Relationship of Objectives to Risk Assessment &

Control Activities
(f ,,• I) " • •• J'
There is a relationship among objectives of internal control, risk assessment, & control activities
=
1) Company establishes objective
We wish to reduce the volume of uncollectible receivables
2) Company assesses risk by evaluating factors that prevent objective from being met
When we sell to customers with poor or incomplete credit histories, a high percentage prove
uncollectible
3) Establish control activity that will help company meet objective
If we perform a more thorough credit check on customers before selling on credit, we will re-
duce the number of sales made to customers with poor or incomplete credit histories, re-
ducing uncollectible accounts

Focus on
Internal Control - Module 2 46

Relationship of Internal Control to Audit

Procedures
The understanding of internal control has a direct impact on the nature, timing, & extent of sub-
stantive tests to be performed
Either of 2 strategies
Substantive strategy

/1) Auditor sets control risk at maximum based on understanding of design of internal control
..,2) Auditor will @rely on internal contml & does 0 perform tests of controls
va) Resulting detection risk is low equiring lJlo~effective substantive testing
Reliance strategy

.;1) Auditor sets control risk below maximum based on understanding of design of internal con-
trol
...-2) Auditor will~on internal control
y ~ 3) Auditor performs tests of controls0 etermin if ssessed level of control risk is valid \
'" ) Auditor reassesses control risk based on results of tests of control
./ 5) Resulting detection risk may b higher requiring~ substantive testing
Focus on
Internal Control - Module 2 47