Chaoter 5 Part 1 Flashcards
A test of control activities is an audit procedure designed to produce evidence about the operating effectiveness of a client’s control activity. A test of controls is completed using some combination of inquiry, observation, document examination, and/or reperformance.
What are tests of control activities?
When testing controls, document examination or inspection refers to auditors determining whether client personnel actually stamped, initialed, or left other signs on documentary evidence that their assigned control activities had been performed.
When testing controls, reperformance refers to auditors actually completing the control activity (again) that were supposed to have been performed by the client personnel (recalculating, looking up the right price, comparing quantities, and so forth).
The key difference between document examination and reperformance is that with the former, audit teams inspect documents for evidence that employees have performed the control activity; reperformance provides evidence that the control activity was (or was not) done correctly.
What is the difference between document examination and reperformance when conducting tests of controls?
A “dual-purpose test” serves the purposes of obtaining evidence (1) about the operating effectiveness of a client’s internal control activity (test of control) and (2) to help detect material misstatements in account balances and disclosures (substantive procedure). Because the test is helping an auditor achieve two objectives at the same time, dual-purpose tests can greatly help with the efficiency of the audit.
What purposes are served by a dual-purpose test?
Management is responsible for establishing and maintaining effective internal control over financial reporting; performing an evaluation and concluding about the effectiveness of the entity’s internal control over financial reporting; and disclosing to the audit team any frauds resulting in a material misstatement to the entity’s financial statements (as well as any other immaterial fraud that involves key managers), all significant deficiencies, and any material weaknesses identified during its evaluation.
What is management’s responsibility for reporting on internal control over financial reporting?
The steps for auditing internal controls over financial reporting are:
(a) Plan the engagement
(b) Use a top-down approach to gain an understanding.
(c) Test controls.
(d) Evaluate identified control deficiencies.
(e) Wrap up by forming an opinion on the effectiveness of internal control over financial reporting.
(f) Report on internal control.
What steps do audit teams follow in examining internal control over financial reporting?
An internal control deficiency is a condition that exists when the design or operation of a control does not allow the company’s management or employees to detect or prevent misstatements in a timely fashion.
What is internal control deficiency
A significant deficiency is defined as a deficiency or a combination of deficiencies in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance.
What is significant deficiency
material weakness in internal control is defined as a deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis.
What is material weakness
One option is to have two separate reports: one on the fairness of the entity’s financial statements (presented earlier in Chapter 2) and one on internal control over financial reporting. Each report would be separately titled, dated (although using the same date), and signed. The second option is to prepare a combined report that expresses one opinion on the financial statements and a second on the effectiveness of internal control over financial reporting.
What options are available to the auditor for presenting reports on the entity’s financial statements and internal control over financial reporting?
