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08 Test Controls PDF

The auditor tests controls to determine if they can rely on a client's control systems rather than using a purely substantive audit approach. Control testing is mostly done for public companies that have dedicated internal control functions, while private companies are often audited using a substantive approach due to their smaller size. The auditor tests controls by selecting random transactions and tracing them through the system to ensure controls operated effectively throughout the year.

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Qaiser Khan
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85 views1 page

08 Test Controls PDF

The auditor tests controls to determine if they can rely on a client's control systems rather than using a purely substantive audit approach. Control testing is mostly done for public companies that have dedicated internal control functions, while private companies are often audited using a substantive approach due to their smaller size. The auditor tests controls by selecting random transactions and tracing them through the system to ensure controls operated effectively throughout the year.

Uploaded by

Qaiser Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Testofcontrols

Itiscommonfortheengagementteamandclienttoholdapreliminarymeetingbeforeanauditbegins. Oneoftheitemsdiscussedatthismeetingiswhethertheclient'scontrolsystemsareeffective.Ifso, theauditorwillplantotestcontrols.Otherwise,theengagementapproachwillbepurelysubstantive. Controltestingismostlydoneforauditsofpubliccompanies.Publiccompanieshavedepartments dedicatedtotheimplementationandevaluationofcontrolsystems,suchasinternalaudit.Also,public companiesarelargeandprocessmanytransactions,makingitverydifficulttoachievesufficientdollar coverageforsubstantivepurposes.Controltestingisrarelydoneforownermanagedorprivate companiesbecauseasubstantiveauditapproachismoreefficientforsmallerclients. BeforetheauditorcantestmanualandITapplicationcontrols,theITauditgroupmusttestITgeneral controls.ITgeneralcontrolsincludelogicalandphysicalaccesscontrols,changemanagementcontrols andsecuritycontrols.Applicationandmanualcontrolsdependonenvironmentalcontrols,soifIT generalcontrolsareineffective,theauditorisunabletoplacerelianceonthesystems.Mostprivate companiesdonothaveITgeneralcontrolsystemssuitablefortheauditor'sreliance. Theauditortestscontrolsinthesamewayawalkthroughisperformed,byreviewingthehistoryof documentationthatconnectsthetransactiontotheclient'sgeneralledger.Normally,2436transactions arebetested.Twoorthreetransactionsareselectedfromeachmonthtoensurethatcontrolsoperated effectivelythroughouttheyear. Unlikesubstantivetesting,transactionsareselectedforcontroltestingatrandomregardlessofthedollar value.Also,anequalnumberoftransactionsareperformedtoverifyoccurrenceaswellas completeness.Occurrencetestinginvolvesselectingtransactionsfromthegeneralledgerandtracing themtosourcedocuments.Thiswastheapproachusedforthewalkthroughsinthepreviousarticle. Completenesstestinginvolvesselectingtransactionsfromsourcedocumentsandandtracingthemto thegeneralledger. Iftheauditorencountersanerrorincontroltesting,theywillfirstconsiderwhethertheerroris systematicorisolated.Systematicerrorsnormallyhaveapervasiveimpactonthecontrolsystem,so theauditorwillnotbeabletorelyoncontrolsunlessacompensatingcontrolisidentifiedandtested.If theerrorisisolated,theauditorwillexpandtheirtestingsampleby35transactions.Ifthelarger samplesizedoesnotyieldanyadditionalerrors,thecontrolsystemisconsideredeffective.

2009myCAsite.com

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