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(a) Define tests of controls, substantive procedures and walk-through tests. (b) Explain how assessment of systems and controls impacts upon the main stages of the...

a) Define tests of controls, substantive procedures and walk-through
tests.
(b) Explain how assessment of systems and controls impacts upon the
main stages of the audit process
(c) Explain the role that internal control questionnaires and internal
control evaluation questionnaires play in determining the effectiveness
of the systems of internal control.

Answers

(a) Tests of control are tests to obtain audit evidence about the effective
operation of the accounting and internal control systems, that is, that
properly designed controls identified in the preliminary assessment of
control risk exist in fact and have operated effectively throughout the
relevant period.

Substantive procedures are tests to obtain audit evidence to detect
material misstatements in the financial statements. They are generally
of two types:
(a) analytical procedures
(b) other substantive procedures, such as tests of details of transactions and balances, review of minutes of directors meetings and enquiry.

Walk through tests involve tracing one or more transactions through the accounting system and observing the application of relevant
aspects of the internal control system.
(b) (i) The first stage in any audit should be to determine its scope and the auditors general approach and preferably to draw an audit programme.
(ii) The objective of the next stage of an audit is to determine the flow of documents and the extent of controls in existence within the clients systems.
Determining the mechanics of a system is frequently achieved by performing walk through tests.
(iii) The next stage is to prepare a comprehensive record (using
ICQs and flow charts) of the clients systems to facilitate the
evaluation of those systems.
(iv) Having confirmed the clients systems auditors should then evaluate
the systems after which they will be able to recommend
improvements to the systems as required.
(v) If the controls are assessed as being effective, it will be necessary to
select and perform tests designed to establish compliance with the
systems. It is necessary for the auditors to check that the controls are
as effective in practice as they are on paper by carrying out tests of
controls. The conclusion drawn from the results of a test of control
may be either:-
(i) That the controls are effective in which case the auditors will only
need to carry out restricted substantive procedures.
(ii) That the controls are ineffective in practice, although they had
appeared strong in theory, in which case the auditors will need to
carry out more extensive substantive tests.
(iii)If the controls are assessed as being ineffective, the auditors
should move straight to a programme of full substantive
procedures. This tests are designed for two purposes:
a) To support the figures in the financial statement
b) Where errors exist, to assess their effect in monetary terms
(c) The major question which internal control questionnaires are
designed to answer is „How good is the system of controls?? Its
primary purpose being to evaluate the system. One of the most
effective ways of designing an internal control questionnaire is to
phrase the question so that all the answers can be given as YES or
NO, when a NO, will indicate a weakness in the system.
Whereas internal control questionnaires tend to ask separate
questions in relation to each individual aspect of internal control,internal control evaluation questionnaires tend to concentrate on key
questions.
Internal control questionnaires and internal control evaluation
questionnaires both have an important role to play in the evaluation
of systems. ICQs have the added advantage that they can infact help
to document the system as well, whereas internal control evaluation
questionnaires are perhaps more useful in focusing attention on the
more important aspects of control systems.

johnson mwenjera answered the question on March 30, 2018 at 07:05

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