Test of Controls
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
A test of controls is a core audit procedure, and a heavily tested concept on the AUD section of the CPA exam.
What is a test of controls?
A test of controls is an audit procedure designed to examine the effectiveness of an organization's internal controls. When auditors perform a test of controls, they're checking whether a company's internal controls are designed well and actually operate effectively to prevent or detect errors or fraud.
What methods do auditors use?
- Inquiry — discussing the procedure with the employees who perform it
- Observation — watching a process or procedure being performed
- Inspection — reviewing documentation that supports a control
- Re-performance — independently executing the control to verify it works correctly
Example: You're auditing a manufacturing company with a control requiring three separate managerial approvals on any expense over $10,000. To test this control, you select a sample of expense reports that crossed that threshold and verify each one actually has three managerial signatures. If several don't, the control isn't operating effectively — and that failure would raise your assessment of control risk.
A test of controls checks whether a control actually works, not whether an account balance is correct. When a test of controls fails, it drives control risk up and typically means more extensive substantive procedures are needed elsewhere in the audit.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
