Exam 7: Understanding and Testing the Clients System of Internal Controls

Correct Answer:

Verified

The internal control objectives are matched with the relevant assertions as follows:
Real - there are controls in place to ensure that fictitious or duplicate transactions are not included in the books and records of the organization (occurrence, rights and obligations, and existence assertions).
Recorded - there are controls in place that will prevent or detect the omission of transactions from the books and records of the organization (accuracy, completeness, and valuation and allocation assertions).
Valued - there are controls in place to ensure that the correct amounts are assigned to the transactions (accuracy, and valuation and allocation assertions).
Classified - there are controls in place to ensure that transactions are charged and allocated to the correct general ledger account (accuracy, classification, and valuation and allocation assertions).
Summarized - there are controls in place to ensure that the transactions in the books and records are summarized and totalled correctly (accuracy, and valuation and allocation assertions).
Posted - there are controls in place to ensure that the accumulated totals in the transaction file are correctly transferred to the general ledger and subsidiary ledgers (accuracy, classification, and valuation and allocation assertions).
Timely - there are controls in place to ensure that transactions are recorded in the correct accounting period (cut-off and completeness assertions).

Correct Answer:

Verified

In determining whether there is a need for additional detailed tests of controls, the following factors are considered:
Results of enquiries and observations. If, during their enquiries or observations later in the audit process, the auditors identify that significant changes to processes and controls have occurred, their previous tests of controls may no longer provide a basis for relying on those controls. Therefore, they may need to identify and test other controls, perform additional tests of controls or increase the level of substantive testing performed at year-end. Changes to processes or controls are only significant if they have implications for the continued functioning and effectiveness of controls on which the auditor is relying in the first place.
Evidence provided by other tests. Tests of account balances (substantive testing) can often provide evidence about the continued functioning of controls. For example, when the auditor examines vendors' invoices in support of year-end accounts payable and expense account balances, they learn whether controls relating to the recording of these transactions continue to function. To the extent that their other audit procedures provide evidence of the effectiveness of controls from the date of interim work to the end of the period under audit, additional tests that otherwise might be necessary can be reduced.
Changes in the overall control environment. An effective entity-level control environment may allow the auditor to limit their tests of controls to enquiry and observation during the period between when they tested the controls (interim) and year-end. If they become aware of adverse changes in the overall control environment of the entity, such as a loss of employees and key management who perform key controls and who provide evidence as to the effectiveness of the overall entity control environment, additional tests of controls may be necessary.