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Hi gromit,
I am grateful that u ansewerd my previous questions. This time i am stuck in many things and i feel i wont pass. 🙁
Q1: If the internal control system is reliable the auditor will move on with Test of controls to obtain audit evidence understood but the thing is by this he will only know whether the controls are working effectively or not. Where is the audit evidence here? How will he come to know the number of transactions to choose for tests?
Q2:Will the auditor carry out Substantive procedures if he is already carrying out test of controls?
Q3: The sample to be chosen for a specific area is known by the audit risk of that area. How is the detection risk calculated to find out the audit risk?
Q4:How to learn or memorize the Controls over sales, purchases etc? And are we suppose to learn them by heart and what about test of controls how to learn them?
Q5:Last thing what is this clarity project or statement thing?
i think its enough please please take out of all these confusions. I cant study further. 🙁
Loads of thankss in advance .Q1 If ToC show that controls are working well, then this is in itself audit evidence that there is a small chance of material misstatements. The number of transaction that will be looked at for evidence of controls operating will be low, typically 20 – 30 transactions. Different audit firms have different ways of arriving at this number – you don’t need to worry much about that process.
Q2 In theory, if ToC are perfect, no substantive tests would be necessary, but no one would take that risk. ToC are very much done on a test basis using a small sample and there is always the possibility of sampling risk (eg just happening to pick a sample that showed good control). Substantive tests will always be done but can be cut down if there are good controls
Q3 Don’t worry about practicalities. If inherent risk and control risk are high detection risk must be lowered by doing more audiit work. The equation AR = IH x CR x DR is really illustrating the relationship, not making hard quantitative predictions.
Q4 I wouldn’t memorise by heart. Try to imagine all the things that could go wrong eg documents lost, miscalculations, bad postings, bad debts, paying invoices twice etc and try to think how these could be prevented. Best thing to do is look at lots of Qs and As to get the general idea.
Q5 I think if you search the site you will find many references to the Clarity Project. The single main thing is how qualified audit opinions are now worded:
Disagreement is now: the FS contain a material misstatement
Limitation on scope is now: we were unable to find sufficient appropriate audit evidence.Also look for ‘performance materiality’ an new term.
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