Lecture 7: Tests of controls

Question 1

Phases of an audit (4)

Answer 1

Client acceptance
Plan the audit
Perform audit tests
Complete the audit and report

Question 2

What is the method of the business risk approach?

Answer 2

Evaluate the risk of material misstatement
- determine inherent risk
- make preliminary assessment of control risk
Respond to the risk evaluation

Question 3

What is a test of control?

Answer 3

Audit procedures designed to

• evaluate the operating effectiveness of controls
• in preventing or detecting and correcting material misstatements at the assertion level

Question 4

3 considerations when planning the scope of a test of control?

Answer 4

Nature of the tests
Timing of the testing
Extent of testing

Question 5

Primary internal controls? (6)

Answer 5

Segregation of duties
Control over source documents
Controls over inputs, processing and outputs of information system
Approvals and reconciliations
Independent checks
Document matching

Question 6

Tests of controls procedures? (5)

Answer 6

Enquiry
Inspection
Observation
Reperformance
Use of test data techniques

Question 7

What are the factors that influence the extent of testing of controls for the remaining period? (5)

Answer 7

Results of interim tests
Unusual transactions and events
Changes during roll-forward period
Changes in internal controls
Changes in key management

Question 8

Factors that influence extent of tests of controls? (3)

Answer 8

Nature of the control
Sample size
More than one source of evidence

Question 9

What are the control activities for sales? (4)

Answer 9

Adequate separation of duties
Proper authorisations
Adequate documents and records (including document matching)
Independent checks on performance

Question 10

Control activities for the expenditure cycle? (3)

Answer 10

Segregation of duties
Control over source documents
Checks, approvals and reconciliations

Question 11

What are the three documents within a voucher pack?

Answer 11

Supplier’s invoice
Receiving report
Purchase order

Question 12

Explain the four reasons for potential misstatements and state the inadequate control.

Answer 12

Classic disbursements fraud

• creating fictitious invoices based on fraudulently created source documents
• poor controls over unused documents

Kickbacks

• supplying goods or services at an inflated price
• poor controls over purchasing

Illegal acts

• bribery
• poor controls over journal entries

Unauthorised executive perks

• overspending by employees
• credit card spending not reconciled with authorised expenditure / limits
• poor controls over expenditures

Question 13

List the four reasons for potential misstatements.

Answer 13

Classic disbursements fraud
Kickbacks
Illegal acts
Unauthorised executive perks