Wiley Federal Government Auditing: Laws, Regulations, Standards, Practices, and Sarbanes-Oxley, 2nd Edition

CHAPTER 11

TEST OF CONTROLS, TRANSACTIONS, AND ACCOUNTS

Audit procedures are designed to gather evidence and should be viewed as processes that continuously seek to obtain and evaluate sufficiently appropriate audit evidence. However, in practical terms, the bulk of appropriate audit evidence supporting the auditor’s financial statement assertions is the result of testing conducted during Phase III of the Federal Government’s audit model. The testing phase encompasses both internal control and substantive testing.

Throughout the audit process, the objective is the continual assessment and validation of the nature of audit risk, which, in its simplest form, is the risk of the auditor unknowingly issuing a clean audit opinion when the financial statements are materially misstated. AU-C 200 states that audit risk encompasses:

• Inherent risks relate to the susceptibility of a process or account to be misstated. For example, estimates such as those required by the Federal Credit Reform Act require complex calculations that are more likely to include errors, than, for example, simple payroll accrual estimates at the end of a reporting period. Similarly, certain assets, such as cash, are more susceptible to theft than others. Finally, certain assets are subject to spoilage unless consumed/disposed of on a timely basis. Inherent risks also arise from factors external to the agency such as changes in congressional funding levels and/or congressionally mandated change in the program’s mission. ...