Definition
Testchecking refers to the practice of examining a subset of items within a financial record to determine the accuracy and validity of the entire account. This method is used by auditors to form an opinion on whether the financial statements are free from material misstatement. The items that are testchecked are selected based on a representative sample.
Examples
- Entertainment Expense Vouchers: An auditor may choose to testcheck every fifth entertainment expense voucher to ensure each has supporting documentation and has been properly approved.
- Sales Invoices: An auditor could testcheck every tenth sales invoice to confirm that the recorded sales are backed by appropriate invoices and that they have been correctly recorded.
- Purchase Orders: Reviewing every third purchase order can help verify that the orders have been authorized, issued, and fulfilled according to company policies.
Frequently Asked Questions (FAQs)
Q1: Why do auditors use testchecking?
A1: Auditors use testchecking to efficiently verify the accuracy of financial records without reviewing every single item, which can be very time-consuming and costly.
Q2: How are items selected for testchecking?
A2: Items selected for testchecking are usually chosen based on a representative sample. This can be a random selection or systematic sampling, such as selecting every fifth transaction.
Q3: What evidence is required for testchecking?
A3: Testchecking requires supporting documentation for the selected items. This documentation may include receipts, invoices, approval signatures, and other relevant records.
Q4: What if errors are found during testchecking?
A4: If errors are found, auditors may need to expand the scope of their testing to determine the extent of inaccuracies and assess the impact on the entire financial record.
Q5: Can testchecking be relied upon completely?
A5: While testchecking is a useful tool, it is not infallible. Auditors must use professional judgment to decide when further testing is necessary.
- Sampling: The process of selecting a subset of items from a larger pool for the purpose of analysis.
- Audit Evidence: Information used by auditors to reach conclusions and form opinions on financial statements.
- Material Misstatement: An error or omission in the financial statements that could influence the economic decisions of users.
- Internal Control: Processes and procedures implemented by an organization to ensure the integrity of financial and accounting information.
Online References
Suggested Books for Further Studies
- Auditing and Assurance Services: An Integrated Approach by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley
- Principles of Auditing & Other Assurance Services by Ray Whittington and Kurt Pany
- Modern Auditing: Assurance Services and the Integrity of Financial Reporting by William C. Boynton and Raymond N. Johnson
Fundamentals of Testchecking: Auditing Basics Quiz
### What is the primary purpose of testchecking in an audit?
- [ ] To reduce the time spent on an audit.
- [x] To verify the accuracy of financial statements.
- [ ] To identify fraud within the organization.
- [ ] To ensure compliance with tax regulations.
> **Explanation:** Testchecking is used to verify the accuracy of financial records, helping auditors form an opinion on the financial statements' reliability.
### How are items typically selected for testchecking?
- [x] Based on a representative sample.
- [ ] By selecting only high-value items.
- [ ] By choosing items that look suspicious.
- [ ] By reviewing items only at the auditor's discretion.
> **Explanation:** Items are usually selected based on a representative sample to provide a reasonable basis for forming an opinion on the entire financial record.
### What should an auditor do if errors are found during testchecking?
- [ ] Ignore the errors as they are part of the sampling process.
- [ ] Inform the organization and stop the audit.
- [x] Expand the scope of testing to assess the extent of inaccuracies.
- [ ] Recalculate the financial statements.
> **Explanation:** If errors are found during testchecking, the auditor may need to expand the scope of testing to better understand the extent of inaccuracies and their impact.
### What does an auditor need to review an item during the testchecking process?
- [ ] Stock market data.
- [ ] Company press releases.
- [x] Supporting documentation.
- [ ] Employee interviews.
> **Explanation:** Auditors need supporting documentation such as receipts and invoices to verify the accuracy of the financial records.
### Which term refers to the error or omission in the financial statements that could influence economic decisions?
- [ ] Internal control
- [ ] Substantive testing
- [x] Material misstatement
- [ ] Analytical procedure
> **Explanation:** A material misstatement is an error or omission that could influence economic decisions of users of the financial statements.
### Which document predominantly governs the standards for auditing?
- [ ] Financial Accounting Standards Board (FASB)
- [ ] International Monetary Fund (IMF)
- [x] International Federation of Accountants (IFAC)
- [ ] New York Stock Exchange (NYSE)
> **Explanation:** The International Federation of Accountants (IFAC) provides the standards for auditing through the International Standards on Auditing (ISA).
### During testchecking, if every tenth transaction is reviewed, which sampling method is being utilized?
- [x] Systematic sampling
- [ ] Random sampling
- [ ] Judgment sampling
- [ ] Stratified sampling
> **Explanation:** Reviewing every tenth transaction is an example of systematic sampling, where items are selected in a predictable interval.
### What is not required to perform a testcheck procedure?
- [ ] Testing a subset of items
- [ ] Reviewing supporting documents
- [ ] Forming an opinion based on findings
- [x] Exhaustively testing every item
> **Explanation:** Testchecking does not require exhaustively testing every item but rather focuses on a subset of items to draw conclusions about the entire set.
### Who is responsible for planning and executing a testcheck in an audit?
- [ ] The organization being audited
- [ ] The tax authority
- [ ] The financial regulator
- [x] The auditor
> **Explanation:** The auditor is responsible for planning and executing the testcheck as part of the audit process.
### What is the next step if no errors are found during testchecking?
- [ ] Start the entire audit process over.
- [ ] Form an unqualified opinion on the financial statements.
- [ ] Ignore the remaining items completely.
- [x] Conclude that the financial statements are free from material misstatement.
> **Explanation:** If no errors are found, the auditor can reasonably conclude that the financial statements are free from material misstatement based on the sample tested.
Thank you for diving into the intricacies of testchecking and enhancing your knowledge through our quiz. Continue to strive for excellence in your auditing proficiency!
