Additional Considerations in Assessing Control Risk

The auditor typically first assesses control risk for assertions about transaction classes such as cash receipts and cash disbursements.

These assessments are then used in assessing control risk for significant account balance assertions so that the appropriateness of the planned level of substantive tests for the account balances can be determined and specific substantive tests can be designed.

This process is considered next, first for accounts affected by a single transaction class and then for accounts affected by multiple transaction classes.

1. Accounts Affected by a Single Transaction Class

The process of assessing control risk for account balance assertions is straightforward for accounts that are affected by a single transaction class.

For example, sales are increased by credits for sales transactions in the revenue cycle, and many expense accounts are increased by debits for purchases transactions in the expenditure cycle.

In these cases, the auditor’s control risk assessment for each account balance assertion is the same as the control risk assessment for the same transaction class assertion.

For example, the control risk assessment for the existence or occurrence assertion for the sales account balance should be the same as the control risk assessment for the existence or occurrence assertion for transactions.

Similarly, the control risk assessment for the valuation or allocation assertion for many expenses should be the same as for the valuation or allocation assertion for purchase transactions.

2. Accounts Affected by Multiple Transaction Classes

Many balance sheet accounts are significantly affected by more than one transaction class.

For example, the cash balance is increased by cash receipts transaction in the revenue cycle and decreased by cash disbursement transactions in the expenditure cycle.

In these cases, assessing control risk for an account balance assertion requires consideration of the relevant control risk assessments for each transaction class that significantly affects the balance.

Thus, the control risk assessment for the valuation or allocation assertion for the cash balance is based on the control risk assessments for the valuation or allocation assertions for both cash receipts and cash disbursement transactions.