Overall Audit PlanOverall Audit Planand Audit Programand Audit Program

Chapter 13Chapter 13

Midterm topic guide will be ready and Midterm topic guide will be ready and posted to the website by sometime posted to the website by sometime Saturday (2/25)Saturday (2/25)

Types of Audit TestsTypes of Audit Tests

Procedures to obtain an understandingProcedures to obtain an understandingof internal control of internal control (Ch 10)(Ch 10)

Focused on understanding the design and Focused on understanding the design and operation of aspects of I/C necessary to plan operation of aspects of I/C necessary to plan the rest of the auditthe rest of the audit

Tests of control Tests of control (Ch 10)(Ch 10)

Procedures used to obtain evidenceProcedures used to obtain evidenceneeded to assess control risk.needed to assess control risk.

Types of Audit TestsTypes of Audit Tests

Analytical procedures Analytical procedures (Ch 8)(Ch 8)

• To indicate possible misstatementsTo indicate possible misstatements• To reduce tests of details of balancesTo reduce tests of details of balances

Tests of details of balancesTests of details of balancesFocus on ending G/L balancesFocus on ending G/L balances

Substantive tests of transactionsSubstantive tests of transactionsProcedures designed to test for dollarProcedures designed to test for dollar

misstatements of financial statementmisstatements of financial statementbalances.balances.

Types of Audit Tests and the Types of Audit Tests and the Audit Risk ModelAudit 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

Relationship Between Types of Relationship Between Types of Tests and Evidence Tests and Evidence (Table 13-2)(Table 13-2)

Type of TestType of Test

Procedures for I/CProcedures for I/C

Tests of controlsTests of controls

Substantive T.O.T.Substantive T.O.T.

Analytical proceduresAnalytical procedures

Tests of detailsTests of details

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Type of EvidenceType of Evidence

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Audit Assurance at Different Levels of Audit Assurance at Different Levels of Internal Control Effectiveness Internal Control Effectiveness (Figure 13-3)(Figure 13-3)

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

CC22

CC11

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Impact of Information Technology onImpact of Information Technology onAudit TestingAudit 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 on Impact of Information Technology on Audit TestingAudit Testing

Computer assisted audit techniques (CAATS)Computer assisted audit techniques (CAATS)may be used to test automated controls or data.may be 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

Variations in Evidence MixVariations in Evidence Mix

Chapter 13 starts “putting the Chapter 13 starts “putting the pieces” of the audit together.pieces” of the audit together.

Audit ProgramAudit Program

Tests of controls and Tests of controls and substantive tests of transactionssubstantive tests of transactions

Analytical proceduresAnalytical procedures

Tests of details and balancesTests of details and balances

It is convenient to think of the audit program as It is convenient to think of the audit program as consisting of the three major classes of tests:consisting of the three major classes of tests:

Role of Audit Tests: Sales & Collection Role of Audit Tests: Sales & Collection Cycle ExampleCycle Example (Fig 13-2)(Fig 13-2)

Designing Controls and Substantive Tests Designing Controls and Substantive Tests of Transactions of Transactions (Figure 13-4)(Figure 13-4)

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.

Approach to Designing Approach to Designing Tests of Details of Tests of Details of Balances (Figure 13-6)Balances (Figure 13-6)

Partial View of Table 13-4Partial View of Table 13-4Tests of Details of Balances – Audit ProgramTests of Details of Balances – Audit Program

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 Objectives Audit Objectives (Ch. 6)(Ch. 6)

Transaction-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 Evidence Types of Evidence (Ch. 7)(Ch. 7)

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

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.