Question

Max is an auditor on the low end limited engagement for the year
ended 30 June 2012. Jordan has performed a number of tests in relation to accounts
payable.
Selected a number of suppliers' invoices and checked that the pricing and discount
terms have been reviewed and authorized by the purchase manager. Three out of 20
invoices tested had not been authorized and incorrect discounts were recorded for
these invoices. A follow-up of the three samples with deviations did not highlight a
pattern of specific reason for the errors. Jordan accepted the result as the errors in
discounts claimed were immaterial. Identify whether this is a test of control or substantive test of detail and discuss why
the conclusion reached is appropriate or inappropriate.

Answer 1

The given case is of a Test of Control.

Test of controls is an audit procedure to test the effectiveness and efficiency of a control used by a client entity to prevent or detect material misstatements.The test of controls can be classified into the following:

• Reperformance
• Observation
• Inspection
• Recalculation and reperformance
• Enquiry and confirmationf

In the given case the auditor insoected the invoices as an test of control measure to determne the nature , timing and extent of substantive procedures to be performed.

The conclusion reached byy the auditor in the given case is that the errors are immaterial. The conclusion is purely dependent upon the professional judgement of the auditor. If the discounts were of small amounts then it may seem immaterial but at the same time , large number of small transactons would lead to a great misstatement.

hance the conclusion of the auditor is inappropriate.