Question

An auditor identifies a significant risk around revenue cut-off due to manual end-period adjustments and complex multi-element contracts. The client proposes reliance on a detective control: monthly reconciliation of shipped-not-billed and deferred revenue by finance. Control design appears sound but testing shows intermittent failures. What is the most appropriate audit response?

Q: Answer-An auditor identifies a significant risk around revenue cut-off due to manual end-period adjustments...

For significant risks, SA 330 requires substantive procedures that are specifically responsive tests of details are often necessary. If operating effectiveness is not supported, the control cannot be relied upon increase the nature, timing, and extent of substantive procedures around cut-off and contracts.

A Rely on the control with reduced substantive procedures since design is sound.

B Do not rely on the control; design and perform substantive procedures responsive to the risk, including detailed cut-off and contract testing.

C Replace substantive procedures with analytical review since it’s a detective control.

D Increase overall materiality to offset risk.

E Accept management representation in lieu of testing because failures were intermittent.

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