Timing of testing on certain controls 2773

  • Those of you that do SOX testing twice a year probably once during Q3 and once around year-end, how do you deal with your tax-related controls and external reporting-related controls testing? Those are the last items that can be finalized in the F/S cycle and therefore the Q4/year-end controls are not available for testing until literally the last minute. Do you test Q3 instead, and use those results as the year-end results?
    Thank you.

  • Well it depends on when these controls operate, on the nature of the controls and on the materiality of amounts at different quarter ends. Some controls for the preparation Q4/annual financial statements will only operate after the end of the year when the Q4/annual financial statements are prepared. Controls over an inventory of fixed assets or other inventories can also be tested during the year supplemented with testing of changes until the end of the year provided that the controls cover inventory movements so that you can have a perpetual inventory. E.g. an inventory of fixed assets can be taken at any time before the end of the year, provided that you have controls over additions and retirement/sale of fixed assets so that you can audit the changes from the time of the interim inventory of fixed assets until the end of the year.
    Controls that relate to transactions that occur during the year and not to quarter or year end closing preparation, can also be tested during the year. This is typically the case for transactions in the income statement (revenue and most operating expenses by nature). It is easier if your income statements is structured by the type of the expense for the produced activity (materials, consumed, salaries, energy, etc.) supplemented with changes in the inventory of finished goods and WIP. If you income statement is structured based on your cost accounting into cost of goods sold, general and administration and sales and marketing, you rely more heavily on the quarterly closing work in cost accounting that allocate the expenses by type to cost centers so that it all ends up in its final form. But again if the cost center quarter closing work in Q3 is comparable to the one in Q4, you could test Q3 as a base and just check that transactions in Q4 were at least posted to the right cost centers and that there were no major structural changes in cost centers or in (re-)allocation rules in Q4.
    Controls that relate to accruals and deferrals and the related balance sheet items could be tested for Q3 provided that they operate in the same detail/way for quarterly closings and for the annual closings and that the magnitude of the items would not lead to a different materiality in the annual financial statements (e.g. seasonality or special accruals having an effect).
    Do the tax related controls only operate after the end of the year (e.g. calculation of the tax to be paid and preparation of the corporate income tax returns)? If yes, then you can only test them then. If you also have value added taxes (VAT) or sales taxes in some of the consoldidated jurisdictions, you can do a lot of testing during the year. Only the preparation of VAT tax returns is at a certain time. However, the process controls for preparing VAT returns are typically embedded in customer and vendor master data and in the sales and purchasing transactions that occur during the year.

  • We have this same situation as well. One example is our SEC Reporting Cycle, which has a handful of annual controls that are performed just before the 10K is filed, or just before the annual report is issued. We simply wait and test those key annual controls in Q1 of the following year. For example, the testing of a control that relates to our 2009 10K may get tested as part of our 2010 Q1 302 testing procedures. We actually allow some additional testing time in Q1 so we can pick up some of these prior year annual controls that could not be tested before sign off.

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