AUD

• Tests of controls are used to test whether controls are operating effectively
• Tests of controls are necessary if the auditor plans to assess the level of control risk at minimum
• The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level

  The second risk is detection risk where material misstatements that occur will not be detected by the audit
• The auditor is required to perform tests of controls when the auditor’s risk assessment includes an expectation of the operating effectiveness of controls
• An auditor intends to perform tests of control on a client’s cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by observation
• The auditor is required to perform tests of controls when substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level
• Factors to assess control risk in terms of financial statements assertions
• Tests of controls are not necessary if the auditor plans to use the primarily substantive approach
• When the risks of material misstatement are high, an auditor should increase the amount of substantive testing
• Risk assessment procedures performed to obtain an understanding of an entity’s internal control also may serve as tests of controls
• An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes controls are unlikely to pertain to the assertions
• When an auditor increases the planned assessed level of control risk because certain controls were determined to be ineffective, the auditor would most likely increase the extent of tests of details
• Regardless of the assessed level of control risk, an auditor would perform some substantive tests to restrict detection risk for significant transaction classes