Chapter 5 Homework – Daniel Pinto
5.36 – C. Confirmation of balances.
5.37 – C. Separation of duties between the payroll and personnel departments.
5.40 – D. Obtaining evidence about the operating effectiveness of client control activities.
5.42 – A. Authorization of transactions from the custody of related assets.
5.47 – D. It is reasonably possible that an immaterial misstatement would not be prevented or
detected and corrected on a timely basis.
5.55
a) The knowledge of internal control components aids auditors in planning the audit
procedures helps identify areas of potential risk, design substantive procedures, and
allocate audit resources effectively.
b)
Obtain Sufficient Understanding: Auditors need a comprehensive understanding of the
design and operation of the client's internal control components.
Evaluate the Design and Implementation: Assess the effectiveness of the design and
implementation of internal controls to prevent or detect material misstatements.
Perform Tests of Controls: The audit team needs to perform tests of controls to obtain
evidence supporting the assessed level of control risk.
c)
Reliability of Controls: Assess the reliability of the client's internal controls. More reliable
controls may allow for a lower assessed level of control risk.
Effectiveness of Monitoring: Evaluate the effectiveness of the client's monitoring of
controls. Well-monitored controls are more likely to be effective.
Nature and Extent of Testing: Consider the nature, timing, and extent of planned
substantive procedures substantive procedures are extensive and effective, the reliance
on controls can be reduced.
d)
1. Understanding Documentation: Document the auditor's understanding of the client's
internal control components, including the control environment, risk assessment
process, information system, control activities, and monitoring activities.
2. Assessment Documentation: Document the assessed level of control risk, including the
basis for the assessment, factors considered, and the rationale for any adjustments to
the initially assessed level.
3. Testing Documentation: Document the nature, timing, and extent of testing performed
on internal controls, as well as the results of those tests.
4. Communication: Document any significant deficiencies or material weaknesses in
internal controls and communicate them to management and charged with governance.
5.56
Reconcile bank statement Abigail
Open mail and list checks. Bryan
Prepare checks for Phillip’s signature. Chris
Prepare payroll checks. Chris
Maintain personnel records. Abigail
Prepare deposit and take to bank. Bryan
Maintain petty cash. Bryan
Maintain accounts receivable records. Chris
Maintain general ledger. Bryan
Reconcile accounts receivable records to Abigail
general ledger account.
5.58
1.
I. Assertion:
a) Occurrence
II. Test of Controls:
d) Select a sample of personnel files for terminations and trace to reports submitted to the
personnel department.
III. Example of Error or Fraud:
d) Terminated workers might continue to be "paid" (with theft of check by someone else) if pay
roll is not promptly notified of terminations.
IV. Substantive Auditing Procedure:
c) Select a sample of terminated employees. Interview their supervisors or the employees
themselves for information about termination dates. Search the next payroll register for
evidence of overpayment in the following pay period.
2.
I. Identify the claim:
d) Rights and Obligations
II. Test of Controls:
c) Select a sample of payroll deductions and vouch them to signed authorizations.
III. Example of Error or Fraud:
c) It is possible that incorrect amounts might be deducted from pay.
IV. Substantive Auditing Procedure:
b) Select a sample of paychecks and vouch the deductions to the amount authorized according
to the personnel files.
3.
Identify the claim:
Completeness
Test of Controls:
Observe the timekeeping operations to determine whether they are performed separately.
Example of Error or Fraud:
If this control were absent or ineffective, there might be a risk of incomplete recording or
manipulation of timekeeping data, leading to inaccuracies in employee payments.
Substantive Auditing Procedure:
N/A (This is a control focused on the segregation of duties and is not directly tested through
substantive procedures.).
4.
1. Identify the claim:
Valuation
2. Test of Controls:
Obtain reconciliation worksheets or checkoff reports and see whether the reconciliation was
done.
3. Example of Error or Fraud:
If this control were absent or ineffective, there might be discrepancies between timekeeping
records and payroll calculations, potentially resulting in incorrect employee payments.
4. Substantive Auditing Procedure:
For details, select a sample of labor cost analyses and reconcile them to the payroll register for
the same period.