Overall Audit Plan and Audit Program

transcript

Overall Audit Planand Audit Program

Chapter 10

Learning Objective 1

Use the five types of audit teststo determine whether financial

statements are fairly stated.

Types of Tests

Procedures to obtain anunderstanding of internal control

Tests of controlSubstantive tests of transactions

Analytical proceduresTests of details of balances

Types of Audit Tests andthe Audit Risk Model

AuditRisk

Proceduresto obtain an

understanding ofinternal control

Tests ofcontrols(TOC)

Substantivetests of

transactions(STOT)

Typesof Audit

Tests+ +

AARIR × CR

Types of Audit Tests andthe Audit Risk Model

Analyticalprocedures

Tests ofdetails ofbalances(TDP)

Sufficientcompetentevidence

per GASS

AARIR × CR

= PDRAuditRisk

Typesof Audit

Role of all Audit Tests in the Sales and Collection Cycle

SalesAccounts

ReceivableCash inBank

Salestransactions

Cash receiptstransactions

Endingbalance

TOC + STOT + AP + TDP= Sufficient competent evidence per GAAS

Audited byTOC, STOT, and AP

Audited by AP and TDP

Audited byTOC, STOT, and AP

Select the appropriatetypes of audit tests.

Relationship BetweenTypes of Tests and Evidence

Type of TestProcedures for internal controlTests of controlsSubstantive tests of transactionsAnalytical proceduresTests of details of balances

Relationship BetweenTypes of Tests and Evidence

Type of TestProcedures for internal controlTests of controlsSubstantive tests of transactionsAnalytical proceduresTests of details of balances

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

Understand how informationtechnology affects audit testing.

Impact of Information Technology on Audit Testing

SAS 80 (AU 326) and SAS 94 (AU 319)provide guidance for auditors of entities

that transmit, process, maintain, or accesssignificant information electronically.

Impact of Information Technology on Audit Testing

Computer assisted audit techniques may beused to test automated controls or data.

Reports produced by IT may be used to testthe effectiveness of IT general controls.

Program changecontrols

Accesscontrols

Understand the concept of evidencemix and how it should be varied

in different circumstances.

Variations in Evidence Mix

Procedures to Obtainan Understandingof Internal Control

Testsof

ControlsAudit 1 E EAudit 2 M MAudit 3 M NAudit 4 M MAmount of testing: Extensive, Medium, Small, None

Variations in Evidence Mix

SubstantiveTests of

TransactionsAnalyticalProcedures

Tests ofDetails ofBalances

Audit 1 S E SAudit 2 M E MAudit 3 E M EAudit 4 E E EAmount of testing: Extensive, Medium, Small, None

Design an audit program.

Audit Program

Part 1:Tests of controls and substantive

tests of transactionsPart 2:

Analytical proceduresPart 3:

Tests of details and balances

Audit Procedures

1. Apply the transaction-related audit objectivesto the class of transactions being tested.

2. Identify key controls that should reducecontrol risk for each audit objective.

3. Develop appropriate tests of controls.4. Design substantive tests of transactions.

Four-Step Approach to Designing Control and Substantive Tests

Apply transaction-related audit objectives

to a class of transactions(Step 1).

Identify key controlsand make an assessment

of control risk(Step 2).

Design tests ofcontrols (Step 3).

Design substantive testsof transactions (Step 4).

Audit procedures Sample size Items to select Timing

Methodology for Designing Tests ofBalances – Accounts Receivable

Identify client business risksaffecting accounts receivable.

Set tolerable misstatementand assess inherent riskfor accounts receivable.

Assess control risk for salesand collection cycle.

Design and perform tests ofcontrols and substantive testsof transactions for sales and

collection cycle.

Design and perform analyticalprocedures for accounts

receivable balance.

Design tests of details ofaccounts receivable balance

to satisfy balance-relatedaudit objectives.

Audit proceduresSample size

Items to selectTiming

Approach to Designing Tests of Details of Balances

Apply transaction-related audit

objectives to a classof transactions.

Identify key controlsand make a preliminary

assessmentof control risk.

Design tests ofcontrols.

Design substantive testsof transactions.

Audit procedures Sample size Items to select Timing

Design testsof controls.

Designsubstantive

tests oftransactions.

Apply balance-related auditobjectives to an account balance.

Audit proceduresSample size

Items to selectTiming

Design tests of details of balances.

Apply balance-related audit

objectives to anaccount balance.

Design testsof details of

balances.

Decide tolerablemisstatement.

Make preliminaryjudgment about

materiality.

Design analyticalprocedures.

Decide acceptableaudit risk.

Assess inherent risk.

Assess clientbusiness risk.

Compare and contrasttransaction-related auditobjectives and balance-related audit objectives.

Relationship of Transaction- toBalance-Related Audit Objectives

Transaction-Related Balance-Related Nature ofAudit Objective Audit Objective RelationshipExistence Existence or Direct

completenessCompleteness Completeness or Direct

existenceAccuracy Accuracy Direct

Transaction-Related Balance-Related Nature ofAudit Objective Audit Objective RelationshipClassification Classification DirectTiming Cutoff DirectPosting and Detail tie-in Directsummarization

Transaction-Related Balance-Related Nature ofAudit Objective Audit Objective Relationship

Realizable value NoneRights and None

obligationsPresentation and None

disclosure

Integrate the four phasesof the audit process.

Summary of theAudit Process

Phase I Plan and designan audit approach.

Phase II

Perform tests ofcontrols and

substantive testsof transactions.

Phase III

Perform analyticalprocedures andtests of detailsof balances.

Phase IVComplete the

audit and issuean audit report.

Summary of the Audit ProcessPhase I

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 acceptableaudit risk and inherent risk.

Understand internal control and assess control risk.Develop overall audit plan and audit program.

Summary of the Audit ProcessPhase II

Assess likelihood of misstatementsin financial statements.

Plan to reduce assessedlevel of control risk?

Perform tests of controls.

Perform substantive tests of transactions.

Summary of the Audit ProcessPhase III

Perform tests of key items.Perform additional tests of details of balances.

Perform analytical procedures.

Low Medium High orunknown

Summary of the Audit ProcessPhase IV

Review for contingent liabilities.Review for subsequent events.

Accumulate final evidence.Evaluate results.

Issue audit report.Communicate with audit

committee and management.

End of Chapter 10

Overall Audit Plan and Audit Program

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