Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 11 Audit Procedures in Response to Assessed Risks: Tests of Controls
Chapter 11 Overview
Assessing Control Risk In assessing control risk, the auditor must evaluate the effectiveness of : Design of internal controls Operation of internal controls
Steps in Assessing Control Risk
Process for Assessing Control Risk Consider Knowledge Acquired from Procedures to Obtain an Understanding Identify Potential Misstatements
Process for Assessing Control Risk Identify Necessary Controls Nature of controls to prevent or detect and correct misstatements Nature of controls implemented by management Significance of each control Risk that designed controls may not operate effectively
Control Design for Specific Assertions Completeness Assertion Existence or Occurrence Assertion Valuation and Allocation Assertion Presentation and Disclosure Assertion
Identify Necessary Controls
Process for Assessing Control Risk Perform Tests of Controls Evidence about effectiveness of the design and operation of controls Evaluate Evidence and Make Assessment Matter of professional judgment Identify strengths and deficiencies Express quantitatively or qualitatively
Strategies for Performing Tests of Controls in an IT Environment User Controls Application Controls General Controls and Manual Followup Procedures
Overview of Computer Controls
Computer-Assisted Audit Techniques (CAATs) Auditing through the computer Advantageous when: Significant part of internal controls is imbedded in a computer program Significant gaps in visible audit trail Large volumes of records to be tested
Types of CAATs Parallel Simulation Test Data Integrated Test Facility Continuous Monitoring of On-line Real-time Systems
Parallel Simulation versus Test Data
Continuous Monitoring of On- Line Real-Time Systems Continuous Monitoring Audit Hook Tagging Transactions Audit Log
Methodologies for Meeting the Second Standard of Fieldwork
Effects of Preliminary Audit Strategies Primarily Substantive Approaches Lower Assessed Level of Control Risk
Designing Tests of Controls Designed to evaluate the operating effectiveness of a control concerned with: How the control was applied Consistency with which it was applied By whom it was applied
Nature of Tests of Controls Inquiries of entity personnel Inspection of items indicating performance of the control Observation of the application of the control Reperformance of the application of the control by the auditor
Timing of Tests of Controls One Occasion versus Multiple Occasions Timing Issues Interim Period Remaining Period Results from Prior Periods
Extent of Tests of Controls Nature of the Control Frequency of Operation Importance of the Control
Designing Tests of Controls Staffing Tests of Controls Audit Programs for Tests of Controls Dual-Purpose Tests
Additional Considerations Assessing Control Risk for Account Balance Assertions Affected by a Single Transaction Class Assessing Control Risk for Account Balance Assertions Affected by Multiple Transaction Classes
Account Balance Assertions and Transaction Class Assertions
Account Balance Assertions and Transaction Class Assertions
Documenting the Assessed Level of Control Risk Control Risk Assessed at the Maximum Only the conclusion is documented Control Risk Assessed at Below the Maximum Basis for assessment must be documented
Communicating Internal Control Matters Internal Control Deficiency Significant Deficiency Material Weakness