Assurance - Test of Control

Question 1

What are the factors that influence the test of controls?

Answer 1

This is where the auditors are looking to reduce control risk to the lowest possible level

• Direct evidence that controls are operated as intended over the reporting period, the extent of auditors’ examination of evidence that is supported
• Where the controls are performed more frequently. the extent of control testing will increase
• Where control testing is related to the objective

Question 2

Why do auditors do a test of control?

Answer 2

Auditors will only test the controls that are critical to the auditor’s opinion
This is called key control

Question 3

Provide the key control indicators.

Answer 3

1. To help detect material misstatement in F/S
2. Mitigate risks that can result in misstatements in F/S
3. Prevent material misstatement in F/S
4. Detect and correct material misstatement in F/S
5. Detect and prevent fraud in accounting

Question 4

What are the common techniques used to gather evidence

Answer 4

Common techniques are:
1. Inspection
2. Inquiry
3. Reperformance
4. Observation
5. Recalculation

Examples of this are:
1. Inspecting bank reconciliation for a checkmark, data, and initial evidence of the controller’s timely reconciliation
2. Inspecting credit note for the signature of the sales manager indicating that has been reviewed
3. Observing monthly statements being maintained of credit customer
4. Reperforming the examination of long overdue accounts and assessing if writing down is required

Question 5

Why is documentation important for the test of control

Answer 5

Once controls are tested, the auditor documents their work in the audit file.
- Such as purpose of control test, internal control selected, performed over internal control
- Auditor compares # of deviation predetermined tolerance deviation rate
- Control risk raises, increase in substantive procedures

Question 6

Explain the testing of internal control for the interim period

Answer 6

• Auditors are to reassess the high-risk level
• Roll forward procedures are required at year-end. The auditor will identify any change in internal control
• Should consider also change in staff
• The audit will not the purpose of control but will help the auditor to develop an appropriateness test to determine function and control
• Good to provide value-added services to the client - to gain an understanding of the test of control

Question 7

How do you prepare for the test of control

Answer 7

• The controls have changed auditors’ wishes to place reliance on control, auditor test operations effectiveness
  Auditing factors are:
  1. Effectiveness of control environment, entity monitoring of control
  2. Risk arising from the characteristics of the control, including whether it is manual or automated
  3. Effectiveness of general IT control.
  4. Risk and extent of reliance on control

Question 8

What is the auditor impact after testing control

Answer 8

• The auditors determine
  1. Whether the test provides a basis for reliance on control
  2. Whether additional test of control is necessary
  3. Whether increased extent of substantive tests need to be performed

Complete test of control - Control effective as expected - No - Substantive approach must be taken
If Yes - Combined approach still appropriate