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Phase III: Testing

To demonstrate effective internal control over financial reporting, management needs to determine whether the company's controls are operating effectively. This requires testing the controls.

The testing of controls generally relates to significant processes and major classes of transactions for relevant financial statement assertions related to significant accounts and disclosures (key controls). Therefore, the underlying assumption is that all exceptions/deficiencies resulting from the testing must be evaluated because they relate to accounts and disclosures that are material to the financial statements taken as a whole.

The purpose of testing controls is to achieve a high level of assurance that the controls are operating effectively. The company must retain evidence of this testing to support management's assessment of internal control over financial reporting.

1. Develop the test plans, including What, How and When to test and identifying who will perform the testing

2. Execute the test plans

3. Evaluate the test results

The time period over which a company tests its internal control must be sufficient to determine operating effectiveness as of the end of the fiscal year. It would be unwise and impractical for management to perform all testing as of the end of the fiscal year and it would not allow management sufficient time to remediate deficiencies.