How do you design and perform tests of controls for complex or high-risk processes or transactions?

Thoroughly understanding the process or transaction and identifying associated risks is the first step in designing effective tests of controls. In my experience when auditing the bank’s loan origination process, I start by mapping out the entire process, from loan application to disbursement. I identify key risks such as credit risk, operational risk, compliance risk, and fraud risk. Understanding these risks helps in determining which controls need to be tested.

Die Geschichte des klugen Fuchses: Ein kluger Fuchs war für ein großes Vorratslager verantwortlich. Um die Qualität zu verbessern, definierte er seine Ziele: Verluste minimieren, Kundenzufriedenheit maximieren und Effizienz steigern. Er erkannte Risiken wie beschädigte Waren, Diebstahl und falsche Lagerbestände. Für die Finanzberichterstattung musste er sicherstellen, dass alle Waren korrekt bewertet und dokumentiert wurden. Der Fuchs überlegte weiter, welche Falschangaben auftreten könnten, wie falsche Bestandsaufnahmen oder überhöhte Bewertungen von Waren. Um die Komplexität und die Risiken zu verstehen, analysierte er Faktoren wie komplexe Lieferverträge, variierende Lagertemperaturen und Sicherheitsmaßnahmen.

Perform the audit in objective to show an improvement or value addition to the clients. And highly avoid the attitude to reach a deadline of conclusion immediately. Hence, the design understanding plays a crucial role and interviews should be very sharp and in probing nature. Highly recommend to have lot of preparation before hand

Para projetar e executar testes de controles em processos complexos ou de alto risco, comece identificando os riscos específicos associados a essas transações. Defina objetivos claros de teste, selecionando amostras representativas. Utilize uma combinação de técnicas, como testes de validação e revisão de documentação, para avaliar a eficácia dos controles. Documente todos os resultados e ajustes necessários, e envolva as partes interessadas na análise para garantir uma abordagem abrangente e eficaz.

Based on the business process: Identify the objectives and the risks associated with those processes and transactions. Control testing should be analysed from a risk based approach, so that high risk areas are priortised for control testing.

Designing and performing tests of controls for complex or high-risk processes involves these steps: Identify Objectives and Risks: Determine relevant financial reporting assertions and potential misstatements. Identify factors increasing complexity or risk. Understand the Process: Gain a thorough understanding of the process flow and key controls. Evaluate Design Effectiveness: Assess if controls effectively mitigate identified risks. Perform Walkthroughs: Confirm process and control implementation through walkthroughs. Test Control Effectiveness: Use methods like inspection, observation, and recalculation to verify control operation. Document & Report: Record findings, evaluate deficiencies, and report to management for remediation.

To identify objectives and risks, follow these steps: 1. Define the goals of the process or transaction and its impact on organizational objectives. 2. Evaluate associated risks, including financial reporting assertions (e.g., completeness, accuracy), potential errors, and complexities (e.g., transaction volume, contract types, accounting policies). 3. For example, when testing revenue recognition controls: - Understand revenue recognition criteria (e.g., point in time vs. over time). - Assess contract diversity and customer complexity. - Review accounting policies and estimates. - Consider fraud risks like revenue manipulation.

For complex or high-risk processes, design tests of controls by first understanding the process thoroughly, including key risks and control points. Develop tests that specifically address these risks, ensuring they are detailed and relevant. Perform tests by examining documentation, conducting interviews, and observing procedures in action. Evaluate the effectiveness of controls by comparing actual outcomes with expected results. Regularly update your tests based on any changes in the process or emerging risks to ensure ongoing effectiveness.

straightforward approach:Identify Risks: Start by pinpointing where problems might occur, like in large financial transactions or new software systems. Design Controls: Develop procedures to address these risks, such as requiring multiple approvals for significant transactions. Test Effectiveness: Check if these controls work as intended. For instance, review a sample of transactions to ensure approvals are documented properly. Monitor Regularly: Continuously review and adjust controls to handle new risks or changes in processes. Example: If a company handles large cash payments, we might test if every payment over $10,000 requires dual manager approvals and is properly documented.

Clearly defining control objectives ensures that tests are focused on evaluating the effectiveness of controls in mitigating identified risks. In the loan origination process, control objectives include ensuring that loans are approved based on accurate and complete information, that credit assessments are conducted according to policy, and that there is segregation of duties to prevent fraud. These objectives guide the design of the tests.

Select controls for testing by aligning with objectives and identified risks. Focus on key controls that prevent or detect errors, considering their design (manual or automated), type (preventive or detective), and scope (entity or activity level). For instance, in testing revenue recognition controls, prioritize controls like contract approval, invoice generation, adherence to revenue recognition policies, and account reconciliation to ensure effective oversight of financial processes.

In my opinion, there are generally 4 types of tests, Walkthrough, Compliance, Substantive and dual purpose. - Walkthrough involves taking a small sample of items that are traced through the system to check if objective is achieved - Compliance uncovers non-compliance or unclear procedures for control mechanisms being applied - Substantive determine whether control objectives are being achieved and are designed to confirm this initial audit view on the impact of residual risk. - Dual purpose is not a test but a recognition of the practicalities of testing controls where one may wish to combine compliance and substantive testing.

I ensured that only authorized personnel are able to make changes to the loan application portal. I also designed specific, measurable test procedures tailored to the complexity and risk level of the process or transaction. Additionally, for manual controls, I implemented procedures that involve sample testing of loan files to verify compliance with approval hierarchies and documentation requirements.

I think to determine test methods and sample size, match methods to control type and complexity. Tailor sample sizes for adequate evidence based on control nature, frequency, population size, and assurance level. For instance, testing contract approval controls might involve inquiry, observation, inspection, or reperformance methods, with sample size chosen to reflect contract number and value, ensuring robust evaluation of control effectiveness.

Executing the test procedures diligently and objectively is key to obtaining reliable audit evidence. I selected a sample of loan applications and verified that the scores were calculated correctly and consistently. I also checked that changes to the system were properly authorized and documented. For manual controls, I review loan files to ensure that all required documents are present and that approvals are obtained according to policy.

I believe that execute test procedures meticulously for selected controls. Adhere to predetermined methods and sample sizes, applying professional skepticism. Clearly document findings objectively, noting any exceptions encountered. Utilize various tools like checklists, questionnaires, or software to ensure thorough documentation. For instance, testing invoice generation controls involves comparing invoices against contracts to identify and record any discrepancies found, ensuring accuracy in financial processes assessment.

After analyzing the test results, I determine the effectiveness of the controls and identify any deficiencies. Upon completing the tests, I evaluate the results to assess the intended operation of the controls. I identify instances of incorrect scores produced by the credit scoring system and cases where loan approvals deviate from the prescribed hierarchy. These findings are documented and their impact on the overall control environment is assessed.

Evaluate test results to draw conclusions on selected controls. Compare findings against established criteria and expectations, assessing significance of any deviations. Consider implications for audit opinion and report. Utilize methods like ratio analysis, trend analysis, or statistical tools. For instance, testing revenue recognition policies involves calculating percentage of revenue recognized pre- or post-delivery, comparing with industry norms to gauge compliance and effectiveness of controls.

Analyze the results in a way to portray your deeper understandings on the business and its risks and what best you can put across the table! Of course, you needed a solid understanding technically and as well the business and its impacts on the different processes. Plus the technology angle to it always plays crucial role, assess your finding from IT perspective also how it changes your thinking towards overall picture

It involves a detailed understanding of the process, identifying key controls, and selecting appropriate testing methods. For example, when auditing a bank's loan approval process (a high-risk area), you would first map out the entire process to identify critical control points, such as credit checks, approval hierarchies, and compliance with lending policies. Then, you would design tests like inspecting loan files for evidence of proper approvals, re-performing credit assessments, and evaluating the effectiveness of system controls that prevent unauthorized lending. This approach ensures that the controls are effectively mitigating risks associated with complex transactions.

El diseño y la implementación de controles efectivos para procesos o transacciones complejas o de alto riesgo es una tarea fundamental en la gestión de riesgos corporativos. Este proceso implica una serie de etapas estructuradas que aseguran que los controles no solo sean adecuados, sino también eficaces en la mitigación de riesgos. te sugiero seguir estos pasos: 1. Identificación y Evaluación de Riesgos 2. Diseño de Controles 3. Implementación de Controles 4. Pruebas de Controles 5. Monitoreo y Mejora Continua Esto asegura no solo la mitigación de riesgos, sino también la optimización de las operaciones y la mejora continua en la gestión empresarial.

Designing and performing tests of controls for complex or high-risk processes aligns with ISO standards such as ISO 9001 for quality management systems or ISO 27001 for information security. These standards mandate robust control environments to ensure reliability and risk mitigation. By adhering to ISO frameworks, organisations systematically assess control effectiveness, identify critical points, and design tests that align with ISO objectives. Thorough testing and documentation enhance transparency, compliance, and operational performance, fostering trust among stakeholders.