Test of Controls

• Payroll or Personnel Cycle

  1. Production – timecards for employees and Job tickets if Job order

  2. Cost accounting – records Job tickets

  3. Payroll department – responsible for computation of payroll

  4. Human resources department - responsible for setting the rate for employees

  5. Account Payable department – prepares voucher to fund payroll

  6. Cash disbursements department – issues check to fund payroll
• Scope of substantive testing is inversely proportional to scope of test of controls
• Control deficiency severity levels

  • Significant deficiency – less severe
  • Material weakness – more severe
• If control risk is set at maximum, perform only more extensive substantive testing
• Expenditure Cycle

  1. Inventory Control department – determine whether to purchase inventories

  2. Purchasing department – make purchase orders

  3. Receiving department – receives supplies from vendors

  4. Accounts Payable department – reconciles 3 way match and requests payment from Cash disbursements department

  5. General Ledger Department – Records and updates general ledger

  6. Cash disbursements Department – issues checks and forwards to vendors
• Control deficiency


  Situation in which design or operation of a control does not allow management or employees in the normal course of performing their assigned function to prevent or detect material misstatement
• Audit procedures in testing controls

  1. Inquiry

  2. Inspection

  3. Observation

  4. Reperformance or walkthrough
• If control risk is set at minimum, perform test of controls and less extensive substantive testing
• Control deficiencies must be communicated to those charged with governance
• Revenue Cycle

  1. Sales Department – receives customer orders; issues invoice

  2. Credit department – reviews credit rating of customers

  3. Warehouse Department – Releases the unit to shipping department

  4. Shipping department – prepares bill of lading

  5. Billing Department – Sends invoice to the customers and updates sales journal; also sends stock release

  6. Inventory Control – updates inventory Subsidiary ledger

  7. Accounts receivable department – updates AR subsidiary ledger

  8. General Ledger – receives AR summary and journal vouchers and record it to General Ledger

  9. Receiving Department – receives sales returns from customers

  10. Mail room – receives checks issued by the customers

  11. Cash Receipt Department – deposit the check in the bank and updates cash receipts journal

  12. Controller – creates bank reconciliation