1. Learning Objectives LO5 Document an accounting system to identify key controls and weaknesses in order to assess control risk. LO6 Write key control tests for an audit program. LO7 Outline the auditor’s responsibility when internal control evaluation work detects or indicates a significant control deficiency or a high risk of fraudulent misstatement. 1

2. Phase 3 – Testing Controls To reduce final assessment of control risk to a low level and rely on controls, the auditor will:  Determine the required degree of compliance.  100% compliance is not expected.  The auditor determines a level of compliance required for adequate control.  Determine how well the control actually functioned during the period under audit.  I.E. Perform tests of control. LO6 2

3. Test of Controls Procedures A test of controls audit procedure is a two- part statement. 1. Identify the data population from which the sample will be drawn. 2. Express an action to be taken to produce relevant evidence.  Selected item corresponds with a standard, or  selected item agrees with information in another population. LO6 3

4. Direction of the Test of Controls Audit Procedures LO6 4 In order to test for completeness or for existence, the right population must be selected. Population of relevant source documents Financial statements, or other summarizing report Completeness Trace to statements Validity Vouch to shipping documents

5. Testing Controls Testing may involve reperformance, for example recalculating a discount, or inspection, for example looking for a managers initial on a document. Some tests will rely on documentary evidence, for example a shipping document, some control elements, such as segregation leave no documentation. Control tests should be applied to samples that cover the entire period under audit. LO6 5