Following are evidence decisions for the three audits described in Figure 13-3 o

Question

Following are evidence decisions for the three audits described in Figure 13-3 on page 411: Audit A Ineffective client internal controls Audit B Very effective client internal controls Audit C Somewhat effective client internal controls Evidence Decisions 1. The auditor performed extensive positive confirmations at the balance sheet date. 2. The auditor performed extensive tests of controls and minimal substantive tests. 3. The auditor decided it was possible to assess control risk below the maximum. 4. The auditor performed substantive tests. 5. This audit was likely the least expensive to conduct. 6. The auditor confirmed receivables at an interim date. 7. The auditor identified effective controls and also identified some deficiencies in controls. 8. The auditor performed tests of controls. Required a. Explain why Audit B represents the maximum amount of reliance that can be placed on internal control. Why can’t all the audit assurance be obtained by tests of controls? b. Explain why the auditor may not place the maximum extent of reliance on controls in Audit B and Audit C. c. For each of the eight evidence decisions, indicate whether the evidence decision relates to each of the audits described above. Every evidence decision relates to at least one of the audits, and some may relate to two or all three audits.

Explanation / Answer

(a) Audit B represents the maximum amount of reliance that can be placed on internal control because the internal audit controls are very effective in the company and balance sheets has all the confirmations. All the audit assurance can't be obtained by tests of controls because it is not a 100% audit of the controls and only the test of randomly left controls.

(b) The auditor may not place the maximum extent of reliance on controls in Audit B and Audit C because the internal audit controls are ineffective in the company, lacking the confirmations on the balance sheets figures and the auditors have to apply the sbustantive tests to audit the controls.

(c) Evidence Decisions describing under each of three audits :

1. The auditor performed extensive positive confirmations at the balance sheet date. - Audit B Very effective client internal controls

2. The auditor performed extensive tests of controls and minimal substantive tests. - Audit B Very effective client internal controls

3. The auditor decided it was possible to assess control risk below the maximum. - Audit C Somewhat effective client internal controls

4. The auditor performed substantive tests. - Audit A Ineffective client internal controls

5. This audit was likely the least expensive to conduct. - Audit B Very effective client internal controls

6. The auditor confirmed receivables at an interim date. - Audit C Somewhat effective client internal controls

7. The auditor identified effective controls and also identified some deficiencies in controls. - Audit A Ineffective client internal controls & - Audit C Somewhat effective client internal controls

8. The auditor performed tests of controls. - Audit A Ineffective client internal controls & - Audit C Somewhat effective client internal controls

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