Important Differences between Routine checking and Test checking

Routine checking

Routine checking is a type of audit procedure that involves the regular examination of certain financial transactions and activities to ensure they comply with established policies and procedures. This type of checking is typically performed by internal auditors or compliance staff on a regular basis, such as daily, weekly, or monthly.

The purpose of routine checking is to detect errors or irregularities early on so that corrective action can be taken before they become larger problems. This type of checking also helps to ensure that the company’s policies and procedures are being followed consistently and effectively.

Examples of routine checking include:

• Bank reconciliations: This involves comparing the company’s bank statement with its own records to ensure that all transactions have been recorded correctly.
• Accounts payable checks: This involves reviewing invoices and purchase orders to ensure that payments are being made to legitimate vendors for legitimate goods and services.
• Payroll checks: This involves verifying that employee salaries, benefits, and taxes are being calculated correctly and that payments are being made on time.
• Inventory checks: This involves verifying that inventory counts match inventory records and investigating any discrepancies.
• Fixed asset checks: This involves verifying that fixed assets are being recorded correctly, are being properly depreciated, and that disposals are being accounted for properly.

Routine Checking Objectives

• Ensuring compliance with established policies and procedures: By performing routine checks, companies can ensure that their policies and procedures are being followed consistently and effectively. This helps to prevent errors and irregularities from occurring and ensures that the company operates in accordance with its guidelines.
• Detecting errors and irregularities: Routine checking helps to detect errors and irregularities early on, before they become larger problems. This allows corrective action to be taken quickly and prevents further damage to the company.
• Promoting efficiency: Routine checking promotes efficiency by identifying areas where processes can be improved or streamlined. This can help to reduce costs, increase productivity, and improve the overall performance of the company.
• Reducing the risk of fraud: Routine checking helps to reduce the risk of fraud by detecting irregularities and suspicious activities. This helps to deter potential fraudsters and ensures that any fraud that does occur is detected and addressed quickly.
• Enhancing financial reporting: By ensuring the accuracy and completeness of financial records, routine checking helps to enhance the quality of financial reporting. This helps to ensure that stakeholders have confidence in the company’s financial statements and can make informed decisions based on accurate information.

Features of Routine Checking include:

• Regularity: Routine checking is conducted on a regular basis, such as daily, weekly, or monthly. This helps to ensure that financial transactions and activities are being monitored consistently and regularly.
• Standardization: Routine checking is typically performed using standardized procedures and checklists. This helps to ensure that all relevant areas are being examined and that the process is consistent across different departments and locations.
• Focus on specific areas: Routine checking typically focuses on specific areas or activities, such as bank reconciliations, accounts payable, payroll, inventory, and fixed assets. This helps to ensure that these areas are being monitored closely and that any issues are detected early on.
• Internal control testing: Routine checking may also involve testing internal controls to ensure that they are working effectively. This helps to identify weaknesses in the company’s internal control system and allows corrective action to be taken.

Scope

The scope of routine checking will vary depending on the company’s specific needs and objectives. However, it typically includes the following areas:

• Financial transactions: Routine checking includes the examination of financial transactions, such as bank deposits and withdrawals, accounts payable and receivable, payroll, and other financial activities.
• Records and documentation: Routine checking includes the review of financial records and documentation, such as invoices, purchase orders, receipts, and other financial documents.
• Compliance: Routine checking includes the examination of policies and procedures to ensure that they are being followed consistently and effectively.
• Internal controls: Routine checking includes the testing of internal controls to ensure that they are working effectively and that any weaknesses are identified and addressed.

Types

There are several types of Routine Checking, including:

• Cash and Bank Verification: This involves verifying the accuracy of cash and bank transactions by comparing them to the bank statements, cash receipts and disbursements, and other financial documents.
• Inventory Verification: This involves verifying the accuracy of inventory records by comparing them to the actual physical inventory on hand.
• Accounts Payable Verification: This involves verifying the accuracy of accounts payable by comparing them to the invoices, purchase orders, and other supporting documentation.
• Accounts Receivable Verification: This involves verifying the accuracy of accounts receivable by comparing them to the customer invoices, receipts, and other supporting documentation.
• Payroll Verification: This involves verifying the accuracy of payroll transactions by comparing them to the employee timesheets, payroll registers, and other supporting documentation.
• Fixed Assets Verification: This involves verifying the accuracy of fixed asset records by comparing them to the physical assets on hand and the supporting documentation.

Test checking

Test checking is a sampling technique used by auditors to test the accuracy and completeness of financial transactions and records. Instead of examining every transaction or record, the auditor selects a representative sample for examination.

Test checking is commonly used by auditors to reduce the time and cost of an audit, while still providing reasonable assurance that financial transactions and records are accurate and complete. It is particularly useful in situations where the population is large and time or resources are limited.

However, it is important to note that test checking is not a substitute for a full audit. It is only one component of the audit process and should be used in conjunction with other audit techniques and procedures. Additionally, the results of test checking may not be fully representative of the entire population, and therefore, there is a risk that errors or irregularities may go undetected.

Test checking involves the following steps:

• Defining the objective: The auditor must define the objective of the test and identify the specific area to be tested.
• Selecting the sample: The auditor selects a sample of transactions or records that are representative of the population.
• Examining the sample: The auditor examines the selected sample in detail to verify its accuracy and completeness.
• Evaluating the results: The auditor evaluates the results of the test and determines whether any errors or irregularities have been detected.
• Extrapolating the results: The auditor extrapolates the results of the test to the entire population, based on the sample size and the level of confidence desired.

Test checking example

Let’s say a company has 10,000 sales transactions in a year, and the auditor decides to test check 100 sales transactions, which represents a 1% sample of the total population.

The auditor selects the 100 sales transactions randomly, using statistical sampling techniques, to ensure that the sample is representative of the entire population.

The auditor then examines each of the 100 sales transactions in detail, looking for errors, omissions, or irregularities. For example, the auditor may check to ensure that each transaction has been properly recorded, that the correct prices and discounts have been applied, and that the transaction is supported by proper documentation.

After examining the sample, the auditor determines that five of the 100 transactions have errors or irregularities. Based on this result, the auditor can estimate that there may be a 5% error rate in the entire population of sales transactions.

The auditor may then decide to perform additional procedures to investigate the source of the errors and to determine whether they are isolated incidents or indicative of a larger problem.

Test Checking Objectives

The objectives of test checking are as follows:

• To provide reasonable assurance that financial transactions and records are accurate and complete.
• To verify compliance with applicable laws, regulations, and company policies.
• To detect errors, omissions, or irregularities in financial transactions and records.
• To identify areas of potential risk or weakness in the organization’s financial systems and controls.
• To reduce the time and cost of the audit, while still providing reasonable assurance that financial transactions and records are accurate and complete.
• To provide a basis for making recommendations for improving the organization’s financial systems and controls.

Features of Test checking

The following are the features of test checking:

• Selective Sampling: Test checking involves selecting a sample of transactions to test instead of examining every transaction. This allows auditors to focus their efforts on areas of greater risk or importance, while still obtaining a reasonable level of assurance about the accuracy and completeness of the financial transactions and records.
• Random Sampling: The sample of transactions selected for test checking should be chosen randomly to ensure that it is representative of the entire population of transactions. This reduces the risk of bias in the selection process and increases the reliability of the results.
• Limited Scope: Test checking is limited in scope and does not cover every transaction. It is designed to provide a reasonable level of assurance that the financial transactions and records are reliable, but it is not intended to provide absolute assurance.
• Efficiency: Test checking is an efficient way to conduct an audit because it allows auditors to focus their efforts on areas of greatest risk or importance, while still providing a reasonable level of assurance that financial transactions and records are accurate and complete.
• Risk-based: Test checking is a risk-based approach to auditing, which means that it focuses on areas of the organization where the risk of material misstatement is highest. This approach ensures that auditors are using their time and resources in the most effective way possible.
• Judgmental: Test checking requires auditors to exercise professional judgment when selecting the sample of transactions to test and when evaluating the results of the testing. This ensures that the audit is tailored to the specific circumstances of the organization being audited and is not a “one size fits all” approach.

Scope of Test checking

The scope of test checking is limited to a sample of transactions and does not cover every transaction. The scope of the test checking will depend on several factors, including the size and complexity of the organization being audited, the nature of the financial transactions and records, and the specific risks associated with the organization’s operations.

Test checking is generally used to obtain reasonable assurance that the financial transactions and records are reliable, and that the financial statements are free from material misstatements. It is also used to identify areas of potential risk or weakness in the organization’s financial systems and controls.

The scope of test checking can include various areas of financial transactions and records, such as accounts receivable, accounts payable, inventory, cash, payroll, and general ledger accounts. The auditor may select a sample of transactions from these areas to test, based on factors such as the significance of the account, the frequency of transactions, and the risk of material misstatement.

The scope of test checking should be designed to provide a reasonable level of assurance that the financial transactions and records are accurate and complete. However, it is important to note that test checking is only one component of the audit process, and should be used in conjunction with other audit techniques and procedures to obtain a full understanding of the organization’s financial systems and controls.

Types of Test checking

There are two main types of test checking:

• Substantive Test Checking: Substantive test checking involves testing the completeness, accuracy, and validity of individual transactions and account balances. This type of test checking is used to gather evidence to support the financial statement assertions made by management. For example, an auditor might perform substantive test checking by verifying a sample of accounts receivable balances, reviewing invoices and receipts, and confirming outstanding balances with customers.
• Compliance Test Checking: Compliance test checking involves testing whether an organization is complying with specific laws, regulations, and internal policies and procedures. This type of test checking is used to assess the effectiveness of an organization’s internal controls and to identify areas of potential risk or weakness. For example, an auditor might perform compliance test checking by reviewing a sample of employee expense reports to ensure that they are in compliance with the organization’s travel and entertainment policies.

Important Differences between Routine checking and Test checking