If control risk is high or maximum and there are no compensating controls, the auditor should
OverviewSometimes a small department has a limited number of employees, making it difficult or impossible to establish adequate separation of duties. If this is the case, the unit needs to establish compensating controls – controls designed to compensate for the increased risk. Compensating controls are typically less desirable than separation of duties, because compensating controls typically occur after the transaction is complete. In addition, it takes more resources to investigate, correct errors, and/or recover losses than to prevent the errors in the first place. Therefore, compensating controls should be viewed as a “last resort” and should not take the place of separation of duties, when the staffing exists to make the separation possible. Show
Examples of Compensating ControlsMost compensating controls take the form of an additional or more in depth review. For example, if a unit does not have a Tier 2 (Reviewer), then the Tier 3 (Leader) would need to perform the detailed review. Here is an example of when a compensating control would be required: A single employee has the duties of accepting cash payments, recording the deposit, and reconciling the monthly financial reports. To prevent errors and/or fraud, additional oversight is required. This means we need a compensating control, such as the leader performing a review of the reconciliation or another unit performing the reconciliation. In some cases, two small units have “swapped” reconciliation duties to provide the needed separation of duties that are not possible within the unit. Requirements for Compensating ControlsNo matter the format the compensating control takes, all compensating controls should:
Why is #3 important? As discussed above, a compensating control is never as good as creating a control up front, so the compensating control has “more to prove.” This means it needs to go above and beyond the original control to provide the same level of assurance. Last Reviewed04/30/2022: reviewed content University Controller’s Office: (352) 392-1321 Office of Internal Audit: (352) 392-1391 Related ArticlesQuestion 28The most important control over the existence, completeness, andvaluation of cash balances ________.is to defer cash collection for as long as possibleis immediate collection of cash by companiesis an independent bank reconciliationCorrect!Correct! 8/25/2020ACCT411E3: T ACCT 411 A Su 20: Auditing Standards And PrinciplesThe most important control over the existence, completeness, andvaluation of cash balances is an independent bank reconciliation.is written representation by senior management with respect to theaccuracy of the cash balance1 / 1 ptsQuestion 29Controls over cash receipts and cash disbursements ________.Correct!Correct! Get answer to your question and much more 17/30Controls over cash receipts and cash disbursement are usually testedas part of testing controls in the revenue process and the purchasingprocess.1 / 1 ptsQuestion 30 8/25/2020ACCT411E3: T ACCT 411 A Su 20: Auditing Standards And PrinciplesIf control risk is high or maximum, and there are no compensatingcontrols, the auditor should ________.Correct!Correct! Get answer to your question and much more If control risk is high or maximum, and there are no compensatingcontrols, the auditor should assume that fraud risk is high and designappropriate substantive tests, particularly substantive tests oftransactions.1 / 1 ptsQuestion 31An analytical procedure related to the substantive testing of cashbalances would be to ________.Correct!Correct! Get answer to your question and much more 8/25/2020ACCT411E3: T ACCT 411 A Su 20: Auditing Standards And Principles19/30An analytical procedure related to the substantive testing of cashbalances would be to calculate cash as a percent of total assets andcompare with auditor expectations.send confirmations to the client firm's stockholderssend notes payable confirmations to creditors1 / 1 pts Upload your study docs or become a Course Hero member to access this document Upload your study docs or become a Course Hero member to access this document Which of the following should an auditor do when control risk is assessed at the maximum level?If control risk is assessed at below the maximum level, the auditor is required to 1) identify "specific internal control policies and procedures relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions" and 2) perform "tests of controls to evaluate the ...
What is a compensating control in auditing?To prevent errors and/or fraud, additional oversight is required. This means we need a compensating control, such as the leader performing a review of the reconciliation or another unit performing the reconciliation.
Should control risk be high or low?Assessment of control risk. How can you reduce risk control?Some practical steps you could take include:. trying a less risky option.. preventing access to the hazards.. organising your work to reduce exposure to the hazard.. issuing protective equipment.. providing welfare facilities such as first-aid and washing facilities.. involving and consulting with workers.. |
