Question

Explain the purpose of an audit firm undertaking an audit of the design and
effectiveness of internal control procedures.

Answer 1

Audit of the design in effectiveness of internal control procedure is an integral part of any audit engagement. Internal controls are the policies, procedures and practices that the auditee has in place to mitigate risk and ensure operating effectiveness.

For an audit firm it is critical to perform design and effectiveness testing of the auditee's internal control procedures, in order to determine the extent of reliability that can be placed on its internal controls. It is called as test of controls (ToC).

For instance if the audit firm finds that internal controls of the auditee are strong enough, It can place reliance on it and thus resort to reasonable testing instead of extensive checking. On the other hand, if the internal controls are found to be weak, the firm needs to go for extensive testing like increasing its sample size or may be checking the entire population.

So, the entire purpose of test of controls is to plan and determine on the extensiveness of test of details (ToD) i.e substantive and analytical procedures required for the audit.