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balances. S A 700 (Audit Report) also mentions that an audit includes examination, on a, test basis, of evidence supporting the amounts and disclosures in the financial statements., select only a few jtems of assets for verification. Such test check_ enables an auditor to, representative sample, auditor can form an opinion about the entire class of transactions or, nor necessary. He can select only a few sample transactions for vouching. Similarly, he can, and by verifying all assets and liabilities. However, such 100% checking is neither possible, various audit techniques like vouching the transactions and verifying the assets and liabilities, Auditor's basic duty is to judge the quality of the final accounts, He has to judge whether, judge whether the remaining entries are correct or not. From an exanmination of a, the accounts are true and fair. For this purpose, he has to obtain audit evidence. He uses, to obtain audit evidence. He can obtain maximum audit evidence by vouching all transactions, Auditing Techniques and Internal tudit, 117, TEST CHECK, 1.1, INTRODUCTION, 1.2, MEANING, 1., Prof. Meigs, Test Checking means to select and examine a representative sample from a large nameer, of similar items. [Walter B. Meigs, Principles of Auditing. Trwin), 2., IAG, According to the International Auditing Guideline 19 on Audit Sampling: test, checking or audit sampling means checking less than 100% of the items within an, account, ba lance or class of transactions. It enables the auditor to obtain and evaluate, evidence and form an opinion about such balances or transactions as a whole., 3., ICAI, SA 500 issued by the Institute of Chartered Accountants of India (ICAI) states that in, forming an opinion an auditor may obtain audit evidence on a selective basis. The, selection may be based on the auditor's personal judgement or statistical sampling, O technique., 1.3 TEST CHECKING VS. STATISTICAL SAMPLING, As the definition by ICAI above indicates, selection of the items to be checked may be, done on the basis of (a) personal judgement or (b) statistic, items are selected and checked on the basis of the personal judgement of the auditor, it is, called Test Checking. When items are selected by applying statistical techniques of sampling,, random selection etc., it is called Statistical Sampling., sampling techniques. When, 1.4, EXAMPLE, The following audit instructions illustrate how test checking is used in an actual audit to, obtain evidence about purchase transactions and creditor's balances :, 1., Check 25% of Purchase Vouchers., 2., Check 25% of Postings from Purchase Journal into Creditors Ledger., 3., Check Totals of 25% of Accounts in Creditors' Ledger., Scanned By Scanner Go

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Check 25% of balances of creditors into Creditors Schedule., Send Letters of Confirmation to 25% of the total creditors., Thus, if the auditor is satisfied about 25% of the purchase transactions and creditors, halances, he may conclude that the remaining 75% of the transactions and balances are, Items requiring calculations/estimates e.g. depreciation, royalty etc., The following transaction/balances are not suitable for test checking., Transactions on which auditor must report under the Companies Act etc. e.g. managerial, Selection of items to be checked must contain an element of surprico The stal and, be checked in the next year and the vouchers of September to December should be, names begin with A to G in the first year, in the next year letters should be sent to, Anditing (S.Y.B.Com.: SEM-, 778, 4, 5., cOrrect., 1.5 UNSUITABLE, 1., Opening and closing entries., 2., Bank Reconciliation Statements., 3., 4., very important/material transactions/ balances., 5., remuneration., Vo nal, non-recurring or exceptional transactions which cannot be test-checked on, yearly basis., 6., 1.6 NEED / IMPORTANCE, 1., Full Checking Impossible, When the number of transactions is large the auditor cannot check all the transactions, 100%. Thus, in case of an audit of a bank, it would be physically impossible for an, auditor to check all the payments made by the bank during an year. In such cases., auditor has to resort to test checks., 2., Full Checking Unnecessary, In most cases, 100%% checking is unnecessary. Detailed checking becomes routine and, mechanical. Auditor becomes so occupied in checking small vouchers that he loses, the overall view. Test checking allows an auditor to concentrate on important areas of, audit. Statement on Auditing Practices issued by the ICAI states that where an adequate, system of internal control is in force, the auditor is entitled to apply test checks., 1.7 HOW TO SELECT ITEMS, Auditor should consider the following factors while selecting the items for test check:, 100% Coverage in 3-5 Years, 1., ltems should be selected in such a way that audit programme for 3 to 5 years would, ver 100% of the transactions and balances. Thus, if Purchase vouchers of January, April are checked in the one year, the purchase vouchers of May to August should, checked in the third year. Similarly, if confirmation letters are sent to parties whose, parties whose names begin with H to N and so on., 2., Surprise, Scanned By Scanner Go

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50%, sales may be checked 10% and so on. If the first checking reveals any major, auditor. Thus another auditor may check only 10% or yet another may check even, In the example above, it was stated that 25% of purchase transactions should be checkecd., Auditing Techhniques and Internal Audit, lgr audit. The sclection should not be predictable c, This percentage or extent of checking depends upon the personal judgement of the, errors, more entries may be checked. The extent of checking should be based on the, 50% of the transactions. Further, purchases may be checked 25%, cash may be checked, pe management should not be able to guess what items will be checked in a particular, 119, Extent of Checking, r's', 3., or, mechanical., are, est following factors :, possibility of, nature and materiality of the item being checked., lie, errors, frauds and mis-statements in accounts., nature of the business and size of the company., the system of accounting, whether well established or not., al, internal controls, whether effective or weak., • internal audit, whether operative and effective or not., experience gained in previous audits., results of checking done till date., type of information available., ob trend indicated by accounting ratios and analysis., IS, 1.8, ADVANTAGES, i,, 1., Test checking helps to reduce the cost of audit., 2., It helps to speed up the audit work., 3., It helps to decide whether the financial records are reliable and to what extent., 4., It is a labour saving technique., 5., It helps the auditor to arrive at a conclusion regarding the true and fair view of the, state of affairs of the business., bluone 39, DRAWBACKS, based on, 1.9, rarderm choice, 1. Arbitrary or Biased Selection, The items to be checked and the extent of checking are selected on an arbitrary basis, The selection depends upon the personal judgement of the auditor., 2. srt: Unscientific - Ignores Statistical Techniques, or 3 Test checking ignores statistical techniques of sampling, random selection, risk, assessment etc. Thus, auditor cannot be confident that he has selected the right sample, He cannot ascertain the exact degree of risk he is taking in doing selective checking as, opposed to 100% checking., 3. Ignores Quality, how those 25% entries are to be selected.Suanned By Scanriergomany items

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Auditor may draw wrong conclusions from test checking. Thus, if he vouches, Both these conclusions may be wrong. In case (a), balance 75% transactions, the random number tables. ni ouScanned By Scanner Go, e that (a) balance 75% transactions, that bias cannot enter in the selection. The selection should be made with reference to, The transactions falling under each tests-check plan should be selected in such a manner, ensure that the cash payments are properly authorised and acknowledged, other may, be to see whether the payment has been debited to the proper account.., 120, h Auditing (S. Y.B.Com.: SEM, good and so on., 4., Risks, (a) Reliance on Internal Controls, have so, reliable., (b) Wrong Conclusions, Toosia brs aeonieud snt, 25% of Purchase transactions, he, conclude tha, may, re proper or (b) he may conclude that balance 75% transactions are not proper, may côntain major errors or in case (b), the errors in 25% may not be significat, and the balance 75% entries may be free of errors., tah lis snob gnilodo to l, |1.10 PRECAUTIONS, Test checking is an accepted auditing procedure which should be adopted for audit work, after taking the following precautions., 1., Classify Transactions, The transactions of the concern should be classified under proper heads., 2., Systems and Procedures, How tibus orli qu boora, Systems and procedures for a transaction right from the beginning to the end should, be studied in their sequence. It involves factors of authorisation, documentation and, recording and evidencing the same., nb rpe sng, 3., Internal Controls, The whole of the system of internal control in the areas of accounts and finance should, be studied and evaluated for its efficiency, soundňess and capability for producing, reliable accounting and financial data. Depending upon this study, the timing and, extent of test checks would be decided., x9 odi bis, 4., Test Check Plan, A properly thought-out test check plan should be prepared. The objective of each, check should be clearly understood by the auditing staff. For example, cash vouchers, y be checked by the test check method for a number of objectives-one, may, be to, 5., No Bias in Selection

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Avoid Unsuitable Areas, necessary to decide upon the criteria to judge what constitutes a material error. Further, Errors that may be found may be material or immaterial in the particular audit. It is, be placed on the test-check result and the confidence that can be placed. Auditor, The number of transactions to be selected for each test check plan should be, if there are only 10 export sales in the ycar, it would be preferable to have them alI, Auditor should identify thc areas where test check may not be suitable. For example,, Auditing Techniques and Internal Audit, should use the statistical tables for deciding the size of the sample., investigation of immaterial error may be avoided and only the material errors may be, predetermined. This can be done by deciding upon the degree of reliance that should, 121, 6., thoroughly checked., Decide No. of Transactions, 7., Decide Significance of Errors, 8., ans!, properly and thoroughly investigated., 1.11 AUDITOR'S LIABILITY, Test checking does not reduce auditor's liability, If an auditor is accused of negligence, he, cannot say that the items he selected for checking were free of errors. It is the duty of the, auditor to take reasonable care and exercise his skills during an audit. The selection of, items for test checking and the extent of test checking should be reasonable and logical. If, the first test check had revealed any errors, he should have checked more transactions in, depth. Auditor must keep proper record of the test checks carried out, to help him defend, his conclusions later on., 2., ROUTINE CHECKING, 2.1 MEANING, Routine Checking means checking of arithmetical accuracy of books of original entry and, ledgers with a view to detecting clerical errors and simple frauds. It involves the, checking of casting, sub-casting (totals, sub-totals), carry-forward, extension and, calculation etc. in subsidiary books,, checking of postings into the ledgers, casting of ledger account and, extraction of their balance into the trial balance., 2.2 FEATURES, 1., Detailed Checking, 10t balances., 2. Traditional System, orns, Scanned By Scanner Go