auditing term?

Question

in auditing terms, what is meant by compliance testing?

Answer 1

This refers to tests of controls. The auditor at his planning stage will have assessed the risks and based on that, he decides whether he will rely on the controls or not. If he decides to rely on controls, he has to test them first to ensure they're working as documented. If there are no controls identified, he'll probably opt for a substantive test approach. The INTERNATIONAL STANDARD ON AUDITING 330 - THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED RISKS paras 8 & 9 state:

8. The auditor’s assessment of the identified risks at the assertion level provides a basis for considering the appropriate audit approach for designing and performing further audit procedures. In some cases, the auditor may determine that only by performing tests of controls may the auditor achieve an effective response to the assessed risk of material misstatement for a particular assertion.
In other cases, the auditor may determine that performing only substantive procedures is appropriate for specific assertions and, therefore, the auditor excludes the effect of controls from the relevant risk assessment. This may be because the auditor’s risk assessment procedures have not identified any effective controls relevant to the assertion, or because testing the operating effectiveness of controls would be inefficient. However, the auditor needs to be satisfied that performing only substantive procedures for the relevant assertion would be effective in reducing the risk of material misstatement to an acceptably low level. Often the auditor may determine that a combined approach using both tests of the operating effectiveness of controls and substantive procedures is an effective approach. Irrespective of the approach selected, the auditor designs and performs substantive procedures for each material class of transactions, account balance, and disclosure as required by paragraph 49.
9. In the case of very small entities, there may not be many control activities that could be identified by the auditor. For this reason, the auditor’s further audit procedures are likely to be primarily substantive procedures. In such cases, in addition to the matters referred to in paragraph 8 above, the auditor considers whether in the absence of controls it is possible to obtain sufficient appropriate audit evidence.

Answer 2

It is a test of the financial practices of a corporation. The auditors come in to look at procedures, not the actual figures on the financial statements and they can initiate new procedures then come back again to be sure those procedures are being followed. Look up Sarbanes-Oxley on the Internet for more information. Commonly referred to as "SOX", it came into being to prevent more Enron-type fiascoes.