acct3708 - lecture 6 - semester two 2013
TRANSCRIPT
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Lecture Summary
This lecture covers the techniques that auditors
use to test controls
We will cover General control testing requirements in ASA 330
Specific control tests in for manual controls.
Links between tests of controls and assertions
Differences in errors between manual and computer
systems
Specific control tests for computerised controls.
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The Audit Process
An Audit consists of 3 basic steps:
Planning
Assessment of business risk
Assessment of the internal control environment
Evidence Gathering and Evaluation
Tests of controls Substantive tests
Formation of the Audit Opinion
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Evidence Gathering and
Evaluation The framework for evidence gathering and
evaluation is covered in the following standard
ASA 330 The Auditors Responses to Assessed Risks The Objective of the auditor is to obtain sufficient
appropriate audit evidence regarding the assessed
risks of material misstatement through designing
and implementing appropriate responses to theserisks.
(ASA 330.3)
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Tests of Controls
Tests of controls means an audit procedure
designed to evaluate the operating
effectiveness of controls in preventing ordetecting and correcting material
misstatements at the assertion level.
ASA 330.4(b)
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Extent of Testing
In designing and performing tests of
controls, the auditor shall obtain more
pervasive audit evidence the greater thereliance the auditor places on the
effectiveness of a control.
ASA 330.9
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Testing Review Controls
Determine who performs the review
From enquiry or policies and procedures
manuals, determine who does the review andhow frequently.
Observe the review
If it is practical (i.e. not frequent)
Reviews are often indicated by a signature.
Look for signature on sample of documents.
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Testing Reconciliation Controls
Reconciliations (almost) always result in the
preparation of a reconciliation document.
View the document. Check signature of the person who performed it.
Reperform the reconciliation
Check that any adjusting entries have beenmade in the relevant journal.
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Testing Physical Controls
Physical controls involve
Safes, locked storage rooms etc.
Locks, keys, swipe cards and access codes
CCTV and other monitoring devices
Alarm systems
Guards and use of (external) security services
Physical inspection and testing should be
used.
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Tests of Controls Example
To test these controls
Check the policy manual to see if they are required
Enquire of the manager and other staff to see if they arecarried out in practice
Observe the receipt of inventory to see if the control
procedures are carried out
Examine the orders to see if a goods received note isattached and if the order is signed
Observe whether the warehouse is kept locked
These tests must be done throughout the year.
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Tests of Controls Examples
How would you test the following controls?
All customer credit limit increases must be
authorised by the credit manager. All cash is banked on a daily basis.
A fixed asset stocktake is performed on an
annual basis and the results are reconciled withthe fixed assets register, to ensure that all
missing/extra items and write downs are
accounted for.
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Tests of Controls Examples
How would you test the following controls?
All customer credit limit increases must be authorised bythe credit manager. How would you test the followingcontrols?
Look for credit managers signature on documents thatauthorise increases in credit limits.
All cash is banked on a daily basis
Look for daily deposits in the bank statement.
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Internal Controls and Audit
Assertions Auditors are interested in internal controls because they
can reduce potential errors in the financial statements.
If a particular control works, it makes it more likely that a
given assertion will be correct. This means that less substantive testing needs to be carried
out for that assertion.
As noted previously,tests of controls are performed to
determine if the control is operating effectively. i.e: The control must exist, The control must be effective,
The control must be effective during all relevant time periods.
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Internal Controls and Audit
Assertions Example If sales invoices are prenumbered then there
is less chance of sales invoices going
missing. This control can be tested by sequence
testing.
If the control works the will need to be lesssubstantive testing directed at completeness
of sales
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Internal Controls and Audit
Assertions Example If all entries to the payroll journal are initiated by
a timesheet that is signed by the employees
supervisor then there is less chance that entrieswill be made for work that was not done.
This can be tested by checking that there is a
signed timesheet for each entry in the journal.
If this control works, there is less need to testoccurrence of wages expense.
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Fewer Errors
The most common sources of errors, in manual
account systems, are idiosyncratic errors in:
Input, such as entering the wrong amount/details and, Processing, such as poor arithmetic, failure to post from
journal to ledger.
The controls, discussed in the previous lecture, go
a long way to eliminating these, if they are well designed and if they work.
Thus, there are fewer errors in computer systems.
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Testing Strategy
For routine transactions
Errors are rare unless controls are poor
A greater focus on control testing. Substantive testing is limited except where control
weaknesses are found.
For non routine transactions
Errors can be more common as controls arelimited
Less control testing and more substantive testing
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Test Data
This is a very simple approach for testing
input controls.
It involves Inputting data that should be rejected and
seeing if it is.
Inputting data that should be accepted andseeing if it is.
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Test Data - Limitations
There are several problems with the testdata approach.
It can only be done periodically The client knows it is being done so they can
ensure that the control works at that time.
A large number of transactions may be needed
to test the controls in a complex system. It is inconvenient for the client and so they are
loath to allow it.
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Integrated Test Facility
An integrated test facility involves:
Adding a fake entity (such as a fake customer
record) to the clients system. Adding fake transactions (such as fake sales) to
the regular set of transactions.
The fake transactions relate to the fake entity. The results can then be tested to see if these
transactions have been processed correctly.
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Advantages and Disadvantages
It allows control testing to occur throughout theyear.
The transaction processors dont know thetransactions are fake so they cant alter their
behaviour
The auditor must be careful that the faketransactions dont result in real consequences.
Clients dont like having fake entities andtransactions in their system.
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Snapshots
Transactions are electronically tagged
Randomly
Criteria set by auditor When the transaction passes certain points in the
program, the time and transaction data are logged.
This information can be analysed by the auditor tosee how the program processes the transaction.
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Audit Hooks
Audit hooks are exit points in programs that
allow the auditor to insert additional
program code Often supplied by the software manufacturer
Code allows auditor to carry out additional
tests without affecting the transaction flow. Calculation of control totals
Flagging unusual transactions
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Summary
If controls work, the auditor can rely on them to
reduce error and perform fewer substantive tests.
Before a control can be relied upon the auditormust perform tests of controls.
More reliance requires more tests
Tests of controls determine if a control
Exists
Is effective
Is continually effective
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