An auditor is testing the design effectiveness of a nonissuer's internal controls over cash disbursements. Which of the following procedures is MOST appropriate for this purpose?

Answer options:

Reperformance of the bank reconciliation.

Inquiry of the accounts payable clerk regarding their duties.

Observation of the segregation of duties and inspection of the organizational chart and process narratives.

Selecting a sample of 40 checks and verifying signatures.

How to approach this question

Design vs Operating Effectiveness. Design = Is the plan good? (Inspect/Observe). Operating = Do they follow the plan? (Reperform/Test Sample).

Full Answer

C.Observation of the segregation of duties and inspection of the organizational chart and process narratives.✓ Correct

To test the design of a control, the auditor evaluates whether the control, if operating as prescribed, would prevent or detect misstatements. This involves inspection of documentation (flowcharts, narratives) and observation/inquiry. Sampling and reperformance are for testing operating effectiveness.

Common mistakes

Confusing Design (Setup) with Operating Effectiveness (Execution).

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