- This topic has 2 replies, 2 voices, and was last updated 5 years ago by
.
- Posts
Joe works as an internal auditor for a company & produce monthly variance reports. The system operates as follows:
I. Variances are reported to the managers responsible within three working days of the end of each month
II. Managers are required to investigate variance in excess of 10% of standard cost
III. Managers are required to report to their superior, in writing, on the reasons for variances and the control measures implemented to reduced future variance, within one week of receiving the report.Which of the following are compliance tests?
Select ALL that apply.
A. Establish the details of the standard costing and budgetary system. Find out how costs are recorded and how variances are produced and distributed at month end
B. Check whether variances are reported within three working days of month end
C. Check whether the 10% figure for exceptional variance is reasonable.
D. Suggest improvements to the system
E. Check whether managers report reasons for variances and control action taken within one week
F. perform detailed tests to establish how staff report variances to managersAns B,C, E
But wouldn’t option C be a substantive test and not a compliance test?A substantive test means testing lots of figures directly eg going trough invoices and making sure they had been posted to the correct account. A compliance test/test of control would mean ensuring that each invoice had, for example, had its coding independently checked by a supervisor. A test of control/compliance test tests controls.
In the above, the 10% figure sets the control level. Anything less than that does not have to be investigated. A compliance test would be to check that variances of more than 10% are investigated. However, the control is only as good if it has been designed properly to be relevant to internal control. To take an extreme example, how wold you feel about the operation of the internal control system if variances had to be in excess of 1000% of the standard cost? The control would be useless for any practical purpose. Hence, when testing the operation of controls not only do they have to be carried out but they also have to be effective at, for example, detecting errors or other problems.
- The topic ‘Audit Tests’ is closed to new replies.