EDNA Vlog

After the auditor has learned about the design of a company’s internal controls, the auditor needs to test the operating effectiveness of the controls. The auditor must determine whether each internal control:• Is operating as designed• Is being performed by an employee who has both the ability and authorization to perform the controlThere are several ways for an auditor to test internal controls. These include:• Inquiry• Observing the client applying the control• Inspecting the client’s documents• Reperforming the control• Walkthrough (this would include several of the steps listed above)If an internal control is not operating effectively, the risk of material misstatement increases. This means the auditor will need to increase the amount of substantive testing to keep audit risk at an acceptable level.When testing controls, the auditor should perform dual-direction tests (aka dual-purpose procedures). For example, to ensure that the client is checking for a 3-way match of the purchase order, shipping document, and sales invoice, the auditor should both:• Test the existence assertion (did all recorded sales occur?) by vouching a sample of sales invoices to the related shipping documents• Test the completeness assertion (were all shipments billed to clients?) by tracing a sample of shipping documents to the sales invoicesAudit software like IDEA or ACL is very helpful when testing controls. In some cases, the auditor can examine the entire sales journal (as opposed to just taking a sample of transactions) to see if there any sales lacking a 3-way match. The auditor can also use audit software to check the numerical sequence of documents for either (a) missing numbers in the sequence or (b) duplication of numbers in the sequence. The auditor should also observe the client’s personnel checking for issues with the numerical sequence. After the tests of controls have been completed, the auditor should set the achieved level of control risk.• If the achieved level of control risk is lower than the planned level, the amount of substantive procedures for account balances can be reduced. For example, accounts receivable confirmations can be sent prior to the fiscal year-end and the auditor can take a smaller sample size• If the achieved level of control risk is higher than the planned level (e.g., if the auditor found that the client was billing customers when goods hadn’t been shipped or wasn’t observing the proper segregation of duties), the amount of substantive procedures should be increased. For example, the auditor might need to choose a large sample size when confirming accounts receivable0:00 Introduction0:30 Techniques for testing internal controls1:01 Dual-direction tests1:27 Audit software 1:52 Tests of controls for revenue3:17 Tests of controls for receivables4:08 Achieved level of control risk vs. planned level of control risk— Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people.— SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING• A 44-PAGE GUIDE TO U.S. TAXATION• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS• MANY MORE FREE PDF GUIDES* http://eepurl.com/dIaa5z— GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT * https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST * Apple Podcasts: https://podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify: https://open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK * https://www.tiktok.com/@prof_mclaughlin — ACCESS INDEX OF VIDEOS * https://www.edspira.com/index — CONNECT WITH EDSPIRA * Facebook: https://www.facebook.com/Edspira * Instagram: https://www.instagram.com/edspiradotcom * LinkedIn: https://www.linkedin.com/company/edspira — CONNECT WITH MICHAEL * Twitter: https://www.twitter.com/Prof_McLaughlin * LinkedIn: https://www.linkedin.com/in/prof-michael-mclaughlin — ABOUT EDSPIRA AND ITS CREATOR * https://www.edspira.com/about/