Preview

Modern Audit Ch10 Solution

Good Essays
Open Document
Open Document
6803 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Modern Audit Ch10 Solution
Chapter 10

Assessing Control Risk / Tests of Controls

|Learning Check |

10-1. a. Assessing control risk is the process of evaluating the effectiveness of an entity's internal controls in preventing or detecting material misstatements in the financial statements.

b. Control risk should be assessed in terms of individual financial statement assertions.

10-2. In assessing control risk for an assertion, the auditor should perform the following five steps: 1. Consider knowledge acquired from procedures to obtain an understanding about whether controls pertaining to the assertion have been designed and placed in operation by the entity's management. 2. Identify the potential misstatements that could occur in the entity's assertion. 3. Identify the necessary controls that would likely prevent or detect the misstatements. 4. Perform tests of controls on the necessary controls to determine the effectiveness of their design and operation. 5. Evaluate the evidence and make the assessment.

10-3. In identifying both potential misstatements and necessary controls, the auditor typically uses either (1) computer software that analyzes responses to specific questions input for computerized internal control questionnaires or (2) checklists developed for the same purpose.

10-4. a. Evidence obtained from procedures to obtain an understanding should be used by the auditor to (1) identify types of potential misstatements and (2) consider factors that affect the risk of material misstatements, such as whether controls necessary to prevent or detect the misstatements have been designed and placed in operation. This knowledge should enable the auditor to make an initial assessment of control risk for an assertion. During this process the auditor may obtain some evidence about the effectiveness of the design and operation of internal controls. However, such evidence rarely is sufficient to allow the

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Understanding internal controls is necessary to plan and complete the audit. The audit is not designed to obtain any type of reasonable assurance about these controls. If any significant deficiencies within the internal control system are discovered during the audit we will express concern to management, and the audit team will be made aware our findings.…

    • 483 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    The three strategies for testing internal controls would first be to assess a control risk based on user controls. This can be done by comparing computer-generated output with the source documents that can support the transactions. The second strategy would be by planning for a low control risk assessment based on application controls. This means that the auditor should test the computer application controls, test the computer general controls, and test the manual follow up of the exceptions noted by the application controls. The last strategy would be planning for a high control risk assessment based on general controls and manual follow up. When an auditor test the general controls they can usually learn about the effectiveness of the design and testing application controls.…

    • 627 Words
    • 3 Pages
    Good Essays
  • Good Essays

    The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. | The students were told by Jones not to spend time reviewing the controls and to simply concentrate on mathematical errors. |…

    • 547 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    13-8 List the steps involved in selecting and evaluating a nonstatistical or a statistical sample for tests of controls. Identify the professional judgments that must be made associated with each step.…

    • 6750 Words
    • 23 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Audit procedures would be conducted more extensively and sample sizes would increase in a situation where assessed control risk and inherent risk were high and analytical procedures indicated…

    • 332 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    The purpose of this audit work program is to assess, at a high level, and validate key controls in place for Information and Communication. Inadequate or ineffective controls in this area may give rise to financial and operational risks.…

    • 948 Words
    • 4 Pages
    Satisfactory Essays
  • Better Essays

    In identifying and assessing the risks of material misstatement, the auditor shall evaluate the degree of estimation uncertainty associated with an accounting estimate. The auditor shall determine whether, in the auditor's judgment, any of those…

    • 1596 Words
    • 5 Pages
    Better Essays
  • Powerful Essays

    Est1 Task 4

    • 1408 Words
    • 6 Pages

    Undertake tests of internal control to ensure that design and operation are consistent with the understanding obtained in the overview in step (i). Test design to determine effectiveness of control when operated properly. Test operation of control to confirm nature, frequency and extent.…

    • 1408 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    The objective of the audit of financial statements is to enable the auditor to express an opinion if the financial statements are prepared in accordance with an identified financial reporting framework. The reason that materiality is allocated to those accounts sampled because materiality represents the magnitude of an omission or misstatement of an item in a financial report. The three function of the audit risk are inherent risk (IR), control risk (CR), and detection risk (DR). Every level of audit risk has an opposite connection that exists between assessed levels of controls, inherent risk, and level of detection risk…

    • 804 Words
    • 4 Pages
    Good Essays
  • Good Essays

    We decided to set Audit Risk High, Inherent Risk low, and Control Risk low. Setting Audit Risk High seems to indicate that we are convinced about the integrity of the management of Sweet Truths. The higher the Audit Risk, the lesser the evidence that has to be gathers by the auditor. Setting Inherent Risk low indicates that the confectionery industry is stable and we do not perceive any risks. The lower the Inherent Risk, the greater the evidence that the auditors needs to gather. Setting Control Risk Low indicates that we are relying on the internal control procedures that are in place in the organization. Control Risk can never be zero since it is advisable for the auditor to avoid placing complete reliance on the internal controls of the firm. Expected Misstatement is the amount of misstatement the auditor believes exists in the…

    • 528 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Alchemy Case Memo

    • 3462 Words
    • 14 Pages

    Assessing the internal control environment, as well as the design of the controls themselves, continues to be an integral step in our auditing process. Without taking the time to understand and assess a company’s controls, not only would the firm not be in compliance with generally accepted auditing standards and the Sarbanes-Oxley Act of 2002, but we would also be unable to provide the comprehensive and reliable audits that the firm’s clients have come to expect.…

    • 3462 Words
    • 14 Pages
    Better Essays
  • Good Essays

    Student

    • 614 Words
    • 3 Pages

    Substantive procedures of a low risk of material misstatement would normally result in strategy where the auditor relies on controls and reduces substantive test. The auditor would confirm the low control risk evaluation by testing controls for effectiveness. High risk material misstatement would result in a more substantive approach with little control testing.…

    • 614 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Auditing

    • 6093 Words
    • 25 Pages

    The risk of incorrect acceptance and the risk of assessing control risk too low relate to the A. Preliminary estimates of materiality levels. B. Allowable risk of tolerable error. C. Efficiency of the audit. D. Effectiveness of the audit.…

    • 6093 Words
    • 25 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Practice Quiz 2

    • 464 Words
    • 4 Pages

    1. ASA 315.A51 (ISA 315.A51) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment includes all of the following as components of internal control except:…

    • 464 Words
    • 4 Pages
    Satisfactory Essays
  • Better Essays

    The audit risk model is composed of four risks. The planned detection risk is a factor of inherent risk, control risk, and acceptable audit risk. Planned detection risk is the risk the auditor fails to detect misstatements and will increase or decrease dependent on the level of risk in the other three factors. If the auditor determines it is expected that misstatements is highly likely than inherent risk increases and create a higher demand for evidence. As the same with control risk, the weaker the internal controls the higher the planned detection risk will be. Acceptable audit risk on the other hand the lower the risk the lesser amount of evidence will be needed.…

    • 1087 Words
    • 5 Pages
    Better Essays