Tests of details definition
/What are Tests of Details?
Tests of details are used by auditors to collect evidence that the balances, disclosures, and underlying transactions associated with a client's financial statements are correct. They are used to determine whether the financial data that rolls up into a client’s financial statements are correct. The main objectives of tests of details are as follows:
Account balance verification. The auditor verifies that the ending balances in a client’s accounts are accurate.
Disclosure review. The auditor examines the footnotes that a client has written to accompany its financial statements, to determine whether they are accurate and complete, and conform to the requirements of the applicable accounting framework.
Transaction validation. The auditor investigates whether the transactions recorded by a client have actually occurred, and that they have been recorded both accurately and completely.
As an example of a test of details, an auditor tests the prepaid expenses asset account by examining each of the prepaid expenses that comprise the ending prepaid expenses balance.
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Example of a Test of Details
An auditor is performing a test of details on a client's accounts receivable balance to ensure it is accurate as of the balance sheet date. Her objective is to confirm the existence and accuracy of accounts receivable balances and ensure no material misstatements exist. The steps that she must follow are:
Obtain the accounts receivable aging report. Request the detailed accounts receivable aging schedule from the client, listing all outstanding invoices, their due dates, and customer information.
Select sample transactions. Use sampling techniques (e.g., random sampling, stratified sampling) to select specific customer balances or invoices for testing.
Send confirmation requests. Prepare and send confirmation letters directly to the customers to verify the balances they owe the client as of the balance sheet date. This can be a positive confirmation (requesting the customer to confirm whether the amount is correct), or a negative confirmation (requesting the customer to respond only if they disagree with the amount).
Verify responses. Compare the responses received from customers to the balances recorded in the accounts receivable ledger.
Investigate discrepancies. If there are differences between customer responses and the client's records, investigate the reasons (e.g., timing differences, errors, disputes).
Conduct alternative procedures (if no response is received). Review subsequent cash receipts to see if the customer has paid the invoice. Or, examine supporting documents such as invoices, shipping documents, and contracts.
This procedure is a specific, detailed audit test aimed at validating the accuracy of individual account balances.