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Question 1

What are the procedures to obtain an understanding of information systems and internal controls?

Answer 1

Document critical systems (procedure manuals, org charts, flowcharts, interviews, internal audit reports).
Risk assessment of critical systems (identify manual processes, potential errors).
Walkthrough tests (trace transactions from initiation to reporting).
Assess controls:
Evaluate design of controls.
Test operation (if planning to rely on controls).

Question 2

What are the main control testing techniques?

Answer 2

Enquiry (ask staff about controls).
Inspection (check documents for control evidence).
Observation (watch procedures performed).
Reperformance (auditor independently performs control).
Inspect management review evidence (e.g., reconciliations, authorizations).

Question 3

: What are the limitations of internal control?

Answer 3

Management override of controls.
Human error or mistakes.
Collusion (circumventing controls through cooperation).

Question 4

Define a test of control and give examples.

Answer 4

Test of control: Audit procedures designed to evaluate the operating effectiveness of controls in preventing/detecting material misstatements.
Examples:
Observe segregation of duties in cash handling.
Inspect signatures on authorisation documents.
Reperform reconciliation procedures.

Question 5

What is the difference between test of control and substantive testing?

Answer 5

Test of control: Evaluates whether controls are operating effectively.

Substantive testing: Detects material misstatements at the assertion level (regardless of controls).

If controls are strong, auditors may reduce substantive testing.

Question 6

Define financial statement assertions and give standard audit tests.

Answer 6

Assertions for transactions:
Completeness
Occurrence
Accuracy
Classification
Cut-off

Assertions for balances:
Existence
Rights & obligations
Completeness
Valuation & allocation

Audit tests:
Inspection of documents (occurrence).
Tracing to accounts (completeness).
Recalculation (accuracy).
External confirmations (existence).

Question 7

What are computer-assisted audit techniques (CAATs)?

Answer 7

CAATs: Use of computer programs in audits to process or analyze data.

Types:
Audit software: Analyze client data (e.g., sample selection, recalculations).

Test data: Input dummy data to verify system processing.
Embedded audit facilities: Monitor transactions in real time within client systems.

Data mining: Use advanced techniques (AI, stats) to analyze large datasets.