A client uses a highly automated system to process sales orders, with minimal human intervention. Orders are received electronically, credit checks are performed automatically, and shipments are initiated upon approval. What is the most likely implication for the auditor's approach to assessing control risk for the revenue cycle?
- AThe auditor will need to increase the extent of tests of details for individual sales transactions.
- BThe auditor will likely bypass testing controls and perform extensive substantive procedures.
- CThe auditor will focus primarily on manual controls related to payment collection.
- DThe auditor will likely be able to assess control risk at a low level, relying heavily on automated controls.
Show answer & explanationAnswer & explanation
Correct answer: D. The auditor will likely be able to assess control risk at a low level, relying heavily on automated controls.
A highly automated system with minimal human intervention suggests that if the automated controls are designed and implemented effectively, they can operate consistently and reliably. This environment typically allows the auditor to assess control risk at a low level and rely on the effectiveness of these automated controls, reducing the need for extensive substantive procedures.
Why the other options are wrong
- A. Increasing tests of details is typically done when control risk is high, not low, or when controls are not relied upon.
- B. Bypassing control testing would be inefficient if automated controls are strong; reliance on controls is possible.
- C. While payment collection controls are important, focusing 'primarily' on manual controls ignores the significant reliance on automated controls throughout the sales order process.
Control Risk - Automated Systems
In highly automated systems, if automated controls are designed and operating effectively, they can provide consistent processing and allow auditors to assess control risk at a lower level, thereby reducing the extent of substantive procedures.
- Automated controls are consistent.
- Effective automated controls enable lower control risk.
- Reduces need for extensive substantive testing.
Memory trick: Good robots mean low risk, less manual checking!