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.

Answer 1

The initial assessed control risk would influence the test of controls and simultaneously the substantive test of transactions of cash disbursements. The initial assessment of control risks if shows that the control risk is relatively low then the test of controls would be relatively simple with more emphasis on the substantive tests on cash disbursement transactions. However, in case the initial assessment of control risk shows that the control risk is high then the test of controls as well of substantive test cash disbursement transactions all shall be specifically done to ensure that the overall risk of cash and cash transactions is low. The test of controls would be detailed in case the control risk is high. Simultaneously the substantive test of cash disbursements would also be very strict. The test of cash balances would be done irrespective of the initial assessment of control risk.

Example:

In case the internal controls in cash disbursement assessed to be very weak then the test of cash balances will obviously be more frequent and detailed compare to the time when the initial assessment of control risk shows that the control risk is very low.