Below Is a conversation between Fran and AJ regarding testing controls:
Fran: AJ, did you have a chance to read some of the working papers in Hillsburg’s last-year’s audit file?
AJ: Yes, I did Fran. Thanks for directing me to those working papers. They gave me a better idea of some of Hillsburg’s processes and controls. For instance, I read that
hardware stores can place their orders directly through Hillsburg’s ONHAND computer system and that the system automatically generates a picklist that lists the ordered products and their location in the warehouse. It’s interesting that only part-time staff, who wear gray uniforms, are allowed to gather the products listed on the picklist. Full-time staff, who wear blue uniforms, are not allowed to gather any products, but are solely responsible for verifying that the part-time staff correctly gathered all the ordered products.
Fran: Yes, Hillsburg has pretty strong controls over its inventory.
AJ: I also noticed that once the order is verified, the picklist is signed off by a full-time staff and filed.
Fran: Yes, that’s correct.
AJ: Once a month, one of the full-time staff is also responsible for counting all the high-value inventory items. The warehouse supervisor is supposed to do a recount to verify the count results and resolve any discrepancies. Once this is done, the supervisor signs off on the count sheets, which are filed.
Fran: Well done. I see that you are now ready to do some testing of controls.
JA: I hope so.

REQUIRED
1. Explain the difference between substantive procedures and test of controls.
2. Describe the process of designing and performing tests of controls.
3. Suggest two tests of controls that JA can conduct to test Hillsburg’s inventory controls.