Final answer:
If an effective compensating control does not exist or is not functioning as designed, the auditor may need to take alternate procedures to achieve the required level of assurance.
Step-by-step explanation:
If the auditor determines that an effective compensating control does not exist, or tests of controls show that the compensating control is not functioning as designed, it indicates a weakness in the internal control system. In such cases, the auditor may need to take alternate procedures to achieve the required level of assurance. This could involve conducting more substantive testing or obtaining additional evidence from other sources.
For example, if a company does not have a compensating control in place for a specific risk, the auditor may need to perform more detailed testing on other controls related to that risk. Additionally, the auditor may need to rely more heavily on substantive testing, such as reviewing actual transactions and documents, to gather sufficient evidence.
Overall, the absence of an effective compensating control or the discovery that a compensating control is not functioning properly requires the auditor to reassess the risk and design of the audit procedures to ensure the reliability of the financial statements.