You have been performing the audit of ABC Ltd. for three years
and have relied on controls in the past for the accounts
receivable and revenue cycles. ABC Ltd.'s controller retired
early in the year, and a new controller was hired two months
later. The new controller has since been let go because it
became known that she had let a staff member use her
username and password and instructed them to approve all
journal entries in order to reduce her workload. Which of the
following statements is true?
A substantive approach should be taken, as the issues with staff member approval result in a pervasive ris
affect all accounts.
A combined approach should still be taken for accounts receivable and revenue, with substantive tests de
month period when the controller position was vacant.
The audit approach used for the past three years should be maintained, as there is no reason to expect tha
the most appropriate approach.
A combined approach should be taken, as the staff member approval is an account level risk; therefore, s
designed for the accounts affected.
Hide question 3 feedback
Answer a) is correct. A pervasive risk affects all accounts and assertions, and therefore control
risk would be affected at the overall financial statement level. Controls in place over the
approval and posting of journal entries cannot be relied upon.
You are the auditor for Bala Ltd. Last year, a combined
approach was used and tests of controls were planned for the
payroll and property, plant, and equipment cycles. When the
testing of controls was performed, the payroll controls were
not operating effectively, but the property, plant, and
equipment controls were operating effectively. Bala Ltd. has
not made any changes to controls in the current year. As well,
Bala has introduced a new product line in the current year,
which has increased the profitability of the company and has
resulted in significant additions to property, plant, and
equipment. What is the appropriate response for the current
A substantive approach should be taken, as controls were tested in the previous year and were not operati