13 4 tests of controls are audit procedures to test

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13-4 Tests of controls are audit procedures to test the operating effectiveness of control policies and procedures in support of a reduced assessed control risk. Examples include: 1. The examination of vendor invoices for indication that they have been clerically tested, compared to a receiving report and purchase order, and approved for payment. 2. Examination of employee time cards for approval of overtime hours worked. 3. Examination of journal entries for proper approval. 4. Examination of approvals for the write-off of bad debts. Substantive tests of transactions are audit procedures testing for monetary misstatements to determine whether the six transaction-related audit objectives have been satisfied for each class of transactions. Examples are: 1. Recalculation of amounts (quantity times unit selling price) on selected sales invoices and tracing of amounts to the sales journal. 2. Examination of vendor invoices in support of amounts recorded in the acquisitions journal for purchases of inventories. 3. Recalculation of gross pay for selected entries in the payroll journal. 4. Tracing of selected customer cash receipts to the accounts receivable master file, agreeing customer names and amounts. 13-5 A test of control audit procedure to test that approved wage rates are used to calculate employees' earnings would be to examine rate authorization forms to determine the existence of authorized signatures. A substantive test of transactions audit procedure would be to compare a sample of rates actually paid, as indicated in the earnings record, to authorized pay rates on rate authorization forms. 13-6 The auditor resolves the problem by making assumptions about the results of the tests of controls and performing both the tests of controls and substantive tests of transactions on the basis of these assumptions. Ordinarily the auditor assumes an effective system of internal control with few or no exceptions planned. If the results of the tests of controls are as good as or better than the assumptions that were originally made, the auditor can be satisfied with the substantive tests of transactions, unless the substantive tests of transactions themselves indicate the existence of misstatements. If the tests of controls results were not as good as the auditor assumed in designing the original tests, expanded substantive tests must be performed. 13-2
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13-7 The primary purpose of testing sales and cash receipts transactions is to evaluate the internal controls so that the scope of the substantive tests of the account balances may be set. If the auditor performs the tests of details of balances prior to testing internal controls, no benefit will be derived from the tests of controls. The auditor should attempt to understand the entity and its environment, including internal controls, as early as practical through the analysis of the accounting system, tests of controls, and substantive tests of transactions.
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  • Spring '08
  • Brady,J
  • Controls, substantive tests

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