When appropriate Substantive

"Internal control expected to be jtlnternal control expected to beReliance strategy

strategy
relativel ineffective>l relatively"effective .0
~cost effective to rely on in- IlCost effective to rely on internal
ternal control t reduce sub- control to reduce substantive

Control risk
stantive testing
Set ~t maximu~
testing
--
Set below maximum"

Tests of controls I (N~equired Required

Detection risk Relativel~ Relatively hig~

Substantive testing Must bee effective Can beQes~effective

Focus on
Internal Control - Module 2 48

-: ~,()7' Understanding the Design of Internal control

~.Y'
An understanding of the design allows n auditor@;assess how internal control is intended to
function
\!-t9 --) The auditor must understand each of the 5 components@);
·1 Identify types of potential misstatements
·2 Consider factors that affect the risk of material misstatement
·3 Design substantive tests
To accomplish this, the auditor must perform procedures that will provide knowledge of
·4 The design of controls for each of the 5 components as they relate to the financial state-
ments .
·5 Whether controls have been placed in operation and are being used by client

Focus on
Internal Control - Module 2 49

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