Question

Section 4, Audit Tests The reading in Chapter 13 (p. 402-407) describes five types of audit tests of financial statements: (1) Risk Assessment Procedures (2) Test of Controls (3) Substantive Tests of Transactions (4) Analytical Procedures (5) Tests of Details of Balances. In 350- to 700-words: Identify which tests are best suited for the company you selected and why. Explain why some tests are not suitable.

Answer 1

The company select for this company is an IT company say Apple . The best audit test of financial statements for such a company is Test of control .

Test of control may be defined as an audit procedure designed to evaluate the operating effectiveness of internal control in preventing and detecting and correcting , material misstatement at the assertion level .

Test of control comprise of 4 components :
1) Reperfomance
2) inquiry
3) Inspection
4) Re computation

The test of control is best because such test is used to get a better understanding of such IT company and its internal control so as to find whether in such highly automated sector internal control is working appropriately and sufficiently or not so as to obtain an assurance that the auditor can rely on financial statements. If they get a negative response they will do further audit procedure and will change their opinion to " not to rely on financial statements" . Test of control 4 components helps to check all the details appropriately and if any material misstatement is present it can be detected and corrected .

The other audit test are not appropriate as test of control because as in an automated environment the transaction are complex and vast . So the other audit procedure can only used to check the accuracy whether the Balances and other details are appropriate but whether the internal control is appropriate and sufficient can be only detected by internal control .
For example : 1) substantive audit procedure is mainly concerned with accounting statement accuracy and is not concerned with whether all entries that have occurred are recorded or not .

2) Tests of details are used by auditors to collect evidence that the balances, disclosures, and underlying transactions associated with a client's financial statements are correct.

Hence the test of control is the most appropriate audit test of material misstatement of an IT company since it can detect all the error which can not be done by other audit test .

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