Test of controls are auditing procedure performed to determine the effectiveness of the design and the operational structure policies and procedures. The procedure to test the effectiveness of controls in support of a reduced assessed control risk is called tests of controls. A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to prevent or detect material misstatements.
Tests of control pertaining to design concerned with whether the policy or procedure is suitably designed to prevent or detect material misstatements in a specific financial assertion. For example, the auditor may conclude that management’s plan to store inventory in locked warehouses should prevent or significantly reduce the risk of misstatements in the existence or occurrence assertions for inventories.
Tests of control pertaining to the effectiveness of operation focus on three questions.
(a) How was the control applied?
(b) Was it applied consistently during the year?
(c) By whom was it applied?
Tests of control may be performed on controls that pertain to a major class of transaction or an account balance.