Test of control
1. Effect of controls on the auditor
Impact of test controls on the audit strategy and plan
If the control risk is low => Auditor can reply more on internals control and evidence
=> increase the appropriateness of interim audit testing
=> reduce detailed substantive procedures
If control risk is high => increase the volume of procedures conducted after the year end
=> increase level of substantive procedures, test of detail
=> increase audit scope
=> obtain more evidence from external sources
2. Components of an internal control system
Control environment, Risk assessment process, information system, control activities,
monitoring
Control activities:
Authorisation: Approval of transactions prior to being processed
Performance review: To identify unusual differences between data
Information processing: To ensure completeness and accuracy of processing
Physical controls: Prevent unauthorised assess
Segregation of duties: Assigning the responsibility for recording transactions
3. Testing the system
Observation of control activities: observe the inventory count to ensure it is conducted
effectively and in accordance with the count instructions
Inspection of documents recording performance of the control: inspecting an order for
evidence of authorisation
Computer-assisted audit techniques
Designing valid test of control
First: Identify the controls they want to test
A control is an activity applied in addition to the normal processing of the system to ensure
the system has operated as it should
Deficiency A clear description of what is wrong
Consequence What happened of the deficiency is not
corrected?
Focus on what matters to the client – the
risk of a reduction in revenue, extra costs,
stolen cash..
Recommendation Must deal with the specific deficiency you
have identified
Must provide greater benefits than the cost
of implementation
Try to show how recommended control
should operate…. Who should carry out the
control procedure, how frequency it should
be performed
Audit test: Risk assessment procedures => Further audit test: Test of control
Test of control if the auditor want to rely on internal control if the result òf risk asessment
seem effective, intial control risk is medium or low => initial evaluation true or wrong
Evaluation control risk is true => Auditor want
Untrue => Auditor don’t want => substantive test
Test of internal control
Three objective internal control: prevent, detect and correct misstatement on financial
statement => Design and implement effectively
Test of control. Validated the effectiveness of internal control
What are control objectives? Related to financial assertion
How many financial assertions? CAVE – Completeness, Accuracy, Valuation, Existence,
Occurrence
The auditor is questioning mind => raise the questions
Control gate: gate keepers => Person who verified
Technique : Analytical procedures, Enquire, Investigation, Observation, Recalculation.
Test of control: designed to evaluate the operating effectiveness of controls in preventing or
detecting and correcting material misstatement
Audit risk = Inherent risk × Control risk × Detection risk
The stronger the control system, the lower control risk => Reduce risk of material
misstatement in the financial statement
Substantive procedures: Substantive procedures are designed to detect material
misstatement at the assertion level.
Consist of:
Test of detail: to verify individual transactions and balances
Substantive analytical procedures involve analysing relationships between
information to identify unusual fluctuations which may indicate possible
misstatement.’
Test of detail Analytical procedures
Look at the supporting evidence for an Use to assess the reasonableness of the
individual transaction such as inspection of purchase figure in total
a purchase invoice to verify the
amount/date/ classification. Not looking at the detail of any of the
individual purchases but at the total figure
=> May have number of misstatements
Should only be used as the main source of
substantive evidence where the internal
controls have been found to be reliable =>
Less chance of misstatement…
Auditor may rely solely on substantive testing:
It is considered to be more efficient or more effective way of obtaining audit
evidence
Client’s internal control system cannot be relied on
Types of audit procedure
Inspection of records, documents or physical assets
Observation of processes and procedures
External confirmation
Recalculation to confirm the numerical accuracy of documents or records
Reperformance by auditor of procedures or controls
Analytical procedures
Enquiry of knowledge parties
Analytical procedures Substantive tests
Use to identify trends and understand
relationships between set of data
Will not detect misstatement, identify
possible areas of misstatement
Cannot be used in isolation and should be
coupled with other, form of testing…
Selecting items for testing
The auditor has three options for selecting items to test:
(1) Select all items to test
(2) Selecting specific items for testing
(3) Sampling
The need for sampling
Impossible to test every item in an accounting population because of the costs involved
It’s important to remember, auditor can not give absolute assurance => FS are not 100%
accurate
Selecting an appropriate sample
Must choose a representative sample
Stratification
Used in conjunction with sampling
The process of breaking down a population into smaller subpopulations
Objective: reduce the variability of items withing the subpopulation => Reduce sample sizes
without increasing sampling risks
Analytical procedures
I. Definition
Evaluations of financial information
Why => When need: Inconsistent with other relevant information
Co bien doi bat thuong, co su khac biet dang ke
II. Purpose
To perform risk assessment
Obtain and relevant and reliable audit evidence
Assist in forming an overall conclusion
Audit risk = IR x Control risk x Detection risk
=> Dr = AR / IR*CR
Audit evident: appropriate and sufficient => Overall conclusion
Relationship between information
Element of financial information expected to conform to a predicted pattern
Financial information and relevant non-financial information
Other comparisons
Prior periods
Anticipated results
Predictive estimates
Similar industry information
Auditor expectations
Audit gap, expectation of users and auditors
The auditor should
Develop an expectation of the results, based on
Understanding of the entity and its environment
The accountants, balances and transactions reposted in the financial statements
Compare the expectation to the actual results of the analytical procedures
Investigate any differences or unexpected fluctuations
Analytical procedures in auditing planning
Understand the business
Identify risks of material misstatement
Plant the nature, timing and extent of other audit procedures.
Performance ratios, Liquidity ratios, Efficiency ratios
Substantive analytical procedures
Must be suitable for the assertion
Underlying data must be reliable => evidence collected by auditor
Expectation needs to be sufficiently precise
Decide what amount of difference will be acceptable
Suitability
By themselves to provide sufficient audit evidence
To test all assertions related to transactions
To test the relevant assertions for balances
