Lecture 7
Test of Controls
Sales are initiated by customer order Shipping document +
invoice follow sale, recorded both in a text file (sale) + summary in
customer master file (for A/R)
Sales Journal posts to the A/R Subsidiary Ledger
o A/R Subsidiary Ledger is used to produce an aged A/R trial
balance
Online Systems
1. Transactions may be recorded without source documents because it
is all electronical
2. Therefore, tracking becomes important for all transactions
3. Focus is on the prevention of errors
4. Input edit process check for valid customer data and
reasonableness
5. Use of passwords to separate transaction entries from master file
entries (For example, Updating of credit limits)
Major Problem of Online Systems: Early recognition of Revenues
Controls over recognition of revenues need to be assessed
Consequently, there will be increased testing required of the
assertions that affect revenue recognition
General Controls
Prior to auditing individual transaction cycles, the auditor
documents pervasive general controls that affect multiple
transaction cycles
If the general controls are good, auditor may rely upon and test
interdependent or fully automated controls
If the general controls are bad, auditor may rely on manual
controls or conduct a substantive approach audit
o Manual Controls: Controls performed only by people
o Automated Controls: Controls performed only by computer
system
o Interdependent controls: Rely on computer processes
(automated) by someone that must also be involved to fully
perform the control
Manual Control
Key Control: Credit is approved before shipment takes
places. Sales manager initiates all sales order > $25
(Occurrence)
Possible TOC: Examine samples of sales orders to determine
if sales manager’s initials appear Automated Controls
Key Control: Orders causing balances to exceed credit limits
are held in a separated transaction file and not processed for
shipment
Possible TOC: Print-out the day’s on hold sales and view the
printout to ensure that all orders on printout caused
customers credit limit to be exceeded
Interdependent Controls
Key Control: Orders causing balances to exceed credit limits
are printed on an exception report and must be approved by
credit manager prior to shipment by means of entering a
password
Possible TOC: Review an exception report and ensure that
all sales orders caused customers’ limits to be exceeded +
discuss with sales manager process followed + release the
held orders
What if Control Testing Yield many Errors?
1. Determine if errors are due to particular circumstances or
restricted to specific time period
2. If errors are systemic, auditors looks for compensatory
controls if alternative control achieves same purpose and is
functioning correctly, auditor can still rely on control
3. If there are no compensating controls, determine if there is a
potential for this weakness to result in a material error
4. If immaterial error could result, you may need to extend TOD,
but you need to report to management
5. If material error could result, extend TOD, need to be
sufficient to provide a reasonable estimate of the extent of
error, report to management and to audit committee
Computer Assisted Audit Test (CAAT)
Large number of tr
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