Before you can test a client’s internal controls you first need to know which internal controls are in place. The auditor can identify the internal controls by asking the client’s employees to complete a questionnaire and by doing a walkthrough of the revenue and collection cycle. The walkthrough would involve following a sale from the initial customer purchase all the way through to the collection of the receivable. If the auditor notices an area where a misstatement might occur during the walkthrough, the auditor should ask: has the client designed a control that, if operating effectively, would prevent or detect a material misstatement? The auditor should also be sure to consider entity-level controls. For example: • Does the audit committee play an active role? • Does management closely monitor sales returns? • Does management closely monitor writeoffs of accounts receivable? • Does management inspect aged accounts receivable for issues with …
