Test Of Details

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21 Aug, 2024

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Test of details is an auditing procedure to find enough necessary audit evidence so as to confirm the accuracy and correctness of transactions, disclosures, and balances recorded in a firm's financial statements. The test helps auditors to form the correct opinion about the financial statement of a company and also check for the level of risk related to material misstatements present in the same.

It is one of the main substantive procedures methods to obtain proper evidence. To ensure the validity of a company's financials. Auditors designed it so that they could detect a client's material misstatement at the assertion level. One could verify individual transactions occurring in a firm. Moreover, it is part of the risk assessment process, helping auditors identify areas where there is a higher risk of material misstatement.

Test Of Details Meaning

A test of details is a procedure used to examine and verify specific details within a company's financial transactions and account balances.
The test aids auditors in forming accurate opinions about a company's financial statements. Moreover, these also verify the degree of risk associated with a substantial misstatement that may be present.
Auditors use these for small volumes of transactions. Test of Controls may use tests of details like processes, but all have a different outcome; on the other hand, substantive analytical procedures are mainly applicable to large volumes of transactions.

Test Of Details Explained

Test of details used by auditors is a set of substantive processes for collecting evidence to establish the correctness of the underlying transactions in preparing the balance sheet of a company. The goal is to ensure the accuracy, completeness, and validity of the financial information, as per the International Standard on Auditing (ISA) section ISA-330. Regarding the Auditor's Responses to Assessed Risks, auditors have the discretion to employ any substantive analytical process to reduce the risk to the lowest acceptable level, regardless of its sufficiency.

As a result, auditors may or may not use audit tests of details as a tool to decipher the truthfulness of transactions and minimize risks. Moreover, ISA has not defined the technique of testing details for use in auditing. Therefore, this is because one needs help finding a fixed framework for the test of details due to their dependence on a variety of factors. These factors, in turn, depend on the information provided by the client and the items taken up by auditors for testing.

Hence, every audit assignment mentioned in the financial statements will have different parameters for the test of details. Additionally, the nature of the accounts being audited and the assessed risks determine the specific procedures used in a test of details for balances. Additionally, the auditors choose substantive tests of details based on the specific risks identified during the audit and the nature of the accounts being examined. These tests are crucial for auditors to gather sufficient and appropriate evidence to support their opinion on the financial statements.

Thus, the results of the test of details in accounting contribute to the auditor's overall opinion on the financial statements. If auditors identify issues during testing, they may communicate these findings in the audit report.

Examples

Let us use a few examples to understand the topic.

Example #1

Let's consider an example of a test of details in the context of accounts receivable for a company. In this case, auditors aim to verify the accuracy and existence of individual transactions within the accounts receivable balance reported in the financial statements.

During the test for accounts receivable, auditors may select a sample of individual customer balances. They would then independently confirm these balances by sending confirmation letters to the selected customers. Hence, the confirmation letters typically request the customers to verify the accuracy of their outstanding balances and respond directly to the auditors.

Simultaneously, the auditors would review supporting documentation such as sales invoices, shipping documents, and customer payment records. Here, the objective is to ensure that the sales transactions leading to these receivables are legitimate, properly authorized, and accurately recorded. Auditors may also analyze historical payment patterns to assess the reasonableness of the outstanding balances.

If the confirmation process identifies discrepancies or issues, the auditors would further investigate and consider the potential impact on the overall financial statements. Hence, the results of the test of details for accounts receivable, along with similar tests for other accounts. These two contribute to the auditors' overall conclusion on the fairness of the financial statements and their ability to provide an accurate and fair view of the company's financial position.

Example #2

Let us perform a test of details on sales transactions related to the company XYZ corporation. For this purpose, one has to:

Get a sample of sale transactions out from the sales ledger of the company.
Check all the concerned documents like gate passes, sales invoices, and goods delivery notes.
Then, check whether these documents match the recorded transactions.
Also, take out a sample sale invoice from the company.
Trail it to the accounts and the financial statements.
Now, the auditor must also check the relation between sales transactions and the accounts receivables balance.
Furthermore, the auditor must initiate the test of details on the company sales transaction.
It will start by sending the confirmation to a sample of receivables balances.
Then auditors must also use bank statements to verify the receipts of receivables accounts.
Lastly, the auditor must also check contracts having balances. If the auditors find any contract made by the client with the accounts receivables parties, they can use it to verify the balance from this source as well.

Test Of Details vs Test Of Controls vs Substantive Analytical Procedures

Let us use the table below to understand the differences between the three:

Test Of Details	Test of Controls	Substantive analytical procedures
Detailed examination of specific transactions.	Assess the design and operating effectiveness of controls	Analyze relationships and trends in financial data.
They are used for small volumes of transactions.	It may use tests of details like processes, but all have a different outcome.	They are mainly applicable to large volumes of transactions.
The transactions are unpredictable.	These include and support control risk assessment.	In this procedure, the transactions involved are predictable.
Here, it gets used to support the overall audit opinion of a company on its financial statements and related transactions.	Test of controls are done to check whether a company’s internal controls are effectively working.	Hence, these may use financial plus non-financial information and financial ratios to deduce balances.
These tests are used to verify individual transactions related to balances.	Moreover, here evidence is collected to examine the effectiveness of control prior to using them.	It may use financial plus non-financial information and financial ratios to compare actual balances.

Test Of Details vs Substantive Procedures vs Analytical Procedures

Let us use the table below to understand the differences between the three:

Test of Details	Substantive Procedures	Analytical Procedures
It needs any supporting documents for transaction verification or balance verification.	These processes are designed at the planning phase to make them more responsive to risk evaluation.	They use analytical methods to check the correct reason for a transaction and its amount.
Various details like date, party, amount, and classification are used here.	It has a substantive test of details as its part.	Percentage change in an item gets compared with the last year's results.
Using the sample transaction opinion may be formed by the auditor.	They include all transactions, disclosures, and account balances.	Sales invoices may be used.
They may also use sample transactions for it.	These are based on assertions of management.	Hence, it can be used at different stages, like planning or finalization stages.
Furthermore, it may be performed on an interim day.	This procedure includes both tests of details as well as analytical procedures.	These processes utilize the analysis of different ratios plus patterns as compared to other different ratios or patterns.
They get used to finding direct evidence of material misstatement.	Here, it is directly proportional to material misstatement risk and inversely proportional to the detection of acceptable risk. Budget variance and ratio analysis on an industry-wide basis is used here.
Test of details forms a part of the substantive procedure.	Furthermore, it may get performed on an interim day.	No such usage.

Frequently Asked Questions (FAQs)

1. Is the test of details a substantive procedure?

Yes, definitely, auditors have taken a test of details as a substantive procedure. Actually, it forms the basis of the primary response to those risks arising out of misstatements of a material nature. Nevertheless, it is one of the significant methods of substantive procedure.

2. What is a substantive test of details?

Whenever there is a high probability of occurrence of material misstatement, then the auditing protocol promulgated under the substantive test comes into play. The primary purpose of the process is to match the amount and figures reflected in the firm's documents with that of the total sum in their accounts at the conclusion of the auditor's report.

3. When to do a test of details?

Clients always conduct this process when they want to check the correctness of their financial statements through their auditors. The auditors then deploy a test of details process to check statements' correctness using evidence collection to examine the accuracy of the underlying transactions, balances, and disclosures.

4. What assertions does a Test of Details address?

These address various assertions, including existence, completeness, rights and obligations, valuation or measurement, cut-off, classification, presentation, occurrence, accuracy, and authorization.