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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.
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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
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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.
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Required Documentation701.3 Section 610 discusses documentation requirements
including documentation of items tested in a test of details.
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