Responses to Assessed Risks - SU 8 Flashcards
An auditor is least likely to test controls that:
Involve records used solely for internal management purposes
EMPHASIS is on the fairness of EXTERNAL financial reporting
Which test of controls are typically used?
Inquiry - NOT sufficient by itself to test operating effectiveness of controls Inspection Observation Reperformance Recalculation
What are some examples of substantive procedures?
Calculations
External confirmations
Analytical procedures
Major purpose of the auditor’s evaluation of the company’s computer processing operations is to:
Evaluate the reliability and integrity of the financial information
When an auditor performs tests of controls, they normally find that:
The rate of deviations in a sample EXCEEDS the rate of error in the accounting records
The risks of material misstatement (RMMs) should be assessed in terms of:
Financial statement ASSERTIONS
When assessing the RMM at a low level, the auditor is required to document:
The auditor’s understanding of the entity’s control environment
Overall responses to assessed risks
The objective of tests of details of transactions performed as tests of control is
To evaluate whether internal controls operated effectively
Dual purpose test
If used as SUBSTANTIVE PROCEDURES: objective is to support relevant assertions or detect material
misstatements
Substantive procedures DO NOT directly test controls
Explain the test data approach
What are advantages and disadvantages?
Auditing through the computer:
Auditor prepares dummy transactions to test control activities
Transactions are processed using the client’s (management’s) program
Expected results are compared with actual output
ONLY ONE transaction for each condition needs to be tested
Auditor is testing the EFFECTIVENESS of the controls
ADVANTAGE: It directly tests the controls
DISADVANTAGE: It tests processing at only ONE MOMENT in time
Explain parallel simulation
What are advantages and disadvantages?
Auditing through the computer:
An auditor developed program (controlled program) that tests the controls in a client’s application program
Actual client data is processed (reprocessed)
The outputs and exceptions report are compared with those of the client’s application program
ADVANTAGE: Transactions from THROUGHOUT the period may be reprocessed
DISADVANTAGE: Cost of obtaining the program and coordinating the transactions to reprocess
Examples of tests of controls:
Inspection of purchase orders for the authorization of the purchase agent
Inquiries of management regarding the assignment of responsibilities
Recalculation of time approved on a sample of time cards: tests the authorization process
Examples of substantive tests:
Confirmation of accounts receivable with debtors
Observation of the physical inventory count: provides assurance that inventory exists
Comparison of financial ratios with those of industry averages: this is an analytical procedure
Comparison of subsidiary ledger with general ledger: this is a test of completeness and existence
Confirming inventory held in public warehouses
What techniques are used to test the operating effectiveness of controls?
Inquiry in combination with observation, inspection, recalculation, and reperformance.
Inquiry ALONE is not sufficient.
Explain the advantages and disadvantages of an integrated test facility (known as the minicompany)?
Dummy transactions are processed at the same time as actual (live) transactions but requires additional programming to make sure that programs recognized the coded test data
ADVANTAGES: Tests the actual program in operation
DISADVANTAGES: Requires considerable coordination and dummy transactions must be purged prior to reporting
As the acceptable level of detection risk increases for a given audit risk, an auditor may change
The timing of substantive procedures from year end to an interim date
The audit effort may be reduced
Acceptable level of detection risk is inversely related to assessed RMM
