existing controls within the
entity The external auditor must carefully evaluate the internal control system as a basis
to determine the degree of audit procedures necessary in the circumstances

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efinition
Accounting is rganized set of manual and computerized accounting methods, procedures,
and controls established to gather, record, classify, analyze, summarize, interpret, and present
accurate and timely financial data for management decisions
and Auditor¶s work to;
Check that accounting system is efficient or not; and
Check that strength of accounting system

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Substantive test applies to detect the material misstatements Actually this is the test on
which audit report is based The basic difference is the compliance test and substantive test
is compliance test checks the system and substantive test focuses on the amounts if system
results are reliable then auditor takes small sample size of transaction and if system results
are not reliable then auditor takes large sample size of transaction because there is huge
chance of errors and frauds

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Test of account balances to verify the correctness of the amounts and give true and fair
view against the results The three forms of substantive tests are:
(!) Tests of transactions;
(2) Tests of balances; and
(3) Analytical review procedures
Tests of transactions and balances gather evidence of the validity of the accounting
treatment of transactions and balances They are designed to identify errors and
irregularities Statistical sampling may be used in determining the accuracy of financial
statement numbers Tests of transactions may be conducted continually throughout the
audit year or at or close to the balance sheet date When an Auditor traces a sales invoice
from the journal to the ledger for correctness, it is called a transaction test When an
Auditor compares the book balance of cash to the book balance, it is a test of balances
This test is done near or at the year-end reporting date Another substantive test is
calculating interest expense on corporate debt and verifying the amount in the financial
records


c

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For example a computer is purchased by a company The following steps may be taken
by an accountant
! c „urchased a computer against the purchase order by the company Voucher was
then made
2 c „ass the journal entry against the voucher
3 c The balance of the product was written in ledgers
4 c The property, plant and equipment account was prepared
5 c Trial Balance was prepared against the account
6 c Statement of financial position was prepared and the amount was properly quoted

c
Then on the time of auditing an Auditor checks the records of the purchase of computer
on this way
! c From the statement of financial position, take property, plant and equipment
figure
2 c Asked for the
3 c Asked for the details of written down value in trial balance
4 c Take property, plant and equipment account and verify it
5 c Then amounts verify in the ledger
6 c Then the actual voucher and annexed documents verified by auditor
7 c
n last after proper check up the value was said okay

n this way auditor conducts walk through test, means where accountants ends their
work from there auditor starts their work

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Complete Audit „rocedure

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An audit approach which concentrates on verifying the assets and liabilities of the entityc
Sometimes auditor bypass compliance test and directly starts the substantive test This
approach is called direct verification approach and some authors also called it as balance
sheet approach
n this approach auditor takes balance sheet and conduct walk through
test of the financial records This approach is viable under the circumstances

Under the following Circumstances auditor may conduct irect Verification Approach;
àc When no system implemented by the client;
àc System is not working well;
àc The Transactions are too small; and if
àc Transactions are material

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