Test checking is a process of selecting and checking of a few transactions from a large volume of transactions. If the entries checked are found to be correct then the auditor assumes that the remaining entries are also correct. The technique is based on the theory of sampling which is commonly used as a statistical method. Checking each and every transaction that occurs during the year is both redundant and uneconomical for the auditor. Therefore, the auditor verifies and examines a few representative transactions in order to obtain sufficient appropriate audit evidence to base his opinion. Test checking reduces the volume of work of the auditor, if in test checking, the auditor finds that the records checked by him are correct then no further detailed checking is carried out.
Test checking can be applied in the following situations:
1. When there are large volumes of identical or routine transactions.
2. When transactions are large.
3. When the auditor has to certify the accounts quickly after the close of the accounting period.
4. When the auditor has past experience about the nature of transactions of the clients organisation.
5. When a satisfactory system of internal control and check system exist.
Test checking can give the following advantages:
1. Reduces Volume of Work: The work of an auditor is reduced considerable as he checks only few transactions, extra time available can be utilised for concentrating on areas of considerable importance.
2. Reduces Time and Cost: Test checking is one of the technique which reduces time, cost and energy of both the auditor and the client.
3. Quick Completion of Audit Work: Test check enables the auditor to complete the work quickly as the auditor checks only a few or limited transactions.
4. Effective Means of Checking: Test checking can be effective if the auditor selects the transaction to be checked carefully.
5. Scientific Assessment of Risk: The risk of material misstatement in the financial statement is assessed by the auditor in a scientific manner by drawing samples and studying them in detail.
6. Serves as a Guide: It serves as a guide for the auditor to arrive at conclusion regarding the true and fair view of the state of affairs of business.
Test checking can give the following dsiadvantages:
1. No Scientific Approach: It is a traditional auditing technique where no scientific approach is used in selecting the samples, hence the results drawn on it tends to be incorrect.
2. Risk cannot be measured: It is not possible to measure the amount of risk involved.
3. Complicated Transactions are not Checked: The audit assistants select only simple transactions for checking and complicated transactions are left omitted.
4. Carelessness of the Client’s Staff: The client’s staff is aware that the auditor will not check all their work hence they become careless.
5. Possibility of Errors and Frauds Remain Undetected: When test check is adopted by the auditor there are possibility of errors and frauds left undetected.
6. Unsuitable when there is no System of Internal Check: The auditor cannot adopt test check when there is no proper system of Internal check and control in operation.
7. Unsuitable for Small Business Concerns: Test checking is not suitable for small business concerns as the number of transactions involved is not large.
The following are the auditor’s duty or precautions to be taken by an auditor while adopting test check:
1. Entries selected for test checking must be representative of all transactions and entries on random basis should be selected for checking.
2. Auditor should select the test independently without regard to the suggestions of the client’s staff.
3. Entries selected for test check should be chosen by the auditor cautiously by applying his intelligence and professional skill.
4. Test check should not be adopted in vouching the entries in the cash Book and bank Pass book.
5. The auditor should not adopt test check while checking the entries of first and last month of the year and all the entries must be thoroughly checked.
6. Test check should be so devised that a sizeable portion of the work done by each employee is checked.
7. Auditor should consider his past experiences in selecting the nature and size of the samples for checking.