Two reasons: one has to do with efficiency and the other with weak internal controls. Accurate management job descriptions delineate specific duties. And if you use a fully substantive approach, you must assess control risk at high for all relevant assertions. If we were unaware of the control weaknesses, we would not plan the needed fraud detection procedures. When performing a public company integrated audit of internal control and the financial statements, you should test controls to simultaneously accomplish the objectives of both audits. A classic documentation control is using prenumbered documents and saving voided documents. b. With further audit procedures. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. Ordinarily, effective internal control equates to a Low control risk assessment (assuming that controls were tested for a sufficient period), and ineffective internal control equates to a High control risk assessment. And you believe the test of controlswill take four hours while a substantive approach will take eight hours? In other words, they would not prevent or detect a material misstatement. Control risk assessments are made for individual financial statements assertions of the internal control structure as a whole. A business management tool for legal professionals that automates workflow. The auditor typically assesses control risk for assertions about transaction classes such as cash receipts and cash disbursements. (Your final conclusion regarding internal control effectiveness will be reached once you complete your substantive audit procedures.). An increase in the assessed level of control risk means that the assessed risk of material misstatement has also increased, and this requires a corresponding decrease in detection risk to maintain the same (presumably low) level of overall audit risk. Chapter 3 Set 2 Flashcards by Arin Neely | Brainscape Thailand is currently facing a severe dengue fever outbreak as the rainy season and El Nio approaches, posing a significant threat to public health. ET. To assess control risk for specific assertions at less than the maximum for the financial statement audit, you are required to obtain evidence that the relevant controls operated effectively during the entire period upon which you plan to place reliance on those controls. Reuters Plus, the commercial content studio at the heart of Reuters, builds campaign content that helps you to connect with your audiences in meaningful and hyper-targeted ways. 148. Weak internal controls can result in more substantive procedures, even if you normally use a substantive approach. CANNOT be changed by the auditor, exist independently of audit, Audit Risk (should be low) = Risk of Material Misstatement (assessed by auditor) X Detection Risk (controlled by auditor). After obtaining an understanding of internal control and assessing the risk of material misstatement, an auditor decided to perform tests of controls. When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the, An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risk of material misstatement primarily to. And the remainder, detection risk, is what the auditor controls. The disclosure of fraudulent activities to the clients senior management and those charged with governance. Not quite sure what it means to tag a piece of furniture? Read my full bio. Reconciling vendors monthly statements with subsidiary payable ledger accounts. The tests include selecting a sample and inspecting related documents, inquiring of client personnel, observing client personnel performing control procedures, and the auditors re-performance of certain controls. Control Risk is the risk of a material misstatement in the financial statements arising due to absence or failure in the operation of relevant controls of the entity. More risk means more audit work. CAN be changed by the auditor, is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entitys internal control. Physical control of assets and records: This includes providing safe and secure locations for the assets, tagging furniture and equipment, and having backup procedures for records should they be misplaced or lost in a fire or flood. D. Which of the following characteristics most likely would heighten an auditors concern about the risk of material misstatements in an entitys financial statements? The physical custody of the computer components after receipt should be the task of a third employee. Request the client to schedule the physical inventory count at the end of the year. Evaluate design effectiveness of controls, and confirm whether controls have been placed in operations. Charles Hall. Which of the following controls would be most effective in offsetting this weakness? Collecting such evidence involves identifying specific. In performing the audit of internal control, and you should obtain evidence that internal control has operated effectively for a sufficient period of time, which may be less than the financial statement period (ordinarily a year). Consider whether controls can have a pervasive effect on financial statement assertions. Control risk must ultimately be assessed in terms of financial statement assertions. If you spot a missing invoice number with no void information, you know right off the bat that the company may have sales that havent hit its financial records.

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  • Physical control of assets and records: This includes providing safe and secure locations for the assets, tagging furniture and equipment, and having backup procedures for records should they be misplaced or lost in a fire or flood.

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    Not quite sure what it means to tag a piece of furniture? An auditor should obtain sufficient knowledge of an entitys information system to understand the. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. If both inherent risk and control risk are high, then RMM is high and the auditor would minimize detection risk by performing more reliable auditing procedures, such as confirmation of the terms of large complex sale. Consequently, mail should be opened by which of the following four company employees? After obtaining an understanding of the internal control structure and assessing control risk, an auditor decided to perform tests of controls. I am the quality control partner for our CPA firm where I provide daily audit and accounting assistance to over 65 CPAs. Letters of representations corroborating inventory pricing. Why? Prepare a duplicate listing of checks received. C. Financial Statement Assertions Which of the following should the auditor do when control risk is assessed at the maximum level? Control risk should be assessed in terms of a - Course Hero The auditor performs procedures to understand relevant internal control structure policies and procedures for significant financial statement assertions. After assessing control risk, an auditor desires to seek a further reduction in the assessed level of control risk. The internal controls set in place by the company have the goal of producing accurate and effective reporting.

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    Here are some examples of control activities and the specific procedures that should be in place in an adequate control environment:

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