Question

12. Enumerate, in chronological order, the steps followed in the study and evaluation of internal controls. Explain each step briefly.

13. What is a transaction walkthrough?

14. What are the different ways by which an understanding of controls is documented?

15. When is the control risk assessment High? Less than high?

16. How does a high control risk assessment affect the planned audit approach?

17. Give examples of responses to the assessed risk of material misstatement.

Answer 1

12.   Enumerate, in chronological order, the steps followed in the study and evaluation of internal controls. Explain each step briefly.

                                I.            Determine the types and the extent of controls being used by the client.

                             II.            Determine which of these controls the auditor intends to rely upon.

                           III.            Determine which audit procedures should be expanded or minimized.

                          IV.            Provide recommendations to the client regarding how to improve the internal controls.

14.   What are the different ways by which an understanding of controls is documented?

·         Flow charts.

·         Narrative descriptions

·         Internal control questionnaires

·         Risk and Control Matrices

·         Policy and procedure manuals

·         Sound documentation

13.   What is a transaction walkthrough?

·         This is a procedure performed by an auditor to trace the audit trail of the company from inception to the end of the transaction.

15.   When is the control risk assessment High? Less than high?

·         The control risk assessment is high when the company doesn't have effective internal controls to prevent fraud and misstatements. It is less than high when the company has effective internal controls to prevent fraud and misstatements.

16.   How does a high control risk assessment affect the planned audit approach?

·         A high control risk assessment increases the scope of audit in the planned audit approach.

17.   Give examples of responses to the assessed risk of material misstatement.

·         Conducting more audits procedures.

·         Performing more substantive procedures to obtain more evidence.

·         Increasing the scope of audit.