May 2016 Q3 a.
An audit is often carried out in more than one sitting, especially when there are tight reporting deadlines. The auditors will carry out an interim audit during the period under review followed by a final audit shortly after the year end. Work at the interim audit will often include obtaining audit evidence about the operating effectiveness of controls.
Required:
i) Describe the impact on the final audit of performing work on internal controls at an interim audit. (2 marks)
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Impact of interim audit work on internal controls on the final audit.
If the auditors are to place reliance on internal controls they must obtain evidence that controls have operated effectively throughout the period.
If the auditor obtains audit evidence about the operating effectiveness of controls at the interim audit, when it comes to the final audit, instead of having to gain evidence over controls covering the whole year the auditor can focus on obtaining audit evidence about significant changes to those controls subsequent to the interim period.
The auditor will need to determine the extent of the additional audit evidence to be obtained for the remaining period.
ii) Assuming an interim audit has taken place and work on internal controls was carried out, list the factors the auditor should consider when deciding how much more work is needed at the final audit in relation to internal controls. (4 marks)
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Factors to consider when determining the extent of further work on internal controls at the final audit:
At the final audit the auditor will need to gain additional audit evidence about controls that were operating during the period between the interim audit and the year end. When determining the extent of the additional work needed the auditor will take into account:
- The significance of the assessed risks of material misstatement at the assertion level.
- The specific controls that were tested during the interim period, and significant changes to them since they were tested, including changes in the information system, processes, and personnel.
- The degree to which audit evidence about the operating effectiveness of those controls was obtained.
- The length of the remaining period
- The extent to which the auditor intends to reduce further substantive procedures based on the reliance of controls.
- The strength of the control environment.