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Cost Considerations and Operating Effectiveness

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1. Auditors must decide, based on cost considerations, whether to test the design effectiveness or operating effectiveness of controls.
2. Inquiry alone provides sufficient evidence to support the operating effectiveness of a control.

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Solution Summary

Your discussion is 467 words plus a reference and explains why controls testing is not decided based on cost/benefit and why inquiry alone is not sufficient evidence of effective controls.

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1. Auditors must decide, based on cost considerations, whether to test the design effectiveness or operating effectiveness of controls.

According to the US PCAOB auditing standards, during the planning phase, auditors must review the controls in order to assess the control risk and whether they will rely on the controls (PCAOB Auditing Standard 5, para 9). If the controls are assessed at high risk, they will use substantive testing to gather evidence about the possible misstatements of the financial reports. If the controls are assessed at less than high risk, the controls must be tested to see if the controls that are expected to be in place (1) do exist and (2) are working as designed. If they are working as planned, the planned ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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