Question

Question 5 (20 marks)

The following questions deal with the topics of internal controls and audit strategies.

Required:

(a) Select and justify the audit strategy you would choose in each of the following situations. Comment on whether you would perform “tests of controls” under the strategy you have chosen.
(i) The internal control component known as the “foundation” of internal controls is not satisfactory.
(ii) Management has designed sufficient control activities and has hired an internal auditor. The other components of internal controls are found to be satisfactory.

(b) Management has certain objectives in setting up internal controls.Discuss the validity of the following sentence: “Auditors are equally concerned with all aspects of internal controls set up by management”.

Answer 1

Ans.(a).(i). Since the internal control in the given scenario is not satisfactory, I would go for complete checking rather than test checking as there will be a lot of scope for manipulation in the financial statement due to inefficient internal control system.

As it is already found out that the internal controls of the company are not satisfactory, there's no point in performing test of control any further.

Ans.(a).(ii). Since the internal control in the given scenario is satisfactory, I would go for test checking rather than complete checking as there will be a lot of savings in time and effort.

As it is already found out that the internal controls of the company are satisfactory, there's no point in performing test of control any further. However, to ensure that the report of internal auditor is in order, I would perform test of controls.

Ans.(b). “Auditors are equally concerned with all aspects of internal controls set up by management”. This statement is FALSE.

The responsibility of setting up and maintaining a system of internal control is that of the management of the company. The auditor has nothing to do with the internal control of the company. However, the auditor reviews the internal control to obtain reasonable assurance about the preparation of the financial statements.