Other Issue In Test Of Control

Question 1

Other

Answer 1

• Less Sophisticated Systems: Smaller entities often have less sophisticated control systems due to limited resources.
• Segregation of Duties: Proper segregation of duties is often difficult in small entities.
• Senior Management Involvement: Extensive involvement in control activities by senior management or the entity’s owner is common.

• Identification and Testing: The auditor will look for the existence of minimum business controls, which should be identified, recorded, and tested.
• Substantive Testing: Due to the limitations in control systems, a large amount of substantive testing is likely to be adopted.
• Reliance on Existing Controls: The auditor may rely on the controls in place to gain assurance on certain aspects, such as the completeness of accounting records.

1. Identify Risks: Consider what could go wrong with the system to identify the risks.
2. Determine Control Objectives: Consider what the controls need to achieve to mitigate those risks.
3. Design Controls: Think of controls that would help prevent or detect the problem. Use examples from the chapter or refer to ISA 315 (revised 2019) control activities:
   
   • Performance reviews (including management controls)
   • Application controls (including authorization, arithmetic, and accounting controls)
   • General IT controls
   • Physical controls
   • Segregation of duties
4. Design Audit Procedures: Design audit procedures to test the operation of the control. Use key audit testing procedures:
   
   • Inspection
   • Observation
   • Enquiry
   • Confirmation
   • Re-calculation
   • Re-performance
   • Test data

Imagine a small business, ABC Ltd., with limited resources. Here’s how an auditor might approach testing controls:

1. Identify Risks:
   
   • Risk: Cash may be misappropriated due to lack of segregation of duties.
   • Risk: Sales may not be recorded completely.
2. Determine Control Objectives:
   
   • Objective: Ensure all cash receipts are recorded and safeguarded.
   • Objective: Ensure all sales transactions are recorded accurately.
3. Design Controls:
   
   • Control: Implement a daily cash reconciliation process where the owner reviews cash receipts and bank deposits.
   • Control: Use pre-numbered sales invoices and ensure all sales are recorded in the sales ledger.
4. Design Audit Procedures:
   
   • Procedure: Inspect daily cash reconciliation records and observe the reconciliation process.
   • Procedure: Enquire with the owner about the reconciliation process and confirm the completeness of sales records by inspecting pre-numbered invoices and comparing them to the sales ledger.

By following this approach, the auditor can effectively identify risks, determine control objectives, design appropriate controls, and create audit procedures to test those controls.

I hope this helps clarify the concepts! If you have any more questions or need further examples, feel free to ask.

Question 2

Other

Answer 2

• Less Sophisticated Systems: Smaller entities often have less sophisticated control systems due to limited resources.
• Segregation of Duties: Proper segregation of duties is often difficult in small entities.
• Senior Management Involvement: Extensive involvement in control activities by senior management or the entity’s owner is common.

• Identification and Testing: The auditor will look for the existence of minimum business controls, which should be identified, recorded, and tested.
• Substantive Testing: Due to the limitations in control systems, a large amount of substantive testing is likely to be adopted.
• Reliance on Existing Controls: The auditor may rely on the controls in place to gain assurance on certain aspects, such as the completeness of accounting records.

1. Identify Risks: Consider what could go wrong with the system to identify the risks.
2. Determine Control Objectives: Consider what the controls need to achieve to mitigate those risks.
3. Design Controls: Think of controls that would help prevent or detect the problem. Use examples from the chapter or refer to ISA 315 (revised 2019) control activities:
   
   • Performance reviews (including management controls)
   • Application controls (including authorization, arithmetic, and accounting controls)
   • General IT controls
   • Physical controls
   • Segregation of duties
4. Design Audit Procedures: Design audit procedures to test the operation of the control. Use key audit testing procedures:
   
   • Inspection
   • Observation
   • Enquiry
   • Confirmation
   • Re-calculation
   • Re-performance
   • Test data

Imagine a small business, ABC Ltd., with limited resources. Here’s how an auditor might approach testing controls:

1. Identify Risks:
   
   • Risk: Cash may be misappropriated due to lack of segregation of duties.
   • Risk: Sales may not be recorded completely.
2. Determine Control Objectives:
   
   • Objective: Ensure all cash receipts are recorded and safeguarded.
   • Objective: Ensure all sales transactions are recorded accurately.
3. Design Controls:
   
   • Control: Implement a daily cash reconciliation process where the owner reviews cash receipts and bank deposits.
   • Control: Use pre-numbered sales invoices and ensure all sales are recorded in the sales ledger.
4. Design Audit Procedures:
   
   • Procedure: Inspect daily cash reconciliation records and observe the reconciliation process.
   • Procedure: Enquire with the owner about the reconciliation process and confirm the completeness of sales records by inspecting pre-numbered invoices and comparing them to the sales ledger.

By following this approach, the auditor can effectively identify risks, determine control objectives, design appropriate controls, and create audit procedures to test those controls.

I hope this helps clarify the concepts! If you have any more questions or need further examples, feel free to ask.