Case:
You are the auditor in charge of a car fleet leasing company, Vroom Ltd. The company owns and leases cars and related equipment to government bodies. The following table summarizes the planning outcomes of Vroom Ltd, including the preliminary assessment of inherent risk (IR), control risk (CR) and detection risk (DR).
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Preliminary Risk Assessment
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Planned Approach: Test of control vs. Substantive Tests
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Objective
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IR
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CR
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DR
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Disclosure and existence of finance leased assets
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Medium
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Medium
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Medium
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Primarily tests of controls with some components of substantive procedures at the balance date
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Measurement and completeness of depreciation expense
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Low
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Low
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High
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More significant level of test of controls with minimal substantive procedures at the balance date
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Rights and obligations in relation to vehicles
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Low
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Medium
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High
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More significant level of test of controls with minimal substantive procedures at the balance date
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Valuation of vehicles
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High
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High
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Low
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No tests of controls. 100% reliance on substantive procedures
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Required
(a) What are the general issues related to deciding whether to use a test of controls approach or a substantive approach?
(b) How do the risk assessments above relate to the choice of audit approach?
(c) If you adopted the approach set out in the planning summary, what audit procedures would you use for the accuracy and completeness of depreciation expense?