What is Test Checking? Explain the non statistical factors for determining the size of sample for test checking?

Testing and test checking means to select and examine a representative sample from a large number of similar items. In a big business house, it is rather impracticable for an auditor to check all the transactions. It is not only impracticable from economic point of view but unnecessary as well.

So where the number of transactions to be checked is very large and the time at the disposal of the auditor is little, a few transactions may be checked at random. Such a checking is known as test checking. This method will minimize the work of auditor to a very large extent.

All the transactions need not be checked. There is no hard and fast rule of selecting item for test checking. The justification for test checks lies on the theory of probability which states, that a sample selected from a series of items will tend to exhibit the same characteristics present in full series of items, which is generally referred to as the population or universe. Greater the size of sample, greater the chances of presenting the characteristics of the population.

Great care should be taken while selecting items, The best method is to have random selection. The sample should include the work of each clerk in the business concern and cover items from all the books.

If later on, if is noticed that errors and frauds have remained undetected the auditor will be held responsible for negligence. Hence, the auditor must be very careful in relying upon the test check. He should apply these checks if he is fully satisfied that the internal check system which is prevailing is efficient and no suspicion arises in his mind.

Precautions before applying Test Checking: The auditor must take the following precautions before he applies test checking for audit:

Internal Control: While applying test checking, the auditor must review the system of internal check, internal control or internal audit in detail. If the auditor finds that the internal control system is either ineffective or defective, he should not apply test checking.

Random Selection: The sample of records, selected for test checking should be taken on random basis.

Representative: The sample selected for test checking should be representative in character.

Homogeneity: The auditor should apply test checking if he finds that the transactions to be checked are homogeneous in nature.

Complete Examination: Cashbook, transfer book and journal should be checked thoroughly.

Element of Business: While applying test checking, there should be no element of bias in the Selection of sample.

Work of each clerk: The sample should include the work of each clerk in the business concern and cover items from all the books.

Review : The system of test checking should be reviewed from time to time to introduce improvements.

Transactions not suitable for Test Checking.

The auditor should examine the following transactions in detail as they are not suitable for test checking:

1. Opening and Closing entries.
2. Items which are material.
3. Bank Reconciliation Statement.
4. Depreciation.
5. Royalty.
6. Presentation and disclosure of information in ‘Profit & Loss Account’ and ‘Balance Sheet‘.
7. Non-recurring or exceptional transactions need not be test checked.
8. The auditor should not resort to test checking on annual basis in case of seasonal industry.
9. Managerial remuneration.
10. Purchase transactions.

Non -Statistical Factors.

1. Random Selection of items.
2. Manageable size of Sample.
3. Representative Sample.
4. Homogeneous Transaction.