Question

Discuss the relationships among the initial assessed control risk, test of controls, and substantive tests of transactions for cash disbursements, and the tests of details of cash balances. Provide one example in which the conclusions reached about internal controls in cash disbursements will affect the tests of cash balances. 

Make recommendations about when to test for further material fraud.

Answer 1

The initial assessed control risk is defined as the assessment of the effectiveness of the controls implemented within the organisation. The auditor frams an opinion whether the controls are weak or good.The test of controls are the audit procedure to determine whether or not the controls of the entity are effective to perevent or detect material misstatements. The auditor on the basis of this determines about his reliance on such controls.The substantive tests of transactions for cash disbursements help to identify whether the details related to the cash disbursements are valid, accurate and complete. This helps the auditor to form an opinion regarding the reliability of the details and determine if any modifications are required.The tests of details  of cash balances helps the auditor to determine any fraud risk factors that results in material misstatements in the cash balances.

The conclusions reached about internal controls in cash disbursements will affect the tests of cash balances : For example, if the auditor determines during his substantive procedures that many transactions of cash disbursements are not recorded or recorded incorrectly. However, he notices that the cash balances ahve been reconciled in the books,this will help him be assured that there are farud risk factors involved and the management has window dressed the balances.