Jorge Yulia Was Anxious to Start the Selection and Testing

Question

Examlex · Accepted Answer

The Answer is a) Preventive controls
Preventive controls can be applied to each transaction during normal processing to avoid errors occurring. When designing controls, consideration is given to what can go wrong with the transac?tion (the risk of material misstatement), which would result in an error. These are some?times referred to as WCGWs (what can go wrongs). Effective controls should prevent the WCGWs from occurring (preventive controls), or, if they do occur, that the errors are detected and corrected as quickly as possible (detective controls).
An absence of effective preventive controls increases the risk that errors or fraud will occur and, therefore, increases the need for controls that are sensitive enough to detect these errors should they occur.
Detective controls
The purpose of detective controls is to discover fraud or errors that may have occurred during transaction processing (in spite of any preventive controls) and to rectify those errors. As dis?cussed above, companies put detective controls in place to assist management in ensuring WCGWs do not occur and that the business is functioning as planned through the design and implementation of its business processes.
Detective controls are often 'unofficial' procedures that client personnel perform to make sure that the information for which they are responsible is accurate.
b) Jorge could integrate preventive and detective controls into the revenue recognition audit program. For example, he could check whether revenue transactions were allowed if customers exceeded their credit limits (preventive control) or if the accounting system had captured all the relevant data of a closed sales transaction.
Jorge would be hard pressed to use preventive or detective controls over the reasonableness of promotional expenses unless he had standards or benchmarks, such as budgeted amounts that he could compare actual expenses to.
c) The factors to consider when deciding the extent of testing include the following:
1. How often the control is performed.
2. The degree to which the auditor intends to rely on the control as a basis for limiting their substantive tests.
3. The persuasiveness of the evidence produced by the control.
4. The need to be satisfied that the control operated as intended throughout the period of reliance.
5. The existence of a combination of controls that may reduce the level of assurance that might be needed from any one of the controls.
6. The relative importance of the 'what could go wrong' questions or statement being considered.
7. Other factors that relate to the likelihood that a control operated as intended during the period of reliance, including:
- The competence of the person who performs the control
- The quality of the control environment
- Changes in the accounting system
- Unexplained changes in related account balances
- The auditor's prior-period experiences with the engagement
Even though the above factors may reduce the expectation of errors, the auditor's tests of a control need to be sufficiently extensive to provide reasonable assurance that the control operated effectively throughout the period of reliance.

Jorge Yulia Was Anxious to Start the Selection and Testing

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