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For this test of control:
The new sales system implemented by the company was fully tested before its implementation and old and new will be run in parallel and internal audit is comparing the output of both systems and identifying discrepancies and making recommendations to fix them
why can’t i use unappropriate credit limits in my answer for its risk? :
It reduces risk of misstatements in provision of bad debts/ bad debts in the FS due to unappropriate credit limits for the new hotel customers that may have poor credit scores
What you are describing is not a “test of control” – a test of control is something the external auditor performs on a audit client’s controls that are expected to be operating effectively (otherwise there’s no point testing them to see if they’re working).
The paragraph is describing changeover to a new sales system.
What was the requirement to the Q? I don’t know why you are looking to find any “risk” in this paragraph.
What you have written is muddled “It reduces risk of misstatements” – so this is not a risk? – but the reverse? What you say regarding credit limits then seems to be mere speculation – I don’t see how you can suppose this.
Extract from the question
This scenario relates to four requirements.
It is 1 July 20X5. You are an audit supervisor with Walsh & Co. You are currently reviewing
notes in relation to the internal controls in place at your client, Whittaker Co. Whittaker Co
manufactures and sells luxury bed linen wholesale to the hotel trade and direct to the public
from its factory store. It has a year ending 31 August 20X5.Sales
Whittaker Co implemented a new sales system in May 20X5. The new system was fully tested
prior to its implementation and will be run in parallel with the old system until the year end.
Whittaker Co’s internal audit (IA) department is responsible for comparing the output from
the old and new systems, investigating any discrepancies and making recommendations for
further action.The company operates a fully automated credit check process for all its new hotel customers.
The automated system generates a credit limit for each new customer which the sales
director approves before the customer can place any orders. The sales director evidence
approval of the credit limit in the system
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You are right, what it truly is a direct control instead of a test of control.
so, requirement of the question is to give the direct control and its risk it is preventing.
can you help?I still don’t see where you are getting the word “risk” from – have you read the examiner’s report on this Q? https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f8/examinersreports/aa%20examiner’s%20report%20march%20june%202022.pdf
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You can download the M/J22 report from here https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/examiners-reports1.html
EXTRACT from examiners report :
for example, the automatic credit
check and review of credit limits by the sales director are not separate controls as
any system generated credit limit would need to be reviewed for reasonableness by
a responsible official.
Having identified direct controls, candidates then need to explain each control. In
considering this it is important to think about what the aim of the control is, what
potential misstatement is being prevented or detected.
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what i am referring as risk is in fact the implication of the test of control.A direct control is aimed at reducing a risk of misstatement.
A test of control tests the operating effectiveness of a direct control.(Avoid saying risk is an “implication” of tests of controls – that is most confusing.)
IA comparing output of the two systems and investigating differences is a direct control – its aim (presumably) to detect whether any data is lost/inaccurate, etc – thereby reducing the risk of incomplete/incorrect sales data in the new system.
Extract from the question
The company operates a fully automated credit check process for all its new hotel customers.
The automated system generates a credit limit for each new customer which the sales
director approves before the customer can place any orders. The sales director evidences
approval of the credit limit in the system.——————————————————————————————————————————
does this mean that the sales director has the authority to decide which customer order to be approved and he might cancelled one with poor credit rating?
A test of control is to test a “strength” – so when given a control – don’t try and turn it into a weakness.
“Approval” – here of automated credit limits – is a good example of a control activity. The auditor would test this control by looking at the evidence of the directors approval – e.g. a digital signature.
The automated system should not be giving any credit limit to a potential new customer with a poor credit rating. If it did, the sales director would simply not approve it – that does not mean “cancelling it” – since no approval has yet been given.
Refer to your answer above=
A direct control is aimed at reducing a risk of misstatement.
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does below give a more complete definition of what is a direct control?Direct control – which is achieving some objective of organization / preventing some risk to organization ( some impact related to FS)
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