Internal Audit

1. INTERNAL AUDIT
TEST TYPE GUIDE

2. 1
INTERNAL AUDIT TEST TYPE GUIDE
There are various types of audit tests, including:
• Facilitated Meetings
• Interviewing
• Questioning
• Observation and Inspection
• Documentation Review
• Confirmation/Representation
• Analytical Review
• Data Analysis
• Vouching and Verifying
• Process Mapping
• Process Tracing
• Surveys
• Scanning
• Reconciliation
• Recalculation and Valuation
The following table defines these types of tests, which might be applied to validate process measures and
controls, and provides some of the advantages and disadvantages of each approach:
Test Description Advantages Disadvantages
Facilitated Meetings
Inquiry procedures involve
discussions with process owners,
process staff and key stakeholders
affected by the process –
customers and suppliers. With
focus groups, many of these
people can participate in an active
interchange of ideas and issues.
Example: A facilitated group of
purchasing, accounts payable and
manufacturing departments may
be an appropriate session to gain
an understanding of the
purchasing cycle processes.
• Ideas and different opinions are
immediately shared.
• Group support for the final
decision is gained.
• Participants have time to think
through their contribution
towards answers.
• Auditees share in the decision-
making process.
• The success of the focus group
method is highly dependent on
the ability of the facilitator to
focus the group on the
achievement of the meeting
objectives.
• An individual may conform to
group answers due to real or
imagined peer pressure.
• A significant time investment is
required by management.
Interviewing
Inquiry procedures involve
discussions with process owners,
process staff and may also involve
key stakeholders affected by the
process – customers and
suppliers.
An example is developing an
understanding of environmental
management controls over
emissions of a power station
• A direct interface with personnel
involved in the business
process is given, which
facilitates a greater
understanding of the business.
• Interviewers have the chance to
probe for further details.
• An effective way to identify
opinions, causes and possible
• The issues conveyed may be
merely a one-sided perception
of management and not actual
business practice.
• The interview style needs to be
matched to the auditee –
structured, casual or flexible –
to be effective.
• Data can be difficult to obtain,
organize and analyze.
TYPES OF AUDIT TESTS

3. 2
Test Description Advantages Disadvantages
through discussion with the plant
manager of the facility.
solutions to problems is
identified.
• Questions are possibly clarified
before a response.
• Interviewees build rapport with
respondents.
• Nonverbal messages are
received and noted.
• Interviewers must be trained to
elicit valuable information – this
involves the use of open-ended
questions versus closed-ended
questions.
• An unskilled interviewer can
make the respondent
uncomfortable or defensive.
Questioning
Questioning is probably the most
pervasive technique used by the
auditor who is reviewing
operations. This type of testing
may involve suggesting a
viewpoint of the process to gauge
management reaction – "pointed
interviewing."
An example is asking management
to explain an unusual fluctuation or
error noted in an audit test.
• Accumulated knowledge of the
auditee is used and provides
management with interpretation
of issues with an opportunity for
them to provide their views of
the process.
• An attempt to identify "root
causes" of identified errors or
issues occurs.
• Information from management,
which may not have been
volunteered to the audit team, is
easily obtained.
• The potential to alienate the
auditee through overly
aggressive questioning is likely.
Observation and Inspection
Observing involves a careful,
knowledgeable look at documents
processed, activities and assets.
It’s a visual examination with a
purpose and a mental comparison
with standards.
An example is sighting employees
recorded on a firm's payroll or
observing quality control inspection
processes on a production line
• A greater understanding of the
business is provided through
audit involvement with
operational personnel.
• The information collected
reflects actual behavior.
• The information collected is
current and not retrospective.
• Tests typically need to be
corroborated with other
procedures.
• Tests are potentially time
consuming.
• Recording data and observing
large numbers of people are
difficult.
• Random observations may not
provide an adequate evaluation
of the process due to
fluctuations in volume or
activity.
• Workers may alter their
behavior if they know their work
is being reviewed.
Documentation Review
This involves a review of existing
reports and documents to identify
controls, to understand the
business or process, and to
provide evidence when supporting
audit conclusions.
Examples include reviewing
• Information is unobtrusive.
• Information is highly valid as
data is quantifiable, historical
and objective.
• A strong base to build questions
is used.
• A skilled auditor is needed to
apply historical documents to
the current situation and to
identify areas where
interpretation is required of the
document.
• Auditors may incorrectly
assume that procedural manual
documentation, as provided, is

4. 3
Test Description Advantages Disadvantages
environmental compliance
manuals, key business contracts,
operational/procedural
documentation or company or
committee minutes.
available to and used by
intended users.
• Risks may be misinterpreted
without involving client
personnel in the review or
corroborating the results
through other types of audit
tests.
Confirmation/Representation
A confirmation or representation is
frequently prepared by the auditor,
completed by the relevant party
and delivered directly back to the
auditor. Confirmations and
representations may be obtained
either externally or internally.
An example may be obtaining
representations from an insurance
agent that they had complied with
certain agent policy conditions or
obtaining representations from
management regarding their
opinion of controls over the audit
area.
• Confirmation/representation is
viewed as reliable audit
evidence.
• This tool is useful for evaluating
whether “relevant party” is
prepared to formally confirm or
represent. For example,
management may state in an
interview that controls are
sufficient but may be reluctant
to sign a document that
represents this.
• Confirmation and
representations should be
corroborated with other
information gained through
alternative audit testing.
• Confirmations from relevant and
appropriate people need to be
obtained.
Analytical Review
The comparison of
interrelationships among sets of
data and the comparison of these
relationships with some predefined
expected relationship may be
referred to as analytical testing.
Analytical tests include:
• Trend analysis, such as
fluctuation analysis
• Benchmarking, such as industry
averages, predetermined
budgets or standards
• Ratio analysis, such as financial
ratios or process-related ratios
• Modeling techniques, such as
reasonableness tests or
frequency distribution analysis
• A sound basis for determining
the reasonableness of historical
or forecast data is utilized.
• A strong understanding of
business activities and
relationships occurs and
provides a structured basis for
identifying areas requiring
further analysis.
• Reviews can be used effectively
as audit tests to assess the
need for more detailed audit
testing.
• Reviews can be used during
initial stages of the audit to
identify problem areas to focus
audit reviews/testing.
• A lack of availability of
appropriate and reliable data
may limit the ability to develop
effective analytical procedures.
• Unstable operating
environments create increasing
difficulties when predicting
relationships.
Data Analysis and Exception
Tests
The analysis and query of
historical data files to identify
• A more scientific and rigorous
approach than scanning type
procedures is provided.
• Significantly identified exception
items need to be evaluated in
the overall business context.

5. 4
Test Description Advantages Disadvantages
trends, problems areas,
exceptions, etc.
Examples include:
• Stratify a data file to identify
types of codes and related
quantities.
• Stratify a data file to identify the
frequency of payments by
amounts in selected intervals.
• Identify duplicates or gaps.
• Create an aging summary of
receivables or identify debtors
who exceed their credit limits.
• Tests are used effectively to
quantify the significance or
incidence of a certain event or
nonevent.
• Data analysis can be used to
understand the volume or
magnitude of certain events or
values, which may assist in
further refined and limited audit
testing.
• Sample files can be selected
automatically.
• Efficient, accurate methods of
analyzing a large amount of
data are utilized.
• An ideal application for
statistical sampling and/or
CAATS is used.
• Data required may not be
available in a readily usable
format and may become costly
to "manipulate."
Vouching and Verifying
This tests to prove that recorded
events or values took place
through an examination of
supporting documents or systems.
Detailed examination of a set of
worker's compensation files for
evidence of doctor's certificates for
certain dates of work absence is
an example of a vouching test.
An example of verifying may be
verifying propriety charges made
by contractors to certain
construction projects.
• This is the most efficient and
effective audit procedure to
verify management assertion.
• "Hard" audit evidence of certain
infractions or errors is provided.
• “Hard" audit evidence that
stated controls are operating
effectively is provided.
• The method and
reasonableness of sample
selection of items to vouch have
a significant bearing on the
appropriateness of conclusions
that may be drawn. Particular
consideration must be made of
whether to select vouching
samples based on a statistical
selection of sample sizes and
items or to judgmentally select
items for review.
Process Mapping
Process mapping analysis may be
used as a test of business
practices. In particular, where the
completeness of controls or logic
of business procedures are being
assessed, process mapping
provides a tool to identify
weaknesses or inefficiencies. This
macro type evaluation is an audit
test.
An example may be assessing a
process map of an accounts
payable function for excessive
authorization controls.
• A clear documentation trail to
support an evaluation of
controls or processes is
provided.
• A complete technique for
assessing a process is
provided.
• This process is readily
understood by the client.
• Determining the proper level of
detail to process map may be
difficult.
• Process mapping may not meet
requirements if a structured
detailed flow chart is required.
• Process mapping analysis can
be time consuming.

6. 5
Test Description Advantages Disadvantages
"Walk-Through"
Tracing procedures beginning with
original documents and following
their life cycle through the process.
An example may be performing a
walk-through of daily shipping
document handling with the goods
receiving department to verify that
processed mapped controls exist.
• Process tracing may be used to
verify that controls exist to
ensure that transactions are
complete.
• Process errors not identified
through other audit steps may
be identified.
• Walk-throughs may be used to
confirm process understanding
gained through process
mapping.
• Workers may alter their
behavior if they know their work
is being reviewed.
• Samples selected for testing
may be too subjective and not
reflective of trends in the
business process.
Surveys
Surveys are commonly used to
gauge perceptions of business
activity.
For example, a survey of a pension
fund administrator's customers
may provide valuable process
information as to customer
perception of claim handling
efficiency, new member processing
and retiring benefit procedure
efficiency.
• Surveys are an efficient and
confidential method of obtaining
information.
• They reach a large group in a
limited time.
• Responses are quantifiable.
• Special training is not needed.
• Questionnaires can be
developed based on the
company's procedural manuals
or standards of conduct to gain
comfort over management
controls in certain areas.
• Time and technical skills to
develop an effective survey
instrument are required.
Scanning
A less detailed procedure that is
intended to detect the unusual.
The effectiveness of scanning
depends on the auditor's ability to
identify the "unusual" items and sift
through large quantities of data to
flag unusual items.
An example may be reviewing the
check register of a company
location for unusual payees and/or
unusual payment amounts.
• This method of identifying
unusual items is cost-effective.
• A trained auditor can detect
unusual items very efficiently
and search for correlations or
notice consistencies in the data
previously unrecognized.
• Scanning may not be effective if
unusual items are difficult to
identify or the auditor is
inexperienced at spotting
unusual items.
• The likelihood of not detecting
errors increases with the
volume of data.
Reconciliation
A specific purpose audit test
designed to analyze variances
between two sets of similar
information.
An example would be preparing or
reviewing a reconciliation of
differences between a physical
stock count and company
• Valuable insight as to business
issues and risks underlying the
process may be provided. For
example, a detailed book to
physical analysis may identify
problems in goods dispatch and
inventory production recording
and monitoring processes. It
may disclose incidents of fraud.
• Reconciliation is time
consuming.
• Root causes may not
necessarily be identified.

7. 6
Test Description Advantages Disadvantages
inventory records.
Recalculation and Valuation
tests
Amounts or values are
recalculated by the auditor to verify
their accuracy or to assess the
reasonableness of the final
valuation.
• This is the most efficient
method to evaluate the
outcome of a certain process.
• It is important to view the
calculation in terms of total
audit risk – for example,
recalculation of interest income
may not be useful if one-third of
loans will never be collected.
• Recalculation may be complex
and time consuming.
• The assistance of outside
experts, particularly where a
valuation is being assessed,
may be required – for example,
the internal auditor's
assessment of the accuracy of
stockpile inventory recording
processes.