Acct3708 Week Six Notes

CHAPTER NINE: TESTS OF CONTROLS

9.1Tests of controls

* If the auditor assesses control risk as high for an account balance or assertion, there will be no tests for that account balance or assertion because the auditor does not plan to place any reliance on the related controls

* Control risk will be assessed as high if the auditor has determined that:

* Controls do not exist

* Controls that do exist will not provide reliable evidence

* It is more efficient/effective to gather the required evidence by undertaking substantive testing

* The characteristics of routine transactions often permit highly automated processing with little or no manual intervention – might be possible to perform only substantive testing

* Any control deficiencies in such automated systems would be expected to lead to systematic errors, which would be better identifies by evaluating and testing the internal control rather than by substantively verifying a small proportion of transactions

* Tests of controls are usually concerned with gathering evidence concerning the effectiveness and continuity of controls associated with the processing of particular classes of transactions

* The audit program sets out the combination of evidence-gathering procedures that the auditor believes will result in the most effective and efficient audit

Planning the scope of tests of controls

* Objective is to gain reasonable assurance that the controls are working – to reduce substantive testing

* Nature

* Refers in the first place to the type of testing

* The auditor identifies whether there are internal control policies or activities in place that provide reasonable assurance of achieving control objectives

* Also refers to the specific type of audit procedure used – inspection, observation, inquiry, external confirmation, recalculation, re-performance and analytical procedures

* Timing

* The auditor will sometimes schedule...