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Dear sir,
In relation to (i) the first issue, which was the identification of control deficiencies in purchase order approval which the audit team had concluded was acceptable and no additional procedures were required.
The suggested answer says that “Prior to finalising the audit, the audit team needs to assess the extent and significance of the internal control deficiency by increasing the original sample size and extending the audit testing.”
1) Here, finalising the audit means finalising the audit plan?
2) extending the audit testing means taking further samples in addition to those three purchase orders?
3) Further, if the extended testing identifies further exceptions in the effective operation of the control, the AUDIT MANAGER or PARTNER may decide that controls based audit approach may be inappropriate and decide for more substantive approach on the trade payables?Thanks,
It will help if you read scenarios carefully – in particular concerning the time frame “The audit of Davis Co’s financial statements for the year ended 30 November 2017 is nearing completion and the auditor’s report is due to be signed next week”. So audit planning was done AGES ago and the “doing” of the audit work (testing of controls followed by substantive procedures) must be virtually completed.
1. The auditor’s report is “due to be signed next week” – so finalising the audit means completing everything that has to be done before the auditor’s report can be signed – so any last minute audit procedures, completion checklists, etc.
2. Yes – to extend a test means to take a larger sample.
3. Yes – if relying on authorisation as a control, it has to be evidenced – there are three deviations/lapses in control. The audit team should have extended the test at that time to show that 3 out of the sample size was not representative. The audit team didn’t do that – so it needs to be done now (immediately). If more deviations are found the reviewer will have to consider how much reliance has been put on the control and whether substantive procedures should also be extended.
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