13 - 1 ©2006 prentice hall business publishing, auditing 11/e, arens/beasley/elder overall audit...

13 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Overall Audit PlanOverall Audit Planand Audit Programand Audit Program

Chapter 13Chapter 13


Learning Objective 1Learning Objective 1

Use the five types of audit testsUse the five types of audit tests

to determine whether financialto determine whether financial

statements are fairly stated.statements are fairly stated.


Types of TestsTypes of Tests

Procedures to obtain an understandingProcedures to obtain an understandingof internal controlof internal control

Tests of controlTests of control

Substantive tests of transactionsSubstantive tests of transactions

Analytical proceduresAnalytical procedures

Tests of details of balancesTests of details of balances


Types of Audit Tests andTypes of Audit Tests andthe Audit Risk Modelthe Audit Risk Model

Audit riskAudit riskmodelmodel

Types ofTypes ofauditauditteststests

ProceduresProceduresto obtain anto obtain an

understandingunderstandingof internal controlof internal control

Tests ofTests ofcontrolscontrols(TOC)(TOC)

SubstantiveSubstantivetests oftests of

transactionstransactions(STOC)(STOC)

+ +

AARAARIR × CRIR × CR = PDR= PDR


Types of Audit Tests andTypes of Audit Tests andthe Audit Risk Modelthe Audit Risk Model

Audit riskAudit riskmodelmodel

Types ofTypes ofauditauditteststests

AnalyticalAnalyticalproceduresprocedures

(AP)(AP)

Tests ofTests ofdetails ofdetails ofbalancesbalances

(TDP)(TDP)

SufficientSufficientcompetentcompetentevidenceevidenceper GASSper GASS

+ =

AARAARIR × CRIR × CR = PDR= PDR


Role of all Audit Tests in the Sales Role of all Audit Tests in the Sales and Collection Cycleand Collection Cycle

SalesSalesAccountsAccounts

ReceivableReceivableCash inCash in

BankBankSalesSales

transactionstransactionsCash receiptsCash receiptstransactionstransactions

EndingEndingbalancebalance

EndingEndingbalancebalance

TOCTOC + + STOTSTOT + + APAP + + TDBTDB= Sufficient competent evidence per GAAS= Sufficient competent evidence per GAAS

Audited byAudited byTOCTOC, , STOTSTOT, and , and APAP

Audited by Audited by APAP and and TDBTDB

Audited byAudited byTOCTOC, , STOTSTOT, and , and APAP



Select the appropriate typesSelect the appropriate types

of audit tests.of audit tests.


Relationship Between Types of Relationship Between Types of Tests and EvidenceTests and Evidence

Type of TestType of Test

Procedures for internal controlProcedures for internal control

Tests of controlsTests of controls



Tests of details of balancesTests of details of balancesP

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Type of EvidenceType of Evidence


Relationship Between Types of Relationship Between Types of Tests and EvidenceTests and Evidence

Type of TestType of Test

Procedures for internal controlProcedures for internal control

Tests of controlsTests of controls



Tests of details of balancesTests of details of balancesIn

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Type of EvidenceType of Evidence


Audit Assurance at Different Levels of Audit Assurance at Different Levels of Internal Control EffectivenessInternal Control Effectiveness

AcceptableAcceptableassuranceassurance

NoNoassuranceassurance

INTERNAL CONTROL EFFECTIVENESSINTERNAL CONTROL EFFECTIVENESSWeak controlWeak control Strong controlStrong control

Reliance on controls: CReliance on controls: C33 – None, C – None, C22 – Some, C – Some, C11 – Maximum – Maximum

Audit assuranceAudit assurancefrom control riskfrom control riskassessment andassessment andtests of controltests of control

Audit assuranceAudit assurancefrom substantivefrom substantiveteststests

AA CC BB

CC33

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Understand how informationUnderstand how information

technology affects audit testing.technology affects audit testing.


Impact of Information Technology Impact of Information Technology on Audit Testingon Audit Testing

SAS 80 (AU 326) and SAS 94 (AU 319)SAS 80 (AU 326) and SAS 94 (AU 319)provide guidance for auditors of entitiesprovide guidance for auditors of entitiesthat transmit, process, maintain, or accessthat transmit, process, maintain, or accesssignificant information electronically.significant information electronically.


Impact of Information Technology Impact of Information Technology on Audit Testingon Audit Testing

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

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

Program change controlsProgram change controls Access controlsAccess controls



Understand the concept ofUnderstand the concept of

evidence mix and how itevidence mix and how it

should be varied inshould be varied in

different circumstances.different circumstances.


Variations in Evidence MixVariations in Evidence Mix

Procedures to obtainProcedures to obtainan understandingan understandingof internal controlof internal control

TestsTestsof controlsof controls

Audit 1Audit 1 EE EE

Audit 2Audit 2 MM MM

Audit 3Audit 3 MM NN

Audit 4Audit 4 MM MM

Amount of testing: Amount of testing: EExtensive, xtensive, MMedium, edium, SSmall, mall, NNoneone


Variations in Evidence MixVariations in Evidence Mix

SubstantiveSubstantivetests oftests oftransactionstransactions

AnalyticalAnalyticalproceduresprocedures

Tests ofTests ofdetails ofdetails ofbalancesbalances

Audit 1Audit 1 SS E E SS

Audit 2Audit 2 MM E E MM

Audit 3Audit 3 EE M M EE

Audit 4Audit 4 EE E E EE

Amount of testing: Amount of testing: EExtensive, xtensive, MMedium, edium, SSmall, mall, NNoneone



Design an audit program.Design an audit program.


Audit ProgramAudit Program

Part 1:Part 1:Tests of controls and substantiveTests of controls and substantivetests of transactionstests of transactions

Part 2:Part 2:Analytical proceduresAnalytical procedures

Part 3:Part 3:Tests of details and balancesTests of details and balances


Tests of Controls and Substantive Tests of Controls and Substantive Tests of TransactionsTests of Transactions

1.1. Apply the transaction-related audit objectivesApply the transaction-related audit objectivesto the class of transactions being tested.to the class of transactions being tested.

2. Identify key controls that should reduce2. Identify key controls that should reducecontrol risk for each audit objective.control risk for each audit objective.

3. Develop appropriate tests of controls.3. Develop appropriate tests of controls.

4. Design substantive tests of transactions.4. Design substantive tests of transactions.


Methodology for Designing Methodology for Designing Controls and Substantive TestsControls and Substantive Tests

Perform procedures toPerform procedures tounderstand internalunderstand internalcontrol.control.

Audit proceduresAudit procedures

Sample sizeSample size

Items to selectItems to select

TimingTiming

Assess control risk.Assess control risk.

Determine extent ofDetermine extent oftesting controls.testing controls.

Design tests of controlsDesign tests of controlsand substantive testsand substantive testsof transactions to meetof transactions to meettransaction-relatedtransaction-relatedaudit objectives.audit objectives.


Four-Step Approach to Designing Four-Step Approach to Designing Control and Substantive TestsControl and Substantive Tests

Apply transaction- relatedApply transaction- relatedaudit objectives to a classaudit objectives to a classof transactions. (Step 1)of transactions. (Step 1)




TimingTiming




TimingTiming

Identify key controls andIdentify key controls andmake a preliminarymake a preliminaryassessment of control risk.assessment of control risk.(Step 2)(Step 2)

Design tests of controls.Design tests of controls.(Step 3)(Step 3)

Design substantive tests ofDesign substantive tests oftransactions. (Step 4)transactions. (Step 4)


Methodology for Designing Tests of Methodology for Designing Tests of Balances – Accounts ReceivableBalances – Accounts Receivable

Identify clientIdentify clientbusiness risksbusiness risksaffecting accountsaffecting accountsreceivable.receivable.

Set tolerableSet tolerablemisstatement andmisstatement andassess inherent riskassess inherent riskfor accounts receivable.for accounts receivable.

Assess controlAssess controlrisk for salesrisk for salesand collectionand collectioncycle.cycle.

Design and performDesign and performanalytical proceduresanalytical proceduresfor accountsfor accountsreceivable balance.receivable balance.

Design and perform testsDesign and perform testsof controls and substantiveof controls and substantivetests of transactions fortests of transactions forsales and collection cycle.sales and collection cycle.




TimingTiming

Design tests of details ofDesign tests of details ofaccounts receivable balanceaccounts receivable balanceto satisfy balance-relatedto satisfy balance-relatedaudit objectives.audit objectives.


Approach to Designing Tests of Approach to Designing Tests of Details of BalancesDetails of Balances

Apply transaction-relatedApply transaction-relatedaudit objectives to a classaudit objectives to a classof transactions.of transactions.




TimingTiming

Identify key controlsIdentify key controlsand make an assessmentand make an assessmentof control risk.of control risk.




TimingTiming

Design tests of controls.Design tests of controls.Design substantive testsDesign substantive testsof transactions.of transactions.


Approach to Designing Tests of Approach to Designing Tests of Details of BalancesDetails of Balances

Apply balance-Apply balance-related auditrelated auditobjectives to anobjectives to anaccount balance.account balance.

Design testsDesign testsof details ofof details ofbalances.balances.

Decide tolerableDecide tolerablemisstatement.misstatement.

Make preliminaryMake preliminaryjudgment aboutjudgment aboutmateriality.materiality.

Design analyticalDesign analyticalprocedures.procedures.

Decide acceptableDecide acceptableaudit risk.audit risk.

Assess inherent risk.Assess inherent risk.

Assess clientAssess clientbusiness risk.business risk.



Compare and contrastCompare and contrast

transaction-related audittransaction-related audit

objectives and balance-relatedobjectives and balance-related

audit objectives.audit objectives.


Relationship Among Five Key Relationship Among Five Key Evidence-Related TermsEvidence-Related Terms

Phases of the audit processPhases of the audit process

Audit objectivesAudit objectives

Types of testsTypes of tests

Evidence decisionsEvidence decisions

Types of evidenceTypes of evidence


Phases of the Audit ProcessPhases of the Audit Process

1.1. Plan and design an audit approach.Plan and design an audit approach.

2. Perform tests of controls and substantive2. Perform tests of controls and substantive tests of transactions.tests of transactions.

3. Perform analytical procedures and tests3. Perform analytical procedures and tests of details of balances.of details of balances.

4. Complete the audit and issue an audit report.4. Complete the audit and issue an audit report.


Audit ObjectivesAudit ObjectivesTransaction-relatedTransaction-related

1. Existence1. Existence2. Completeness2. Completeness3. Accuracy3. Accuracy4. Classification4. Classification5. Timing5. Timing6. Posting and6. Posting and summarizationsummarization

Balance-relatedBalance-related

1. Existence1. Existence2. Completeness2. Completeness3. Accuracy3. Accuracy4. Classification4. Classification5. Cutoff5. Cutoff6. Detail tie-in6. Detail tie-in7. Realizable value7. Realizable value8. Rights and obligations8. Rights and obligations9. Presentation and9. Presentation and disclosuredisclosure


Types of TestsTypes of Tests

1. Procedures to obtain an understanding1. Procedures to obtain an understanding of internal controlof internal control

2. Tests of controls2. Tests of controls

3. Substantive tests of transactions3. Substantive tests of transactions

4. Analytical procedures4. Analytical procedures

5. Tests of details of balances5. Tests of details of balances


Evidence DecisionsEvidence Decisions

1.1. Audit proceduresAudit procedures

2. Sample size2. Sample size

3. Items to select3. Items to select

4. Timing of performance4. Timing of performance


Types of EvidenceTypes of Evidence

1. Physical examination1. Physical examination

2. Confirmation2. Confirmation

3. Documentation3. Documentation

4. Analytical procedures4. Analytical procedures

5. Observation5. Observation

6. Inquiry of the client6. Inquiry of the client

7. Reperformance7. Reperformance



Integrate the four phasesIntegrate the four phases

of the audit process.of the audit process.


Summary of the Audit ProcessSummary of the Audit Process

Phase IPhase IPlan and designPlan and designan audit approach.an audit approach.

Phase IIPhase II

Perform tests ofPerform tests ofcontrols andcontrols andsubstantive testssubstantive testsof transactions.of transactions.

Phase IIIPhase III

Perform analyticalPerform analyticalprocedures andprocedures andtests of detailstests of detailsof balances.of balances.

Phase IVPhase IVComplete theComplete theaudit and issueaudit and issuean audit report.an audit report.


Summary of the Audit Process:Summary of the Audit Process:Phase IPhase I

Accept client and perform initial planning.Accept client and perform initial planning.

Understand the client’s business and industry.Understand the client’s business and industry.

Assess client’s business risk.Assess client’s business risk.

Perform preliminary analytical procedures.Perform preliminary analytical procedures.


Summary of the Audit Process:Summary of the Audit Process:Phase IPhase I

Set materiality and assess acceptableSet materiality and assess acceptableaudit risk and inherent risk.audit risk and inherent risk.

Understand internal control and assess control risk.Understand internal control and assess control risk.

Gather information to assess fraud risks.Gather information to assess fraud risks.

Develop overall audit plan and audit program.Develop overall audit plan and audit program.


Summary of the Audit Process:Summary of the Audit Process:Phase IIPhase II

Perform substantive tests of transactions.Perform substantive tests of transactions.

NoNo

YesYes

Perform tests of controls.Perform tests of controls.

Assess likelihood of misstatements inAssess likelihood of misstatements infinancial statements.financial statements.

Plan to reducePlan to reduceassessed levelassessed levelof control risk?of control risk?


Summary of the Audit Process:Summary of the Audit Process:Phase IIIPhase III

Perform analytical procedures.Perform analytical procedures.

Perform tests of key items.Perform tests of key items.

Perform additional tests of detailsPerform additional tests of detailsof balances.of balances.

LowLow MediumMedium High orHigh orunknownunknown


Summary of the Audit Process:Summary of the Audit Process:Phase IVPhase IVReview for contingent liabilities.Review for contingent liabilities.

Review for subsequent events.Review for subsequent events.

Accumulate final evidence.Accumulate final evidence.

Evaluate results.Evaluate results.

Issue audit report.Issue audit report.

Communicate with auditCommunicate with auditcommittee and management.committee and management.


End of Chapter 13End of Chapter 13

13 - 1 ©2006 prentice hall business publishing, auditing 11/e, arens/beasley/elder overall audit...

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