CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceEasy
A client operates a complex manufacturing process. The auditor is performing tests of controls related to the production cycle, specifically focusing on the authorization of production orders. Which of the following procedures would be most effective in testing the operating effectiveness of this control?
- AObserving the process of production order authorization and subsequent release to the factory floor.
- BExamining a sample of production orders for evidence of proper authorization.
- CReperforming the authorization process for a sample of production orders.
- DInquiring of production supervisors about their understanding of the authorization process.
Show answer & explanationAnswer & explanation
Correct answer: B. Examining a sample of production orders for evidence of proper authorization.
Examining a sample of production orders for evidence of proper authorization (e.g., signatures, electronic approvals) directly tests whether the control was applied to the items processed, providing evidence of its operating effectiveness.
Why the other options are wrong
- A. Observation is effective for controls leaving no audit trail but is limited to the point in time it's performed and may not capture consistent operation.
- C. Reperformance involves the auditor independently executing the control, which is often done for controls over calculations, but for authorization, inspection of existing evidence is typically more direct and efficient.
- D. Inquiry provides an understanding but is not sufficient evidence of operating effectiveness.
Tests of Controls: Authorization
Testing the operating effectiveness of an authorization control involves examining documentation for evidence that the authorization was properly applied.
- Focuses on how a control was applied to transactions.
- Often involves inspection of documents or electronic logs.
- Aims to determine if the control prevents or detects misstatements.
Memory trick: Look at the Paper Trail to See if they Signed.