(Assessing control risk) An auditor is required to obtain a sufficient understan
ID: 2417103 • Letter: #
Question
(Assessing control risk) An auditor is required to obtain a sufficient understanding of each
of the components of an entity’s system of internal control to plan the audit of the entity’s
financial statements and to assess control risk for the assertions embodied in the account
balance, transaction class, and disclosure components of the financial statements.
Required
a. Explain the reasons an auditor may assess control risk at the maximum level for one or
more assertions embodied in an account balance.
b. What must an auditor do to support assessing control risk at less than the maximum
level when the auditor has determined that controls have been placed in operation?
c. What should an auditor consider when seeking a further reduction in the planned
assessed level of control risk?
d. What are an auditor’s documentation requirements concerning an entity’s system of
internal control and the assessed level of control risk?
Please answer all questions please.
Explanation / Answer
a.CONTROL RISK REFERS TO A RISK THAT ERROR OR MISSTATEMENT MAY OCCOUR BUT WOULD NOT BE PREVENTED/DETECTED/CORRECTED BY THE CONCERNS INTERNAL CONTROL SYSTEM.AN AUDITOR WILL ASSESS CONTROL RISK AT MAXIMUM LEVEL IF INTERNAL CONTROL SYSTEM OF THE CONCERN IS NOT EFFECTIVE AND FAILS TO PREVENT AND/OR DETECT ANY ERROR OR MISSTATEMENT IN BOOKS OF ACCOUNTS AND FINANCIAL STATEMENTS.
SUCH SITUATION WILL ARE WHEN THERE IS LACK OF SEGREGATION OF DUTY OR THE CLIENTS SYSTEMS ARE NOT CORRECTLY DESIGNED AND THE RISK OF ERROR OR MISSTATEMENT IS HIGH.
b.INORDER TO SUPPORT ASSESSING CONTROL RISK AT LESS THAN THE MAXIMUM LEVEL WHEN IT IS DETERMINED THAT CONTROLS HAVE BEEN PLACED IN OPERATION THE AUDITOR SHOULD IDENTIFY THE SPECIFIC CONTROLS,PERFORM TESTS OF CONTROLS TO VERIFY EFFECTIVENESS.
c.SEEKING A FURTHER REDUCTION IN THE PLANNED ASSESSED LEVEL OF CONTROL RISK AUDITOR SHOULD EVALUATE WHETHER ADDITIONAL TEST WILL PROVIDE ADDITIONAL EVIDENCE,AND WHETHER IT WOULD BE PROPER TO CONDUCT ADDITIONAL TESTS.
d.AUDITORS DOCUMENTATION:
DESCRIPTION OF TEST OF CONTROLS PERFORMED
DEFICIENCIES DETECTED
EVALUATION OF EFFECTIVENESS OF CONTROL
NATURE ,TIMING AND EXTENT OF SUBSTANTATIVE AUDIT PROCEDURES
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