Question

If an auditor performs tests of controls and determines that the control is not effective, what should the auditor's next step in testing controls be?

a) Determine if a compensating control exists.
b) Perform tests of controls on compensating controls.
c) Document the results of tests of controls and proceed with a primarily substantive approach.
d) Document the results of tests of controls and proceed with the planned audit strategy.

Answer 1

If an auditor finds a control not effective, they should check for compensating controls and, if none, take a substantive approach.

Step-by-step explanation:

If an auditor performs tests of controls and determines that the control is not effective, the auditor's next step should be to determine if a compensating control exists. If such a control is found, the auditor should then perform tests of controls on the compensating controls. However, if no effective compensating control is identified, the auditor should document the results of the tests of controls and then proceed with a primarily substantive approach. This is because the ineffectiveness of the initial control indicates a higher risk of material misstatement, thus requiring a more detailed substantive examination of the financial information.