At point c 2 the auditor performs some tests of

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At point C 2 , the auditor performs some tests of controls and is able to reduce control risk below maximum. Point C 2 would be appropriate if it is cost beneficial for the auditor to obtain assurance at a level between the two extremes mentioned above (C 1 and C 3 ). 13-15 By identifying the best mix of tests the auditor can accumulate sufficient appropriate evidence at minimum cost. The auditor can thereby meet the standards of the profession and still be cost effective and competitive. 13-16 The four-step approach to designing tests of controls and substantive tests of transactions is as follows: 1. Apply the transaction-related audit objectives to the class of transactions being tested. 2. Identify specific control policies and procedures that should reduce control risk for each transaction-related audit objective. 3. Develop appropriate tests of controls for each key control. 4. Design appropriate substantive tests of transactions considering deficiencies in internal control and expected results from 3 above. 13-17 The approach to designing tests of controls and substantive tests of transactions (Figure 13-4) emphasizes satisfying the transaction-related audit objectives developed in Chapters 6 and 10. Recall that these objectives focus on the proper functioning of the accounting system. 13-5
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13-17 (continued) The methodology of designing tests of details of balances (Figure 13-6) emphasizes satisfying the balance-related audit objectives developed in Chapter 6. The primary focus of these objectives is on the fair presentation of account balances in the financial statements. The extent of testing depends, in part, on the results of the tests of controls and substantive tests of transactions. 13-18 It is desirable to design tests of details of balances before performing tests of controls and substantive tests of transactions to enable the auditor to determine if the overall planned evidence is the most efficient and effective in the circumstances. In order to do this, the auditor must make assumptions about the results of the tests of controls and substantive tests of transactions. Ordinarily the auditor will assume no significant misstatements or control problems in tests of controls and substantive tests of transactions unless there is reason to believe otherwise. If the auditor determines that the tests of controls and substantive tests of transactions results are different from those expected, the amount of testing of details of balances must be altered. 13-19 If tolerable misstatement is low, and inherent risk and control risk are high, planned tests of details of balances which the auditor must perform will be high. An increase in tolerable misstatement or a reduction of either inherent risk or control risk will lead to a reduction in the planned tests of details of balances.
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  • Spring '08
  • Brady,J
  • Controls, substantive tests

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