Chap 8

Examples of detect controls:

-

Mgmt lv reviews are made of actual performance vs budgets, forecasts, prior periods, competitors
and industry benchmark. Mgmts actions in analysizing and following up on unexpected
variances is a detect control.
o The financial controller may review the monthly results and compare the number of days
sales outstanding to previous periods to ensure any allowance for doubtful debts is
reasonable.
Performance indicators related different sets of data, operation or financial, to each other. These
indicators, together with an analysis of the relationships and the subsequent follow up of
anomalies, are also control activities. For example: purchase price variances, stock ordered but
not yet manufactured and percentage of sales returned compared to total sales orders. By
investigating unexpected result or unusual trends, the client identify issues in the underlying
procurement and manufacturing processes.
Reconciliations are prepared, reconciling or unusual items are then investigated, and issues are
resolved or corrections made. The performance of reconciliations without following up on
reconciling or unusual items is not a control. The control is the follow-up. For example: the bank
reconciliation reconciles the bank statement to te cash recorded in the general ledger The trade
debtors reconciliation reconciles sales recorded in the trade receivables subsidiary ledger to the
trade receivables recorded in the general ledger,
Review of exception reports: Reports are automatically produced showing transactions/groups of
transactions that fall outside a set of parameters selected by the client. These exceptions are then
reviewed and followed up. For example, a report maybe produced that shows all sales made to a
customer who has exceeded its credit limit. The credit manager then follows up these sales with
the salesperson to ensure no further sales are made until the balance is brought below the credit
limit. Alternatively, if necessary a reevaluation of the customers credit limits is performed to
increase it.

Chap 7
Factor
1. An increase in the extent to which the auditors risk assessment takes
into account relevant controls => Auditor increases testing of that
control to ensure it effective.
2. An increase in the tolerable rate of deviation
=> if auditor relies heavily on control, set lower tolerable rate, sample
size increases
=> if auditor relies heavily on sub pro, set higher tolerable rate, sample
size decreases
3. An increase in the expected rate of deviation of the population to be
tested => if auditor set the higher rate of deviation (due to changes: new
staffs, new programs), increase sample size
4. An increase in the auditors desired level of assurance that the
tolerable rate of deviation is not exceeded by the actual rate of deviation
in the population => control risk set at low, high level of confidence,
increase sample size
5. An increase in the number of sampling units in the population
=> no difference since procedures are all same.

Effect on sample size

Increase

Decrease

Increase

Increase

Negligible

Factor
1. An increase in the auditors assessment of the risk of material misstatement =>
high control and inherent risk, high risk of MM
=> more sub test=> increase size
2. An increase in the use of other substantive procedures directed at the same
assertion => less reliance on evidence provided by one test alone, smaller size
3. An increase in the auditors desired level of assurance that tolerable
misstatement is not exceeded by actual misstatement in the population
=> higher control and inherent risk, low detection risk
=> greater confidence on sub pro
=> increase size
4. An increase in tolerable misstatement
=> not relying on that particular test to provide all of the evidence required for a
particular assertion
=> reduce sample size
5. An increase in the amount of misstatement the auditor expects to find in the
population => gain a better estimation of the actual misstatement in the population
=> increase sample size
In the case whereby:
- Acc required estimation: provision for doubtful debt
- Acc required complex calculation: forex
- Difficult valuation technique: fair values
- Control risk is high
6. Stratification of the population when appropriate
=> more efficient sampling and reduce sample required.
7. The number of sampling units in the population

Effect on sample size

Increase

Decrease
Increase

Decrease

Increase

Decrease
Negligible

The difference between tests of controls and substantive procedures

Tests of controls:
- Provides evidence that an internal control
procedure exists and is effective
- Nature: to reperform certain procedures,
inspect doc for evidence of procedures
carried out by client personnel and observe
client personnel performing control
procedures.

Substantive procedures:
- Details tests of transactions, balances and
analytical procedures.
- The lower the risk of material
misstatement, the more reliance placed
upon more efficient, less costly, analytical
procedures.
- The auditor needs to spend time on testing
the assertions most at risk of MM for each
transaction class and acc bal.

Nature of audit testing:

-

are the purpose of the test ( that is, to test controls, transactions or acc bal) and
the procedure used (that is, inspection, observation, enquiry, confirmation, recalculation, reperformance or analytical procedures)
and depends on the assertion being tested.
The higher the risk of MM, the more reliance placed on substantive pro, the greater the use of
audit procedures that access the most persuasive audit evidence

Timing of audit testing:

The stage of the audit when procedures are performed and the date, such as within or outside the acc
period, that audit evidence relates to.
Interim audit:
-

Initial visit to a client before year end, where planning takes place.

The higher the risk of MM, the greater the reliance on testing conducted close to year-end.
Tests of controls
Substantive testing of
transactions
Low-risk acc

Interim
Begin
Begin

Year end
Extended
Extended

More work on TOC and Sub Test

Less work on Sub Test

More work on Sub Test
At, or after year end
Spend most time conducting
detailed sub test
Yes

High-risk acc

Inventory counts
Extent of audit testing:

The amount of audit evidence gathered when testing controls and conducting detailed sub pro.
Tests of controls

Substantive procedures

Control risk is low

Control risk is high

Increase reliance
Extent the tests
Little or no test

Reduce reliance
Increase reliance
Increase reliance
Extent the pro

Audit working paper:

Includes:
-

Client name
Period under audit
Title describing the content of the working paper
File reference indicating where the working paper fits in the audit file
Initials identifying the preparer of the working paper together with the dates the working paper
was reviewed
Cross-referencing between working papers indicating where further work and evidence is
summarized elsewhere.