## Learning Outcomes

After studying this article, you will be able to explain why and how auditors perform tests of controls in key accounting areas. You will know the aims of tests of controls, identify typical control objectives and activities within main transaction cycles, and design suitable tests for core systems such as sales, purchases, payroll, inventory, non-current assets, and cash. This will prepare you to answer ACCA FAU exam questions requiring practical application and understanding.

## ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the importance and application of tests of controls within various accounting systems. In particular, focus your revision on:

- The purpose and nature of tests of controls within the audit process
- Control objectives and control activities for key systems: sales/receivables, purchases/payables, payroll, inventory, non-current assets, and cash
- Designing appropriate audit tests to evaluate the effectiveness of controls
- The distinction between tests of controls and substantive procedures
- The types of evidence obtained by different audit testing methods

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What is the main objective of a test of control?
2. Which of the following is NOT usually a test of control?
   a) Inspecting invoices for evidence of authorisation
   b) Reperforming reconciliations to check accuracy
   c) Observing the payroll distribution process
   d) Recalculating the depreciation charge for a vehicle
3. For the purchases system, list two control activities that help ensure only authorised goods are ordered.
4. True or False? A test of control provides audit evidence about the effectiveness of a control, not about the actual amount stated in the financial statements.

## Introduction

Auditors seldom rely solely on examining year-end figures. Instead, a key part of an audit is assessing whether a client’s internal controls are appropriately designed and operating as intended throughout the accounting period. This assessment allows auditors to decide the extent of substantive work required.

Tests of controls are audit procedures that determine whether relevant controls are working effectively over significant transaction cycles. Strong controls reduce the risk of material misstatement, allowing the auditor to plan less detailed year-end testing. Weak or poorly functioning controls require more substantive work.

> **Key Term: test of control**
> An audit procedure designed to evaluate the operating effectiveness of a control in preventing, or detecting and correcting, material misstatements at the assertion level.
>
> **Test Tip:**
> When revising Testing controls over key areas, connect each definition, method, or rule to the kind of question the assessment is likely to ask.

### Purpose and Scope of Tests of Controls

Tests of controls answer the question: "Are the system controls that the auditor plans to rely on actually working effectively, as described?" These tests do not directly test year-end balances but focus on whether control procedures (such as authorisation, segregation of duties, or regular reconciliations) operate reliably.

![Tests of controls using inspection, observation, inquiry, and reperformance, with inspection and reperformance linked to stronger evidence than observation or inquiry.](https://static.pastpaperhero.com/images/acca-fau-tests-of-controls-testing-controls-over-key-areas_00.png)

_Audit procedures for control testing classify inspection and reperformance as stronger evidence, observation as moderate, and inquiry as weaker._

Tests of controls are typically applied to core cycles:

- Sales and receivables
- Purchases and payables
- Payroll and HR
- Inventory
- Non-current assets
- Cash and bank

When planning tests of controls, the auditor identifies significant controls based on risk and materiality. The focus is on controls most relevant to the risk of material misstatement.

> **Key Term: control objective**
> The aim that a control activity seeks to achieve, such as ensuring completeness, accuracy, or validity of transactions.
> **Key Term: control activity**
> The specific procedure or policy established to achieve a stated control objective, e.g., authorising purchases before an order is placed.

### Main Types of Audit Testing Procedures

Auditors use several types of tests to evaluate controls, often tailored to the specific area being audited:

- **Inspection:** Examining documents for evidence that a control has operated (e.g., signatures showing authorisation).
- **Observation:** Watching procedures being performed (e.g., observing wage packet distribution for payroll controls).
- **Inquiry:** Asking relevant staff about their understanding of control procedures.
- **Reperformance:** Independently re-performing a control procedure to check its effectiveness (e.g., redoing a reconciliation).

These test types provide different strengths of audit evidence. Written and objective evidence (e.g., documented approval) is more reliable than verbal evidence alone.

### Test of Control vs. Substantive Procedure

It is important to distinguish between testing whether a control operates (test of control) and checking the value or existence of a transaction or balance itself (substantive procedure).

> **Key Term: substantive procedure**
> An audit procedure designed to detect material misstatements in balances, transactions, or disclosures. This includes tests of details and analytical procedures.

### Key Areas: Typical Control Objectives, Activities, and Tests

#### Sales and Receivables

- **Control objectives:** All sales are authorised, recorded promptly and accurately, and only valid transactions are processed.
- **Control activities:** Credit checks, approval of sales orders, separation between sales processing and cash handling, regular reconciliations of receivables ledger.
- **Tests of controls examples:** Inspect a sample of sales orders for credit approval; check for signatures of authorisation; observe month-end reconciliations.

#### Purchases and Payables

- **Control objectives:** Purchases are properly authorised, only valid transactions are recorded, and liabilities are incurred and recorded promptly.
- **Control activities:** Authorised purchase orders, three-way matching (order, goods received note, invoice), segregation between ordering, receiving, and payment functions, supplier statement reconciliations.
- **Tests of controls examples:** Inspect purchase orders for authorisation; verify invoices are matched to orders and goods received notes; confirm reconciliations are performed.

#### Payroll

- **Control objectives:** Only authorised staff are paid and at correct rates; all payroll changes (starters, leavers, pay adjustments) are properly approved.
- **Control activities:** Written approvals for payroll amendments, supervisor authorisation of timesheets, segregation of HR and payroll processing, reconciliations of payroll records to bank transfers.
- **Tests of controls examples:** Inspect personnel files for authorisation of new starters or rate changes; observe payroll run; inspect reconciliation documents.

#### Inventory

- **Control objectives:** All goods received and issued are recorded, and inventory is safeguarded from loss.
- **Control activities:** Use of pre-numbered goods received notes, authorisation for inventory issues and write-offs, physical periodic counts.
- **Tests of controls examples:** Observe inventory counts for compliance with instructions; check documentation for recording of inventory movements.

#### Non-current Assets

- **Control objectives:** All acquisitions and disposals are approved; asset records are accurate; depreciation is correctly calculated.
- **Control activities:** Capital expenditure authorisation, asset register maintenance, approval of disposals, regular asset verification.
- **Tests of controls examples:** Inspect minutes for capital approvals; inspect physical assets against the asset register.

#### Cash and Bank

- **Control objectives:** Only authorised payments are made; all receipts and payments are recorded accurately; cash is safeguarded.
- **Control activities:** Dual signatures on cheques, segregation between payments and reconciliations, regular bank reconciliations.
- **Tests of controls examples:** Inspect payment vouchers for dual signature; inspect monthly bank reconciliation files.

### Worked Example 1.1

> **Question:**
> A client organisation's sales invoices are required to be authorised by a credit controller before dispatch to customers. As part of your audit, how would you test this control?
>
> **Answer:**
>
> - Select a sample of invoices from throughout the year.
> - For each, inspect the invoice for evidence of the credit controller's authorising signature or stamp.
> - Check that authorisation was dated before the invoice was sent.
> - If unauthorised invoices are found, consider whether the control is operating as intended and extend the testing if necessary.

### Worked Example 1.2

> **Question:**
> In the payroll system, each overtime claim must be approved by a line manager before payment is processed. How can an auditor test the effectiveness of this control?
>
> **Answer:**
>
> - Select a sample of overtime claims submitted during the year.
> - Review each claim for the signature of the line manager as evidence of approval.
> - Confirm the approval was given before payment was processed.
> - Discuss any missing authorisations with payroll staff and evaluate whether extra work is needed.
>
> **Exam Warning:**
> A frequent error is to mistake testing for the value of a transaction (substantive procedure) for testing whether a control operated (test of control). Remember: A test of control focuses on whether the control policy—such as authorisation—has been applied, not on whether the figure is correct in the accounts.

## Summary

Tests of controls are central to determining the direction and extent of audit work. Effective control testing allows an auditor to limit further substantive procedures but only if controls are working as described. Testing should be directed at key controls in critical transaction cycles using inspection, observation, inquiry, or reperformance. Keep the distinction clear between tests of control and substantive procedures during audit planning and in the exam.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Explain the purpose of tests of controls and how they fit into the audit process
- Distinguish between tests of controls and substantive procedures
- Identify typical control objectives and activities across key systems (sales, purchases, payroll, inventory, assets, and cash)
- Select and design appropriate audit testing methods for controls (inspection, observation, inquiry, reperformance)
- Apply tests of controls to real-life scenarios in exam questions

## Key Terms and Concepts

- test of control
- control objective
- control activity
- substantive procedure


Tests of controls - Testing controls over key areas