Internal Control, Test of Control and Substantive Testing

REQUIRED:

For each of the following client internal controls, 1) identify the relevant control activity, 2) determine an appropriate audit procedure to test whether the internal control is effective or not (i.e. design a test of control procedure), 3) list a possible misstatement if the internal control does not work effectively and 4) design a substantive test procedure to detect the misstatement listed in (3).

Note: Do not use analytical procedures unless an accounting estimate is involved. In addition, do not use audit procedures that produce unreliable audit evidence. (8 marks).

a) All credit sales exceeding the credit limit of $5000 need to be approved by the credit manager.

b) Vendors invoices that have been processed for payment are properly cancelled with a stamp.