During Internal Control phase, what is the primary activity?

• A. The auditor gains an understanding of the auditee
• B. The auditor evaluates the effectiveness of internal controls
• C. The auditor performs substantive testing
• D. The auditor writes the audit report

Answer: (B)

The main idea here is that the Internal Control phase focuses on evaluating how well the auditee’s internal controls work. The auditor digs into whether the controls are properly designed to prevent or catch errors and whether they are actually operating as intended. This evaluation informs the assessment of control risk and helps shape the audit plan, including how much substantive testing will be needed. Understanding the auditee’s environment and controls happens early in planning, while substantive testing and final reporting occur after this evaluation as part of fieldwork and closeout. If controls are found to be effective, reliance on them can reduce the amount of substantive testing; if not, more substantive procedures are required.