AUD 3 Internal Control 10 - 5 Flashcards

Question

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • Detection Risk (DR) tells you how much substantive t___ing to do

Answer 1

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • Detection Risk (DR) tells you how much substantive testing to do

Answer 2

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • Detection Risk (DR) tells you how much substantive testing to do

Answer 3

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • Detection Risk (DR) tells you how much substantive testing to do • Must do substantive testing (adjust Audit Program for Substantive tests)

Answer 4

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • Detection Risk (DR) tells you how much substantive testing to do • Must do substantive testing (adjust Audit Program for Substantive tests)

Answer 5

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • Detection Risk (DR) tells you how much substantive testing to do • Must do substantive testing (adjust Audit Program for Substantive tests)

Answer 6

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • Detection Risk (DR) tells you how much substantive testing to do • Must do substantive testing (adjust Audit Program for Substantive tests) ``` • AR / (IR × CR) = DR or AR = (IR × CR) x DR or DR = AR / (IR × CR) ```

Answer 7

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR ``` • AR / (IR × CR) = DR or AR = (IR × CR) x DR or DR = AR / (IR × CR) ```

Answer 8

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR ``` • AR / (IR × CR) = DR or AR = (IR × CR) x DR or DR = AR / (IR × CR) ```

Answer 9

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR ``` • AR / (IR × CR) = DR or AR = (IR × CR) x DR or DR = AR / (IR × CR) ```

Answer 10

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR ``` • AR / (IR × CR) = DR or AR = (IR × CR) x DR or DR = AR / (IR × CR) ```

Answer 11

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • AR = (IR × CR) x DR

Answer 12

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR • AR = (IR × CR) x DR

Answer 13

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 14

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 15

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 16

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 17

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 18

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 19

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, based on the tests of controls, the auditor concludes that the controls are effective, the nature, timing, and extent of further audit procedures in relation to that assertion will be reduced.

Answer 20

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, based on the tests of controls, the auditor concludes that the controls are effective, the nature, timing, and extent of further audit procedures in relation to that assertion will be reduced.

Answer 21

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, based on the tests of controls, the auditor concludes that the controls are effective, the nature, timing, and extent of further audit procedures in relation to that assertion will be reduced.

Answer 22

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, based on the tests of controls, the auditor concludes that the controls are effective, the nature, timing, and extent of further audit procedures in relation to that assertion will be reduced.

Answer 23

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, based on the tests of controls, the auditor concludes that the controls are effective, the nature, timing, and extent of further audit procedures in relation to that assertion will be reduced.

Answer 24

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, CR will be reset to maximum

Answer 25

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, CR will be reset to maximum

Answer 26

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, CR will be reset to maximum

Answer 27

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, CR will be reset to maximum and the auditor will develop an audit program to test the assertion

Answer 28

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion ```

Answer 29

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion ```

Answer 30

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion ```

Answer 31

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion applying substantive audit procedures as if there were no controls related to the assertion ```

Answer 32

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion applying substantive audit procedures as if there were no controls related to the assertion ```

Answer 33

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion applying substantive audit procedures as if there were no controls related to the assertion ```

Answer 34

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion applying substantive audit procedures as if there were no controls related to the assertion and as if no test of controls had been performed. ```

Answer 35

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion applying substantive audit procedures as if there were no controls related to the assertion and as if no test of controls had been performed. ```

Answer 36

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion applying substantive audit procedures as if there were no controls related to the assertion and as if no test of controls had been performed. ```

Answer 37

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, however, based on the tests of controls, the auditor cannot conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion applying substantive audit procedures as if there were no controls related to the assertion and as if no test of controls had been performed. ```

Answer 38

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit. If, based on the tests of controls, the auditor concludes that the controls are EFFECTIVE, the nature, timing, and extent of further audit procedures in relation to that assertion will be reduced. If, however, based on the tests of controls, the auditor canNOT conclude that the controls are effective, ``` control risk (CR) will be reset to maximum and the auditor will develop an audit program to test the assertion applying substantive audit procedures as if there were NO controls related to the assertion and as if no test of controls had been performed. ```

Answer 39

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls,

Answer 40

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable,

Answer 41

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable,

Answer 42

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable, the auditor will do a cost/benefit analysis before deciding to perform tests of controls.

Answer 43

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable, the auditor will do a cost/benefit analysis before deciding to perform tests of controls.

Answer 44

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable, the auditor will do a cost/benefit analysis before deciding to perform tests of controls.

Answer 45

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable, the auditor will do a cost/benefit analysis before deciding to perform tests of controls.

Answer 46

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable, the auditor will do a cost/benefit analysis before deciding to perform tests of controls.

Answer 47

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable, the auditor will do a cost/benefit analysis before deciding to perform tests of controls. In performing the analysis: • The auditor will estimate the cost of performing a substantive audit without performing tests of controls.

Answer 48

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: • The auditor will estimate the cost of performing a substantive audit without performing tests of controls.

Answer 49

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: • The auditor will estimate the cost of performing a substantive audit without performing tests of controls.

Answer 50

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: • The auditor will estimate the cost of performing a substantive audit without performing tests of controls.

Answer 51

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: • The auditor will estimate the cost of performing a substantive audit without performing tests of controls.

Answer 52

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor will estimate the cost of performing a substantive audit without performing tests of controls. * The auditor will estimate the cost of performing tests of controls.

Answer 53

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor will estimate the cost of performing a substantive audit without performing tests of controls. * The auditor will estimate the cost of performing tests of controls.

Answer 54

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: • The auditor will estimate the cost of performing tests of controls.

Answer 55

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor will estimate the cost of performing tests of controls. * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable.

Answer 56

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor will estimate the cost of performing tests of controls. * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable.

Answer 57

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor will estimate the cost of performing tests of controls. * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable.

Answer 58

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor will estimate the cost of performing tests of controls. * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable.

Answer 59

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * Finally, the auditor will estimate the likelihood that the controls to be tested are likely to be effective.

Answer 60

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * Finally, the auditor will estimate the likelihood that the controls to be tested are likely to be effective.

Answer 61

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * Finally, the auditor will estimate the likelihood that the controls to be tested are likely to be effective.

Answer 62

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * Finally, the auditor will estimate the likelihood that the controls to be tested are likely to be effective.

Answer 63

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * Finally, the auditor will estimate the likelihood that the controls to be tested are likely to be effective.

Answer 64

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: * The auditor will estimate the cost of performing a substantive audit without performing tests of controls. * The auditor will estimate the cost of performing tests of controls. * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * Finally, the auditor will estimate the likelihood that the controls to be tested are likely to be effective.

Answer 65

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Since the most expensive and inefficient alternative is to perform tests of controls, only to determine that the controls are not reliable, the auditor will do a cost/benefit analysis before deciding to perform tests of controls. In performing the cost/benefit analysis: * The auditor will estimate the cost of performing a substantive audit without performing tests of controls. * The auditor will estimate the cost of performing tests of controls. * The auditor also estimate the cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * Finally, the auditor will estimate the likelihood that the controls to be tested are likely to be effective.

Answer 66

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective.

Answer 67

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective.

Answer 68

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective.

Answer 69

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective.

Answer 70

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective.

Answer 71

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective.

Answer 72

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously.

Answer 73

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously.

Answer 74

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously.

Answer 75

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously.

Answer 76

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously.

Answer 77

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously.

Answer 78

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously.

Answer 79

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously.

Answer 80

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. • The total of those two amounts will be compared to the cost of performing substantive tests exclusively.

Answer 81

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. • The total of those two amounts will be compared to the cost of performing substantive tests exclusively.

Answer 82

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. • The total of those two amounts will be compared to the cost of performing substantive tests exclusively.

Answer 83

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. • The total of those two amounts will be compared to the cost of performing substantive tests exclusively.

Answer 84

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. • The total of those two amounts will be compared to the cost of performing substantive tests exclusively.

Answer 85

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. • The total of those two amounts will be compared to the cost of performing substantive tests exclusively. The lower of the two amounts will determine the strategy to be taken.

Answer 86

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The auditor will then: • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. • The total of those two amounts will be compared to the cost of performing substantive tests exclusively. The lower of the two amounts will determine the strategy to be taken.

Answer 87

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The lower of the two amounts will determine the strategy to be taken.

Answer 88

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The lower of the two amounts will determine the strategy to be taken.

Answer 89

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In performing the cost/benefit analysis: The lower of the two amounts will determine the strategy to be taken.

Answer 90

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion.

Answer 91

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion.

Answer 92

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion.

Answer 93

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be reduced but will not be eliminated.

Answer 94

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be reduced but will not be eliminated.

Answer 95

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be reduced but will not be eliminated.

Answer 96

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be REDUCED but will NOT be ELIMINATED.

Answer 97

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are NOT normally considered SUFFICIENT evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be REDUCED but will NOT be ELIMINATED.

Answer 98

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are NOT normally considered SUFFICIENT evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be REDUCED but will NOT be ELIMINATED. In many cases, the auditor will use DUAL purpose testing,

Answer 99

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are NOT normally considered SUFFICIENT evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be REDUCED but will NOT be ELIMINATED. In many cases, the auditor will use DUAL purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions.

Answer 100

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are NOT normally considered SUFFICIENT evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be REDUCED but will NOT be ELIMINATED. In many cases, the auditor will use DUAL purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions.

Answer 101

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions.

Answer 102

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions.

Answer 103

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions.

Answer 104

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions.

Answer 105

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions.

Answer 106

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be reduced but will not be eliminated. In many cases, the auditor will use DUAL purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions.

Answer 107

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing.

Answer 108

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing.

Answer 109

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing.

Answer 110

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing.

Answer 111

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing.

Answer 112

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing.

Answer 113

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing.

Answer 114

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. * When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing. * When the results are not satisfactory, the auditor will conclude that the control may not be relied upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 115

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. * When the results are satisfactory, the auditor will conclude that the control may be relied upon and the evidence obtained is sufficient to support the assertion, eliminating the need for further testing. * When the results are not satisfactory, the auditor will conclude that the control may not be relied upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 116

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are not satisfactory, the auditor will conclude that the control may not be relied upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 117

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are not satisfactory, the auditor will conclude that the control may not be relied upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 118

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are not satisfactory, the auditor will conclude that the control may not be relied upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 119

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are not satisfactory, the auditor will conclude that the control may not be relied upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 120

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are not satisfactory, the auditor will conclude that the control may not be relied upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 121

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR In many cases, the auditor will use DUAL purpose testing. • When the results are SATISFACTORY, the auditor will conclude that the control may be relied upon and the evidence obtained is SUFFICIENT to support the assertion, eliminating the need for further testing. • When the results are NOT satisfactory, the auditor will conclude that the control may NOT be RELIED upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 122

Obtain an Understanding of the Entity’s Internal Control Structure (AU-C 315) Step 5 – 5. Reassess RMM to Determine DR Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion. As a result, even when tests of controls prove that controls can be relied upon, further audit procedures may be reduced but will not be eliminated. In many cases, the auditor will use dual purpose testing, which consists of tests that are designed to test the effectiveness of controls while providing evidence as to the fairness or correctness of an element of the financial statements by supporting one of management’s assertions. • When the results are SATISFACTORY, the auditor will conclude that the control may be relied upon and the evidence obtained is SUFFICIENT to support the assertion, eliminating the need for further testing. • When the results are NOT satisfactory, the auditor will conclude that the control may NOT be RELIED upon and will determine the nature, timing, and extent of further audit procedures that will be necessary to support the assertion.

Answer 123

Based on the results of the tests of controls the auditor will determine whether it is necessary to modify the scope of substantive procedures.

Answer 124

Based on the results of the tests of controls the auditor will determine whether it is necessary to modify the scope of substantive procedures.

Answer 125

Based on the results of the tests of controls the auditor will determine whether it is necessary to modify the scope of substantive procedures.

Answer 126

Based on the results of the tests of controls the auditor will determine whether it is necessary to modify the scope of substantive procedures.

Answer 127

Will there generally be the need to change the scope of planned substantive procedures, if tests of control reveal that the system operates as expected? No Need to change the scope --------- If tests of control reveal that the system operates as expected, there will generally be no need to change the scope of planned substantive procedures.

Answer 128

Will there be the need to change the scope of planned substantive procedures, if tests of control reveal that the system does NOT operate as effectively as expected? Yes. The scope of substantive procedures for the relevant assertions involved will increase. (thereby decreasing detection risk) -------------- Conversely, if the system does not operate as effectively as expected, the scope of substantive procedures for the relevant assertions involved will increase (thereby decreasing detection risk). • DR tells you how much substantive testing to do • Must do substantive testing (adjust Audit Program for Substantive tests) • AR / (IR × CR) = DR

Answer 129

Detection risk (DR) tells you how much substantive testing to do.

Answer 130

Detection risk (DR) tells you how much substantive testing to do.

Answer 131

Detection risk (DR) tells you how much substantive testing to do.

Answer 132

DR = AR / (IR × CR)

Answer 133

DR = AR / (IR × CR)

Answer 134

DR = AR / (IR × CR)

Answer 135

DR = AR / (IR × CR)

Answer 136

AR / (IR × CR) = DR

Answer 137

AR / (IR × CR) = DR

Answer 138

AR / (IR × CR) = DR

Answer 139

AR / (IR × CR) = DR

Answer 140

AR = (IR × CR) x DR

Answer 141

AR = (IR × CR) x DR

Answer 142

AR = (IR × CR) x DR

Answer 143

AR = (IR × CR) x DR

Answer 144

If the system does not operate as effectively as expected, the scope of substantive procedures for the relevant assertions involved will increase.

Answer 145

If the system does not operate as effectively as expected, the scope of substantive procedures will increase.

Answer 146

If the system does not operate as effectively as expected, the scope of substantive procedures for the relevant assertions involved will increase.

Answer 147

Increase the scope of substantive procedures for the relevant assertion = decreasing detection risk

Answer 148

Increase the scope of substantive procedures for the relevant assertion = decreasing detection risk

Answer 149

Increase the scope of substantive procedures for the relevant assertion = decreasing detection risk

Answer 150

Increase the scope of substantive procedures for the relevant assertion = decreasing detection risk

Answer 151

Decreasing detection risk = Increase the scope of substantive procedures

Answer 152

Decreasing detection risk = Increase the scope of substantive procedures

Answer 153

Decreasing detection risk = Increase the scope of substantive procedures

Answer 154

Decreasing detection risk = Increase the scope of substantive procedures

Answer 155

When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 156

When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 157

When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 158

When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 159

When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 160

When an auditor decides to rely on controls, tests of controls are performed to determine if the controls were working effectively as they were designed for the period under audit.

Answer 161

Why tests of controls are performed? To determine if the controls were working effectively as they were designed for the period under audit.

Answer 162

What will happen if, based on the tests of controls, the auditor concludes that the controls are effective? The nature, timing, and extent of further audit procedures in relation to that assertion will be reduced.

Answer 163

What will be reduced if, based on the tests of controls, the auditor concludes that the controls are effective? The nature, timing, and extent of further audit procedures in relation to that assertion will be reduced.

Answer 164

What will happen if, based on the tests of controls, the auditor cannot conclude that the controls are effective? - Control risk (CR) will be reset to maximum - The auditor will develop an audit program to test the assertion - Applying substantive audit procedures as if there were no controls related to the assertion and as if no test of controls had been performed.

Answer 165

When does the auditor perform a cost/benefit analysis related to deciding to perform tests of controls? The auditor will do a cost/benefit analysis before deciding to perform tests of controls.

Answer 166

What are items the auditor need to estimate during cost/benefit analysis? In performing the analysis: * The cost of performing a substantive audit without performing tests of controls. * The cost of performing tests of controls. * The cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * The likelihood that the controls to be tested are likely to be effective.

Answer 167

What are items the auditor need to estimate during cost/benefit analysis? In performing the analysis: * The cost of performing a substantive audit without performing tests of controls. * The cost of performing tests of controls. * The cost of the reduced substantive testing that will be performed if the controls prove to be reliable. * The likelihood that the controls to be tested are likely to be effective.

Answer 168

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. Choice 1 - Effective Control = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. Choice 2 - Ineffective Control = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control) Choice 3 - Perform Substantive Testing only • The total of those two amounts will be compared to the cost of performing substantive tests exclusively. Choice 3 - Perform Substantive Testing only = Substantive Testing Cost The lower of the two amounts will determine the strategy to be taken.

Answer 169

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 170

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 171

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 172

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 173

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 174

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 175

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 176

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 177

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 178

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 179

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 180

Cost / Benefit Analysis Choice 1 - Effective Control • Add the cost of performing tests of controls to the cost of reduced substantive testing and multiply the total by the probability that the controls will be effective. = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control

Answer 181

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 182

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 183

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 184

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 185

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 186

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 187

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 188

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 189

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 190

Cost / Benefit Analysis Choice 2 - Ineffective Control • Add the cost of performing tests of controls to the cost of the unreduced substantive testing and multiply the total by the probability that controls will not be reliable, which is 100% minus the probability used previously. = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x Probability of Ineffective Control or = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control)

Answer 191

Cost / Benefit Analysis Choose lower cost between Choice 1 - Effective Control and Choice 2 - Ineffective Control Then compared the lower cost with Choice 3 - Perform Substantive Testing only The lower of the two amounts will determine the strategy to be taken.

Answer 192

Cost / Benefit Analysis Choose lower cost between Choice 1 - Effective Control = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control and Choice 2 - Ineffective Control = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control) Then compared the lower cost with Choice 3 - Perform Substantive Testing only = Substantive Testing Cost The lower of the two amounts will determine the strategy to be taken.

Answer 193

Cost / Benefit Analysis Choose lower cost between Choice 1 - Effective Control = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control and Choice 2 - Ineffective Control = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control) Then compared the lower cost with Choice 3 - Perform Substantive Testing only = Substantive Testing Cost The lower of the two amounts will determine the strategy to be taken.

Answer 194

Cost / Benefit Analysis Example: Choose lower cost between Choice 1 - Effective Control = [ (Test of Controls Cost) + (Reduced Substantive Testing Cost) ] x Probability of Effective Control = [ $1,000 + $1500 ] x 80% = $2,000 and Choice 2 - Ineffective Control = [ (Test of Controls Cost) + (Substantive Testing Cost) ] x (100% – Probability of Effective Control) = [ $1,000 + $3,500 ] x 20% = $900 Then compared the lower cost with Choice 3 - Perform Substantive Testing only = Substantive Testing Cost = $3,500 $900 vs $3,500 The lower of the two amounts will determine the strategy to be taken.

Answer 195

Do tests of controls alone are considered sufficient evidence to base an audit opinion? No, not sufficient ----------- Tests of controls alone are not normally considered sufficient evidence upon which to base an audit opinion.

Answer 196

Will further audit procedures be eliminated if tests of controls prove that controls can be relied upon? No. Further audit procedures may be reduced but will not be eliminated. ------- Even when tests of controls prove that controls can be relied upon, further audit procedures may be reduced but will not be eliminated.

Answer 197