Can the Auditor exclude controls from the relevant risk assessment?
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Peer Review results indicate that some auditors believe they can default control risk assessments to "maximum" without any consideration of their client's controls. But is this the right approach? Many will be shocked to learn that the answer is "no." Show
Auditors should not default to any level of control risk. An auditor should have a reasonable basis for his or her assessment of control risk, regardless of the assessment level. Defaulting to a control risk assessment of "maximum" without evaluating the design and implementation of relevant controls could lead an auditor to failing to identify risks that are relevant to the audit. The evaluation of the design of controls and the determination of whether the controls are implemented provide the basis for designing an effective response to the risk of material misstatement. The auditor's strategy may or may not include testing the operating effectiveness of controls. In other words, a substantive audit approach may be implemented as long as your audit procedures are responsive (and linked) to the assessed risks of material misstatement. Peer Review results also indicate that some auditors believe they can lower their control risk assessment without testing whether the controls are operating as designed, but that's not true. If the auditor's response (i.e., substantive procedures) to the assessed risk of material misstatement is based on an expectation that controls are operating effectively, then the auditor is required to perform tests of the controls upon which reliance is placed. Evaluating control design and implementation is not the same thing as testing the operating effectiveness of those controls. Many auditors confuse the terms "implementation" and "operating effectiveness," but as paragraph .A77 of AU-C Section 315 states, "obtaining audit evidence about the implementation of a manual control at a point in time does not provide audit evidence about the operating effectiveness of the control at other times during the period under audit." Misstep No. 5: Failing to link further procedures to control-related risksOnce the auditor has assessed the risks of material misstatement including risk associated with the client's internal control, his or her next step will be to design and perform further audit procedures that are responsive to the client's risks. The auditor should not simply perform the same procedures that were required for another client in the same industry or even those audit procedures performed in the prior year. To illustrate, consider two clients in the manufacturing industry. For both clients, the auditor has assessed the risks of material misstatement related to the rights and obligations assertion in the accounts payable balance as maximum. Client A's bookkeeper records all invoices in the accounting system once the invoice is received. Because the invoices are not matched to a purchase order or otherwise reviewed to confirm their validity, the auditor determines that Client A's controls over the recording of accounts payable are ineffectively designed. A specific concern is the risk of recording fictitious invoices. Alternatively, Client B's bookkeeper records all invoices for authorized purchase orders in the accounting system when the invoice is paid. Because recording of invoices is delayed until payment occurs, the auditor determines that Client B's controls are ineffectively designed because a risk of unrecorded liabilities exists. While both clients are in the same industry and both have maximum risks of material misstatement related to the accounts payable rights and obligations assertion, they may require two very different audit responses. Client A's auditor may determine that the best way to lower detection risk would be to compare invoices received from vendors with a listing of approved vendors and purchase orders. Conversely, Client B's auditor may lower the threshold amount in performing a search for unrecorded liabilities. Tips to help comply with AU-C sections 315 and 330When performing future audit engagements, auditors should be sure to:
Following these tips will help drive high-quality, efficient audits that conform to the standards. For more help, visit aicpa.org/internalcontrol for free tools and resources on internal controls. About the authors Deana Thorps, CPA, is a manager; Hiram Hasty, CPA, CGMA, is a senior technical manager; and Bob Dohrer, CPA, CGMA, is chief auditor, all for the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA's editorial director, at [email protected] or 919-402-2112. AICPA resources Articles
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For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077. What is the auditor's responsibility in connecting with control risk?32 The auditor should assess control risk for relevant assertions by evaluating the evidence obtained from all sources, including the auditor's testing of controls for the audit of internal control and the audit of financial statements, misstatements detected during the financial statement audit, and any identified ...
Can control risk be controlled by the auditor?Where control risk is likely to be high, the auditor should mostly obtain the required assurance from substantive testing, as reliance cannot be placed on internal controls.
Why would an auditor not test controls?There is one reason, however, why you might not test controls even though they appear appropriate: substantive tests may take less time. Once risk assessment is complete, your responses—the further audit procedures—are based on efficiency and effectiveness. If control testing takes less time, then use this option.
How is control risk assessed by an auditor?The auditor uses the assessed risk of material misstatement to determine the appropriate level of detection risk for a financial statement assertion. The higher the risk of material misstatement, the lower the level of detection risk needs to be in order to reduce audit risk to an appropriately low level.
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