Testing controls in an accounting

System
Auditing
UMI
Kasekende Daniel
 Accounting controls
• Definition:
• These are methods and procedures that are
implemented by a firm to help ensure the
validity and accuracy of its financial
statements. The accounting controls do not
ensure compliance with laws and regulations,
but rather are designed to help a company
comply
Testing controls in accounting systems
• Sales Transactions

• Objectives:
– Sales are made to valid customers
– Sales are recorded accurately
– All sales are recorded
– Cash is collected within a reasonable period
 Tests of control- sale
• Carry out sequence tests checks on invoices,
credit notes, dispatch notes and orders.
• Review the existence of evidence for
authorization in respect of:
– Obtain goods dispatch notes (GDN)
 Tests of control- sale
– Obtain a sample of credit notes and ensure each
document is signed by the an authorized person to
confirm the arithmetical accuracy
– Obtain a sample of dispatch notes and goods returned
notes, ensure that they are signed by a responsible
official to confirm that details have been agreed with
relevant sales invoices and credit notes
• Observe that control account reconciliations have
been performed and reviewed. By reviewing work
done by a client or through observation
 Purchase transactions

• Objectives
– Purchases are made only when there is a genuine
need
– Value for money is achieved
– Services/goods delivered are what was ordered
– Quality of goods/services delivered is satisfactory
– Liabilities are recorded completely
– Only valid liabilities are paid
– Liabilities are paid in a sensible and a commercial
timescale.
 Tests of control-purchases
• Obtain the ledger recording purchases orders;
ensure each page has been signed by a
responsible official to confirm all orders have been
recorded and there are no gaps in the sequence
orders.
• Obtain a sample of purchase invoices has been
signed by a responsible official to confirm checks
on the invoice have been completed and the
invoice is passed for payment.
• Obtain a sample of credit notes; ensure that each
credit note is signed by a responsible official to
confirm credit note details have been agreed to
the relevant goods returned note.
 Tests of control-purchases
• Review the purchase order for the relevant
signature for approval.
• Review purchase invoices for evidence that all
has been reviewed and checked..
• Review /observe the supplier reconciliation
note to ensure the control has been complied
with.
 Wages/payroll transactions
• Objectives

– That the right people are paid

– The people that are being paid are paid at the
right rate
– Only valid work should be paid for.
– Taxes and any deductions have been correctly
calculated.
 Tests of control-wages/payroll
• Test a sample of timesheets, clock cards for approval
by a responsible official. Particular attention should be
paid for approval of overtime.
• Observe wages distribution for adherence to
procedures ensuring that employees sign for their
wage and unclaimed wages are re-banked.
• Test authorisation for payroll amendments by
reference to personnel records.
• Obtain the payment sheet for casual labour payments
and ensure this has been signed by the head of
accounts to authorise the payments made.
 Tests of control-wages/payroll
• Inspect payroll reconciliation done regularly,
clearing wage control account tying the
tax/deductions up to the relevant authorities
records.
• Examine explanations for payroll expense
variances.
 Tests of control-wages/payroll
• Test authorisation for payroll deductions by reviewing
the employees records, looking at who is authorised to
place through amendments, and observe the process.
• Test controls over unclaimed wages. You could use
unofficial transaction to see how the system works,
what happens to unclaimed wages, are they placed in
a safe, if so check the client’s working papers agree
with the amount in the safe.
• Obtain a period’s payroll and ensure this has been
signed by a responsible official to approve those
payments.
 Cash and Bank transactions
• Objectives

• Cash balances are safeguarded

• Cash balances are kept to the minimum

• Money can only be extracted from bank

accounts for authorised purposes only
 Cash and bank cont.
• Testing controls-receipts

• Test independent check of cash receipts to bank

lodgments.
• Test for evidence of a sequence check on any
pre-numbered receipts for cash.
• Test authorisation of cash receipt.
• Test for evidence of arithmetical checks on cash
received records
 Cash and bank cont.
• Testing controls-payment

• Inspect current cheque books for sequential use of

cheques, controlled custody of unused cheques.
• Test (for avoidance of double payment) to ensure that
paid invoices are marked “paid”
• Test for evidence of arithmetical checks on cash
payment records, including cashbook.
• Obtain the file of direct debit payments ensuring that
payment is authorised
 Cash and bank cont.
• Testing controls-petty cash

• Test petty cash vouchers for appropriate

authorisation
• Test cancellation of petty cash vouchers.
• Test for arithmetical checks on petty cash records
• Test evidence of independent checks on the petty
cash balance.
• Perform a surprise petty cash count and reconcile
to petty cash records.
 Cash and bank cont.
• Testing controls-bank
• Examine evidence of regular bank reconciliations, at
least one per month, but in large organisations it
should be done more frequently
• Examine evidence of independent checks of bank
reconciliation. For example a signature of an
independent senior.
• Examine evidence of follow up of outstanding items on
bank reconciliation. Pay particular attention to old
outstanding reconciling items that should be written
back such as old or un-presented.