Page 119 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes Define the Objectives of the Test Step 1

The auditor must have a definite question to be answered by the test. Examples of questions to
be answered are:
1. Does the Sales Summary contain all invoices and is information recorded accurately?

2. How often are invoices voided without explanation?
3. Does the taxpayer record all supplies pulled from inventory in the inventory log?
4. Does the sales supervisor correctly batch sales by destination so that they can be recorded
by state in the summary journal?
5. What is the amount of deductions not supported by NTTC’s?
6. What is the percentage of sales of services to the government relative to total sales?
7. What percentage of supplies is pulled from inventory held for sale each month?

8. What percentage of supplies purchased outside NM has not had tax paid or accrued?
Auditors should record the objective of the test within the audit narrative and/ or other work
papers. Not only does that help the reviewer, but it also clarifies the objective for the auditor so
that the proper audit procedure and sampling application can be defined. If the auditor can
create a one sentence question, like the ones above, to be answered, he or she is less likely to
perform an inappropriate procedure or use the wrong sampling application.

Determine the Type of Test to be Performed Step 2

The type of sampling application, whether statistical or non-statistical, is usually defined by the
conclusion which the auditor is attempting to reach. “Variables sampling” is used to reach a
conclusion about a population in terms of an amount. Variables sampling is commonly used to
determine the dollar size of a population or to determine if the stated dollar size is correct.
“Attribute sampling” is used when the auditor is only concerned with acceptance or rejection of
a hypothesis.
It is used to reach a yes or no answer about a question.
The reason that defining the type of application is so important is that sample size is dependent
on which type of application is being performed. Below is the same list of questions given on the
previous page, and an explanation of the type of application required for each.

Compliance Tests

Compliance tests are most often used by tax auditors to determine if controls which ensure the
accuracy of records are in place and working correctly. These tests can be performed directly on
the control feature itself or indirectly on the outcome of the control.
An example of a direct test would be a test to determine that invoices are pre-numbered, used in
sequence and accounted for by those issuing the invoices. Such a test would be helpful in
assuring the auditor that all invoices issued in a period are used or voided.
An example of an indirect test would be a tracing of a sample of invoices to a summary journal
to determine that the controls over recording invoices in the summary journal are working.
In this case, the controls themselves are not actually tested, but the results of those controls are
examined, and the question of whether the summary record is reliable will be answered yes or
no.

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