Testing controls Learning objective In designing an audit strategy, auditors should consider the effectiveness of the clients internal control structure, thereby determining the control risk. An auditor should perform a preliminary assessment of control risk to assess if a combined audit strategy is the appropriate audit strategy. A combined audit strategy is one in which the internal controls of a significant process are tested and proven to be effective and, therefore, can be relied upon to reduce the amount of substantive testing needed. If internal controls are tested and proven to be operating effectively, the auditor can reduce the control risk of the related financial statement assertion. This method of testing controls can reduce the substantive procedures to be performed or allow substantive testing to be performed prior to year end. When testing controls, the auditor designs the procedures to conclude that the control: operated the way it was understood to operate was applied throughout the period of intended reliance was applied on a timely basis encompassed all applicable transactions was based on reliable information resulted in timely correction of any errors that were identified If the control satisfies the above objectives and no exceptions are found, then the control will be deemed to be effective. In this assignment, you will test some internal control procedures over the sales and cash receipts process. Required Based on the preliminary assessment of the controls obtained in earlier procedures, the audit team has decided to test controls over the sales to cash receipts process. It is expected that there will be no deficiencies in the transaction-level internal controls. Josh has partially completed the testing for selected controls over the sales/accounts receivable and cash receipt processes. He has asked you to complete the testing for him. All information has

been provided by the client (refer to appendices 4 and 5). Document your findings for the sales process testing on working paper A7-1. Document the cash receipts testing on working paper A7-2. Once you complete the work Josh has started, then conclude with your assessment on the overall effectiveness of the controls tested. Note: For the purposes of this case study, sample tests 9 to 19 have been removed. There were no exceptions noted in the results.

Alpine Bags Ltd. December 31, 2023 Sales processtesting internal controls Aim: To test selected controls over the sales and accounts receivable process. Sample: We haphazardly selected 25 sales invoices from the entire year. Complete the following audit procedures: Match the quantities and products ordered on the invoices to the shipping document. If they match, mark all matching lines on both documents with the letter A. Each shipping document should include a customer signature declaring the goods were received undamaged. For each item in the sample, check the shipping documents for the signature by the customer. If a signature is present, mark the signature with a B. Use the shipping note reference number in order to recall the on-line authorization screen. Noted the passcode entered by the shipping supervisors, which agreed to the passcode listing provided by the IT Manager. (Note: all agree). Documentation: Completed on the following page.

Conclusion on the effectiveness of the controls

Alpine Bags Ltd. December 31, 2023

Cash receipts processtesting internal controls Aim: To test selected controls over the cash receipts process. Sample: We haphazardly selected 25 working days from the entire year in order to test the reconciliation of the daily cash receipts to the accounts receivable. Match the total amount of the EFT cash receipts to the accounts receivable postings. If the amounts match, mark both documents with a D. In the working paper below, record the total posted to the accounts receivable and the amount deposited to the bank and identify if they do not agree. Also note with a checkmark in WP A7-2 if there is evidence of review of the reconciliation by the controller (demonstrated with a signature).

Alpine Bags Ltd. December 31, 2023 Assessing control risk

Use the information you provided in the working paper from assignment 6 (A51) to focus your controls testing on the significant assertions. In the explanation column, indicate whether any exceptions were noted that would impact the risk assessment or if the control worked as expected. If an exception is noted, comment on whether there are any compensating controls. Complete the table below, indicating whether the control risk for the assertion is high, medium, or low. The control risk is low if the controls are tested and can be relied upon. Control risk is medium if there is limited testing of the controls, and they are not to be relied upon. Control risk is high if no controls are tested and no assurance can be concluded from the controls.

During an audit, all assertions are evaluated for their level of control and inherent risk. However, in this assignment, you will only be looking at a subset of those assertions.