As an audit manager, you have been given charge of assessing risk management for two business processes of The Solas Co., a privately owned wholesaler of textbooks (hence not subject to PCAOB AS 2).

The first process, sales collection, processes high-volume payments from many small, independent bookstores and a few large-dollar payments from large chain bookstores. In past audits, it has scored poorly on its tests of controls that impact financial reporting, but management has instituted a program to correct that situation.

The second process, human resources management, processes a large volume of small-dollar transactions. This process supports all of the other business processes. Many of the top managers and all of the salespeople are on incentive compensation plans. The remaining employees for the organization, including administrative personnel are paid hourly wages at rates consistent with organizations of similar size.

a. Discuss conditions under which you would choose whether or not to perform tests of controls when analyzing these two business processes. Specifically, what characteristics of each process would suggest that the audit would be appropriate for performing tests of controls and what characteristics would argue against performing them?

b. What are the implications for the financial statement audit if tests of controls for each business process are not performed?