Modern Auditing:

Assurance Services and the Integrity

of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 11 – Audit Procedures in Response to Assessed

Risks: Tests of Controls
Chapter 11 Overview
 Assessing Control Risk
In assessing control risk, the auditor
must evaluate the effectiveness of :

• Design of internal controls

• Operation of internal controls

Steps in Assessing Control Risk
 Process for Assessing Control
Risk
• Consider Knowledge Acquired from
Procedures to Obtain an
Understanding

• Identify Potential Misstatements

 Process for Assessing Control
Risk
• Identify Necessary Controls
– Nature of controls to prevent or detect and
correct misstatements

– Nature of controls implemented by

management

– Significance of each control

– Risk that designed controls may not operate

effectively
 Control Design for Specific
Assertions
• Completeness Assertion

• Existence or Occurrence Assertion

• Valuation and Allocation Assertion

• Presentation and Disclosure

Assertion
Identify Necessary Controls
 Process for Assessing Control
Risk
• Perform Tests of Controls
– Evidence about effectiveness of the
design and operation of controls

• Evaluate Evidence and Make

Assessment
– Matter of professional judgment
– Identify strengths and deficiencies
– Express quantitatively or qualitatively
 Strategies for Performing Tests
of Controls in an IT Environment
• User Controls

• Application Controls

• General Controls and Manual

Followup Procedures
Overview of Computer Controls
 Computer-Assisted Audit
Techniques (CAATs)
• Auditing through the computer

• Advantageous when:
– Significant part of internal controls is
imbedded in a computer program
– Significant gaps in visible audit trail
– Large volumes of records to be tested
 Types of CAATs
• Parallel Simulation

• Test Data

• Integrated Test Facility

• Continuous Monitoring of On-line

Real-time Systems
Parallel Simulation versus Test
Data
 Continuous Monitoring of On-
Line Real-Time Systems
• Continuous Monitoring

• Audit Hook

• Tagging Transactions

• Audit Log
Methodologies for Meeting the
Second Standard of Fieldwork
 Effects of Preliminary Audit
Strategies
• Primarily Substantive Approaches

• Lower Assessed Level of Control Risk

 Designing Tests of Controls
Designed to evaluate the operating
effectiveness of a control concerned
with:

• How the control was applied

• Consistency with which it was applied
• By whom it was applied
 Nature of Tests of Controls
• Inquiries of entity personnel

• Inspection of items indicating

performance of the control

• Observation of the application of the

control

• Reperformance of the application of the

control by the auditor
 Timing of Tests of Controls
• One Occasion versus Multiple
Occasions

• Timing Issues
– Interim Period

– Remaining Period

– Results from Prior Periods

 Extent of Tests of Controls
• Nature of the Control

• Frequency of Operation

• Importance of the Control

 Designing Tests of Controls
• Staffing Tests of Controls

• Audit Programs for Tests of Controls

• Dual-Purpose Tests
 Additional Considerations
• Assessing Control Risk for Account
Balance Assertions Affected by a
Single Transaction Class

• Assessing Control Risk for Account

Balance Assertions Affected by
Multiple Transaction Classes
Account Balance Assertions and
Transaction Class Assertions
Account Balance Assertions and
Transaction Class Assertions
Documenting the Assessed Level
of Control Risk
• Control Risk Assessed at the
Maximum
– Only the conclusion is documented

• Control Risk Assessed at Below the

Maximum
– Basis for assessment must be
documented
Communicating Internal Control
Matters
• Internal Control Deficiency

• Significant Deficiency

• Material Weakness