What methods can be used to test the effectiveness of controls in the revenue and collection cycle?
file:///F|/Courses/2010-11/CGA/AU1/06course/m08intro.htmModule 8: Revenue and collection cycle, and acquisition andexpenditure cycleOverviewIn this module, you draw on the concepts learned in the previous modules and apply them to two important transactioncycles: revenue and collection, and acquisition and expenditure.When you have completed this module, you should have a good understanding of each cycle’s characteristics, evidencesources, control objectives, control risk assessment, tests of controls, and substantive procedures for selected accountswithin the cycle. You also apply what you have learned by responding to questions involving audit procedures.Assignment reminder: Assignment 3 in Module 9 is due at the end of Week 9 (see Course Schedule). You may wish totake a look at the assignment before working on Module 8 to familiarize yourself with the requirements and to prepare forany work that may be required in advance.Test your knowledgeBegin your work on this module with a set of test-your-knowledge questions designed to help you gauge the depth of studyrequired.Learning objectives8.1 The balance sheet approach Explain how net income is indirectly audited throughthe balance sheet approach to auditing. (Level 1)8.2 Revenue and collection cycle — The basics Identify the main activities, accounts, sources ofevidence, and functional responsibilities in therevenue and collection cycle, and explain how theresponsibilities should be segregated. (Level 1)8.3 Revenue and collection cycle — Tests of controls Explain the control objectives and test of controlsprocedures for the revenue and collectioncycle. (Level 1)8.4 Cash balances Identify the knowledge of the entity’s business andsignificant assertions relevant to the audit of cashbalances, and describe the analytical and substantiveprocedures to support these assertions. (Level 1)8.5 Accounts receivable Explain the knowledge of the entity’s business that isrelevant to the audit of accounts receivable, anddescribe the analytical procedures used to auditaccounts receivable. (Level 1)8.6 Accounts receivable — Substantive procedures Identify the most significant assertions with respect toaccounts receivable, and describe the substantiveprocedures used to support these assertions. (Level 1)8.7 Accounts receivable — Confirmations Explain the nature and types of confirmations in thecontext of accounts receivable and their reliability asevidence. (Level 1)file:///F|/Courses/2010-11/CGA/AU1/06course/m08intro.htm (1 of 2) [04/10/2010 3:24:43 PM] Show
What type of effectiveness test is test of controls?A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to prevent or detect material misstatements. Depending on the results of this test, auditors may choose to rely upon a client's system of controls as part of their auditing activities.
How do you measure operating effectiveness of controls?Testing Operating Effectiveness
Procedures the auditor performs to test operating effectiveness include a mix of inquiry of appropriate personnel, observation of the company's operations, inspection of relevant documentation, and re-performance of the control.
What are the five procedures used for tests of controls?There are five main methods to walk through and test each control in place at the service organization. These methods include (listed in order of complexity from lowest to highest): inquiry, observation, examination or inspection of evidence, re-performance, and computer assisted audit technique (CAAT).
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