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Chapter 13 Overall Audit Plan and Audit Program. Presentation Outline. Application of Audit Testing Selecting Tests to Perform Design of the Audit Program A Summary of the Audit Process. I. Application of Audit Testing. Tests of Controls Testing for Monetary Misstatement - PowerPoint PPT Presentation
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Chapter 13Overall Audit Planand Audit Program
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Presentation Outline
I. Application of Audit Testing
II. Selecting Tests to Perform
III. Design of the Audit Program
IV. A Summary of the Audit Process
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I. Application of Audit Testing
A. Tests of ControlsB. Testing for Monetary Misstatement
C. Reduction of RiskD. Audit Assurance at Different Levels of
Internal Control EffectivenessE. Simultaneous Testing of Controls and
Substantive Testing of TransactionsF. Timing of Audit Testing
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A. Tests of Controls
Audit procedures to test the operating effectiveness of control policies and procedures in support of a reduced assessed control risk. Some examples
include: Matching of vendor invoices against a purchase order
and receiving report before approving invoice for payment.
Examination of employee time cards for approval of overtime.
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B. Testing for Monetary Misstatement
Substantive Tests ofTransactions
Testing for monetary misstatements to determine
if the following 6 transaction-related audit objectives
have been met:Existence
CompletenessAccuracy
ClassificationTiming
Posting and Summarization
Tests of Details ofBalances
Testing for monetarymisstatements to determine if thefollowing 9 balance-related audit
objectives have been met:Existence
CompletenessAccuracy
ClassificationCutoff
Detail tie-inRealizable value
Rights and obligationsPresentation and disclosure
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C. Reduction of Risk
Control Risk Procedures to gain an understanding of internal
control Tests of controls
Once the auditor obtains an initial understanding of
controls, tests of controls must be performed to obtain evidence regarding the
effectiveness of controls. Stronger controls will allow the auditor to assess control risk below the maximum.
Detection Risk Substantive tests of
transactions Analytical procedures
Tests of details of balances
The more evidence an auditor collects from the
above procedures, the lower the detection risk. Detection risk must be
lower when control risk is higher.
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D. Audit Assurance at Different Levels of Internal Control Effectiveness
Acceptableassurance
Noassurance
INTERNAL CONTROL EFFECTIVENESSWeak control Strong control
Reliance on controls: C3 – None, C2 – Some, C1 – Maximum
Audit assurancefrom control riskassessment andtests of control
Auditassurancefromsubstantivetests
A C B
C3
C2
C1
AU
DIT
AS
SU
RA
NC
E
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E. Simultaneous Testing of Controls and Substantive Testing of Transactions
The determination of control risk affects the type of procedures and sample size for the substantive testing of
transactions. For purposes of convenience, the testing of controls and
substantive testing of transactions will often occur simultaneously.
In such situations the auditor will make an assumption about the results of tests of controls. If the testing of controls indicates that internal control is worst than
expected, substantive testing of transactions will have to be modified accordingly.
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F. Timing of Audit Testing
Auditors frequently consider it desirable to perform audit tests prior to year end. Certain procedures may be
performed at an interim time (prior to client’s year end) : Update depreciation schedules Examine new loan agreements
Vouch transactions Analyze changes in client’s accounting system
Review board of director minutes If strong internal controls exist the auditor may also:
Observe physical inventories Confirm account balances
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II. Selecting Tests to Perform
A. The Cost of Testing
B. Appropriate Evidence for Audit Testing
C. Risk and Testing in the Audit Process
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A. The Cost of Testing
Going from the most to least costly, the types of tests
are: Tests of details of balances
Substantive tests of transactions
Tests of controls Procedures to obtain an
understanding of internal controls
Analytical procedures
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B. Appropriate Evidence for Audit Testing
Type of Test
Procedures for internal control
Tests of controls
Substantive tests of transactions
Analytical procedures
Tests of details of balances
Ph
ysic
alE
xam
inat
ion
Con
firm
atio
n
Doc
um
enta
tion
Ob
serv
atio
n
Type of Evidence
Inq
uir
ies
ofth
e cl
ien
t
Rep
erfo
rman
ce
An
alyt
icp
erfo
rman
ce
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C. Risk and Testing in the Audit Process
Substantive Testing of Transactions
In some situations it may be more efficient to assess control risk at
a higher level and reduce or eliminate tests of controls. This
depends on cost of testing controls versus the additional substantive testing that would result from a higher control
risk.
Tests of Details of Balances
If tolerable misstatement is low, and inherent risk
and control risk are high, planned tests of
details of balances must be high.
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III. Design of the Audit Program
A. Tests of Controls and Substantive Tests of Transactions
B. Analytical Procedures
C. Tests of Details of Balances
Most audits design an audit program in the following three parts:
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A. Tests of Controls and Substantive Tests of Transactions
A four-step approach when the auditor plans to reduce assessed control risk below the maximum:
Transaction related audit objectives are applied to the class of transactions being tested, such as sales.
Key controls that should reduce control risk for each transaction-related audit objective are identified.
For all internal controls used to reduce the initial assessment of control risk below the maximum (key controls),
appropriate tests of controls are developed. Design appropriate substantive tests of transactions, considering weaknesses in internal control and expected
results of tests of controls (allows for simultaneous tests of controls and substantive testing).
Note: If control risk is assessed at 1.0, only substantive tests of transactions will be used in this part of the audit program.
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B. Analytical Procedures
Analytical procedures may be performed during 3 different stages of the audit:
In the planning stage to help the auditor understand the client’s business and determine other evidence needed to satisfy
acceptable audit risk. During the audit, especially during substantive testing.
Near the end of the audit as a final test of reasonableness.
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C. Tests of Details of Balances
If the results of tests of controls, substantive
tests of transactions, and analytical procedures
are not consistent with the predictions, tests of details of balances will need to be changed as the audit progresses.
Figure 13-6 on page 388 illustrates the testing methodology using Accounts Receivable
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Summary of the Audit Process - Phase I (Planning)Accept client and perform initial planning.
Understand the client’s business and industry.
Assess client’s business risk.
Perform preliminary analytical procedures.
Set materiality and assess acceptable audit risk and inherent risk.
Understand internal control and assess control risk.
Develop overall audit plan and audit program.
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Summary of the Audit Process - Phase II (Begin Field Work)
Perform tests of controls.
Perform substantive tests of transactions.
Assess likelihood of misstatements in financial statements.
Plan to reduce assessedlevel of control risk?
Yes
No
FromPhase I
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Summary of the Audit Process Phase III (End of Fieldwork)
Perform analytical procedures.
Perform tests of key items.
Perform additional tests of details of balances.
Likelihood of Misstatementin Financial Statements
Low Medium High orunknown
FromPhase II
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Summary of the Audit Process Phase IV (Wrap-Up)
Review for contingent liabilities.
Review for subsequent events.
Accumulate final evidence.
Evaluate results.
Issue audit report.
Communicate with auditcommittee and management.
FromPhase III
Recommended