8.1. Explain the purpose of (a) prevent controls and (b) detect controls. Why would it be important for an entity to have both types of controls?
In order to prevent, detect and correct material misstatement the auditor performed the procedures called Test of Controls. There are two types of controls: Prevent Controls and Detect Controls.
Prevent Controls can be applied to each transaction during normal processing in order to avoid errors. When planning controls, an auditor should take in consideration all possible scenarios (What can go wrong WCGWs) which would result in an error. By designing effective controls the auditor can prevent and correct detected errors as ...view middle of the document...
3. Inspection of physical evidence
Enquiry - the technique which an auditor uses to seek information of knowledgeable persons inside or outside the entity and involve questioning by an auditor to determine how the control is completed and whether it has been carried out properly and on a timely basis. I think this type of test of controls has the lowest reliability of the evidence because Inquiry alone does not provide sufficient audit evidence to detect a material misstatement, and it is not sufficient to test the operating effectiveness of controls.
Observation – technique which an auditor uses to observe the actual control being performed. Observation provides audit evidence about the procedure being observed but is limited to the point in time at which the observation takes place and by the fact that employees may perform the procedure more accurately when they know they are being watched.
Inspection of physical evidence – technique that relies on the auditor testing the physical evidence to verify that a control has been performed properly. Inspection of records and documents provides audit evidence of varying degrees of reliability, depending on their nature and source and, in the case of internal records and documents, on the effectiveness of the controls over their production.
Re-performance – technique the auditor use to re-perform the control to test its effectiveness.
8.5. Does the auditor have to test every control? Explain.
The auditor does not have to test every control, but he or she must apply professional judgment in decision on which controls should be selected for testing and establish the extent of audit testing to be performed. The auditor usually choose controls testing that they believe will provide the most efficient and effective audit evidence, which further provide assurance that controls are working.
8.9. What is the relationship between the results of tests of controls and substantive testing?
If the results of the tests of controls confirm the auditor’s preliminary evaluation of controls and control risk, the planned substantive audit procedures are not modified.
If the results of the tests do not confirm their preliminary evaluation of controls and controls risk, the auditor revises the overall audit risk assessment for the related account and the planned audit strategy, and that increases the level of substantive procedures.
8.10. Explain the process of documenting the auditor’s conclusions. What must be documented?
Once controls have been tested, the auditor documents their work in a working paper. This is the documentation standard that is required by ASA 230 (ISA230) Audit Documentation.
1. The auditor sets out the PURPOSE OF THE TEST which assists in performing testing by reminding the auditor of their overall purpose in testing of controls and identifies any exception or issues.
2. WORK PERFORMED: the auditor documents the...