Commercial Law and Preliminaries of Auditing · Ch 4 — Routine Checking and Test Checking
Transactions Not Suitable for Test Checking
Transactions Not Suitable for Test Checking
Transactions Not Suitable for Test Checking
Because test checking carries a genuine sampling risk (Section b), certain categories of
transactions must always be checked in FULL — never merely sampled — regardless of how strong
the overall internal control system otherwise is:
- Transactions involving a large amount of money (individually material items) — a single large, incorrect, or fraudulent transaction can materially distort the accounts on its own, so its risk cannot be diluted by treating it as part of a larger, mostly-routine sample.
- Transactions of an unusual or non-recurring nature — one-off, out-of-the-ordinary transactions (e.g. the purchase or sale of a fixed asset, a major legal settlement) are, by definition, NOT part of a large, repetitive population that sampling is designed for; each such transaction should be individually examined.
- Transactions involving related parties (e.g. transactions with directors, their relatives, or associate/subsidiary companies) — these carry an inherently higher risk of conflict of interest or manipulation, and require full, individual scrutiny.
- Statutory/legal transactions — items with direct legal or statutory consequences (e.g. dividend payments, statutory bonus, provident fund remittances, tax payments/deductions) should be checked in full, since an error here has legal, not just accounting, consequences.
- The opening and closing entries of the accounting year — items that affect the opening or closing balances (e.g. year-end adjustments, provisions, closing stock valuation) directly shape the final accounts' figures and are always checked fully, not sampled.
- Transactions where internal control is known to be weak. Where the auditor has already identified a specific area with a genuinely weak internal check (Class XI Ch9), sampling that specific area is inappropriate — it should instead be checked more thoroughly, or in full.
- Cash transactions in general are commonly treated with greater caution than bank transactions, given cash's higher inherent risk of misappropriation (Class XI Ch9's Internal Check for Cash Receipts/Payments), and are often checked more extensively than a routine test …