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701.1 Tests of details may be applied to transactions or to balances. Those tests can be described as follows:
- a. Tests of Transactions.
- These are tests of the processing of individual transactions by
- inspection of the documents and accounting records involved in
- processing, e.g., tracing a sample of invoices to the purchase journal
- or other accounting records to see whether invoices have been recorded
- as expenses.b. Tests of Balances.
- These are tests applied directly to the details of balances in the
- accounting records, e.g., confirming investments held by others, such as
- a broker.
Tests of transactions and tests of balances are related because
- each class of transactions affects a
- related account balance. For example, assessment revenue affects the
- assessments receivable balance. An auditor may test the transactions
- that enter an account balance, the individual items included in the
- ending balance, or both. Generally, tests of balances are more efficient
- and effective than tests of transactions because transaction tests are
- applied to individual transactions and may be more time-consuming than
- direct tests of a balance that results from many transactions
Confusion about Tests of Details701.2
Inspection of documents and accounting records may be involved in both
tests of controls directed toward operating effectiveness (if controls
leave a documentary trail) and tests of details. For this reason, some
auditors have equated tests of details and tests of controls
- The difference is in the objective
- of the test. The mere fact that a transaction or balance is being tested
- does not make the test a test of controls. For example, the inspection
- of invoices in support of additions to equipment is a substantive
- test. The objective of the test is to substantiate the transaction,
- i.e., the addition. The same principle applies to other types of
- transactions or balances. For example, revenue transactions may be
- tested to substantiate total revenue without being concerned with the
- effectiveness of control policies and procedure for processing member
- assessment transactions. It is the objective of the test and not whether
- it is applied to a class of transactions or a balance that determines
- whether the test is a test of controls or a substantive procedure.
- Substantive procedures, including tests of details, are normally applied
- after the auditor has obtained an understanding of internal control,
- but substantive tests of details in the current period may contribute to
- the auditor's understanding in subsequent periods. Tests of details can
- be performed concurrently with tests of controls.
Required Documentation701.3 Section 610 discusses documentation requirements
including documentation of items tested in a test of details.