Four cases of control procedures used for financial statement items in different businesses are given below.

Required:

a. For each control procedure, evaluate whether there are significant risks in the business that would make this control essential to preventing or detecting the risks of material misstatements in the financial statements, or whether the control is less essential. Explain your evaluations.

b. Discuss whether you would use a combined approach for each item by testing the control, or whether you would choose a substantive approach where you rely only on substantive audit work for the item and do not test the control. Explain your reasoning.

CASES AND CONTROLS

CASE 1
The business processes a high volume of cash sales transactions through retail stores (e.g., Canadian Tire). There is a significant risk that not all sales will be recorded.

CASE 2
The inventory controller performs a monthly variance analysis to ensure production costs are staying within budget. There is a risk that avoidable cost overruns will occur if timely action is not taken when variances from budget occur.

CASE 3
The company’s petty cash fund of $200 is kept in a locked box by the receptionist, who must present valid signed receipts for all expenditures to the controller when the fund runs low. The controller authorizes the payables manager to issue a cheque to “cash” to replenish the fund back up to $200. There is a risk that petty cash funds will be misappropriated.

CASE 4
The company uses an Internet-based sales order system. Customers enter order details online and pay online by entering their credit card information. The order entry system automatically checks that order details are correct and the goods are in stock, calculates the price, and verifies the validity of the credit card payment online with the credit card company. After these control routines are run, a shipping order is automatically created that simultaneously creates entries in the accounting system to recognize the revenue and costs of sales.