Unit 8 Flashcards
Prior to testing internal controls what must an auditor do?
document their understanding of them.
What are the most common forms of documentation?
- Narratives
- Flowcharts
- Combinations of narratives and flowcharts
- Checklists and preformatted questionnaires
What are Narrative documentations?
- The most common form of documentation.
- Best used with smaller entities where accounting and internal controls are relatively simple and straightforward.
- The auditor describes, in words, each step of the transaction from start to finish.
What are Flowchart documentations?
- Best used in larger and more complex environments.
- The auditor summarizes in text boxes each step of a transaction from start to finish.
- Takes longer to prepare than a narrative.
- Provides a visual representation of the flow of the transaction and the key controls in place.
- Easy for the reader or reviewer to understand.
What are combinations of narrative and flowcharts documentations?
Typically a page divided into two sections with the process flowchart in one section and the narrative describing each step in the other section.
-The flowchart highlights the key activities from initiation to reporting, while the narrative contains the details about what happens in the flow of the transaction.
What are Checklists and preformatted questionnaires
documentations?
- Another technique used to systematically identify the most common types of internal controls that should be present.
- Useful in industries that the auditor is not familiar with.
- Useful when less experienced auditors find it difficult to identify the critical internal controls.
What must the auditor do after internal controls are documented?
the auditor must decide which controls to test and how much audit testing to perform.
What controls will the auditor select to be tested?
- The auditor will select controls that provide the best evidence of the operating effectiveness of the control, with the least amount of testing required.
- To improve efficiency, the auditor will only test those controls they believe are critical or key to their opinion (key controls).
What are key controls?
Key controls are those controls that are most likely to prevent material misstatement and detect material misstatement if it occurs.
How much testing does an auditor need to do?
- The frequency of the control: the less frequently a control is performed, the fewer instances of the control there are to test.
- The degree to which the auditor intends to rely on the control as a basis for limiting their substantive tests: the greater the degree of intended reliance, the greater the amount of testing required.
- The need to be satisfied that the control operated as intended throughout the period of reliance: for controls where evidence of its operating effectiveness is required throughout the year, the greater the amount of testing required.
What is it called when a control has not performed as intended?
Control exception
What methods are there to test controls?
- Inquiry
- Observation
- Inspection of physical evidence
- Re-performance
What is inquiry testing?
Involves the auditor asking questions to determine how the control is performed and whether the control appears to have been carried out properly and on a timely basis.
What is observation testing?
Involves the auditor observing the actual control being performed.
What is Inspection of physical evidence testing?
Involves the auditor testing the physical evidence to verify that a control has been performed properly.
