Appendix 3

Tests of Controls

The auditor may wish to test controls if they will be relied upon to reduce substantive
testing, or obtain information on which to base recommendations in the Management
Letter. The following tables list some control procedures that a company might have in
place for cash, accounts receivable, and inventories, along with tests that the auditor
might perform to see if these controls are operating.

Control Procedures or Activities that the Typical Tests of the Control that the
Company Might Perform Auditor Might Perform

Cash:
Authority to sign bank payment orders is
restricted to selected individuals who do
not have access to the accounting records
(segregation of duties).
Segregation of duties between personnel
who have access to cash receipts and those
who make entries into the accounts
receivable records.
Cash receipts are listed and deposited on a
daily basis.
Cash disbursements must be properly
authorized.
Cash on hand is adequately safeguarded.
Daily bank statements are compared with
accounting records and any differences are
investigated and resolved. The comparison
is performed by a person who is restricted
from making entries in the accounting
records.
Observe and make inquiries about the
performance of various functions and
duties.
Observe and make inquiries about the
performance of various functions and
duties.
Select a sample of daily cash receipts
listings. Compare information (date and
amount) to bank deposit records, cash
receipts journal and posting to accounts
receivable.
Compare the details of a sample of
recorded disbursements in the cash
disbursements journal to accounts payable
postings, purchase orders, receiving
reports, invoices and bank payment orders.
Observe and make inquiries about the
security procedures for cash on hand,
including inquiries about access.
Observe and make inquiries about the
performance of this comparison. Select a
sample of bank statements throughout the
year and examine for indications that this
comparison was performed and that any
differences were promptly investigated and
resolved.

1
Control Procedures or Activities that the
Company Might Perform
Accounts Receivable and Sales:
Segregate duties over sales from duties
over collections of receivables.
Match sales invoices with shipping
documents, purchase orders, and sales
orders.
Review of the clerical accuracy of sales
invoices by a second person.
Obtain credit approval of sales prior to
shipment.
Mail monthly statements to customers and
follow up on errors reported.
Use listings to control and document cash
collections.
Use budgets and analyze variances from
actual amounts.
Use pre-numbered shipping and billing
documents and account for the sequence.
Use credit memoranda for authorization of
adjustments to sales and receivables.
Typical Tests of the Control that the
Auditor Might Perform
Observe and make inquiries about the
performance of various functions and
duties.
Select a sample of sales invoices and
examine for evidence that the company
compared details to shipping documents,
purchase orders, and sales orders.
Select a sample of sales invoices and
examine them for evidence of second-
person review.
Make inquiries about credit policies; select
a sample of sales transactions and examine
evidence of credit approval.
Observe and make inquiries about the
mailing of statements and review evidence
of follow-up for a selected sample of
statements.
Observe, make inquiries about the process,
and reconcile selected listings to the bank
and accounting records.
Examine budgets and evidence of follow-
up on variances.
Observe and make inquiries about the use
of pre-numbered documents and inspect
evidence of accounting for the sequence.
Select a sample of credits to customers’
accounts and inspect credit memoranda and
other supporting documents.
2
Control Procedures or Activities that the
Company Might Perform
Inventories:
Segregation of duties over purchases and
custody of inventories.
Use pre-numbered requisitions, purchase
orders, and receiving reports and account
for the sequence of documents.
Establish procedures for authorizing
purchase transactions, reconciling purchase
invoices to purchase orders and receiving
reports, and verifying the clerical accuracy
of purchase invoices.
Establish general ledger control of
inventories of raw materials, goods in
process, and finished goods and
periodically reconcile to production
records.
Establish controls for the cost accounting
system that accumulates appropriate
inventory costs on a job order or process
cost basis, such as independent reviews of
cost accumulations.
Analyze variances from standard costs
Use perpetual records to control
inventories.
Use appropriate procedures for taking the
physical inventory counts.
Establish appropriate physical controls
over inventories.
Typical Tests of the Control that the
Auditor Might Perform
Observe and make inquiries about the
performance of various functions.
Observe and make inquiries about the use
of pre-numbered documents and inspect
evidence of accounting for the sequence.
Observe and make inquiries about purchase
procedures, and test a sample of purchase
transactions by inspecting evidence of
authorizations and reconciliations,
comparing the details to authorized
purchase orders and receiving reports, and
recomputing the invoice amounts.
Inspect accounting and production records
and selected reconciliations.
Inspect evidence of independent reviews of
cost accumulations, recompute material
costs by reference to requisitions and
purchase invoices, direct labor costs by
reference to time and payroll records, and
overhead application rates.
Inspect inventory reports and examine
evidence of follow-up on variances.
Inquire about the perpetual inventory
procedures, and test the records by
reference to purchase invoices, receiving
reports, and production records.
Review the inventory instructions and
observe the inventory-taking process.
Observe and inquire about the physical
control policies and procedures.