CHAPTER 10 Overall Audit Plan and Audit Program

CHAPTER 10 Overall Audit Plan and Audit Program Copyright 2003 Pearson Education Canada Inc. 10 - 1

Steps in audit planning preplan obtain background information set materiality, and assess acceptable audit risk and inherent risk obtain information about client’s legal obligations understand internal control and assess control risk perform preliminary analytical procedures develop overall audit plan and audit program Copyright 2003 Pearson Education Canada Inc. 10 - 2

What are the different types of audit tests? Copyright 2003 Pearson Education Canada Inc. 10 - 3

What are the different types of audit tests? - procedures to obtain an understanding of internal control Copyright 2003 Pearson Education Canada Inc. 10 - 4

What are the different types of audit tests? - procedures to obtain an understanding of internal control The auditor must focus on both design and operation of internal controls. Copyright 2003 Pearson Education Canada Inc. 10 - 5

What are the different types of audit tests? - procedures to obtain an understanding of internal control The auditor’s understanding of internal control must be supported by evidence. Copyright 2003 Pearson Education Canada Inc. 10 - 6

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls ? Copyright 2003 Pearson Education Canada Inc. 10 - 7

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls Tests of controls examine the effectiveness of internal control design and operation. Copyright 2003 Pearson Education Canada Inc. 10 - 8

Tests of controls examine the effectiveness of internal control design and operation. EXAMPLES: - enquiries of client personnel Copyright 2003 Pearson Education Canada Inc. 10 - 9

Tests of controls examine the effectiveness of internal control design and operation. EXAMPLES: - enquiries of client personnel - examination of documents, records, and reports Job Description Memo: CANADIAN BANK Copyright 2003 Pearson Education Canada Inc. 10 - 10

EXAMPLES: Tests of controls examine the effectiveness of internal control design and operation. - enquiries of client personnel - examination of documents, records, and reports - observe controlrelated activities Copyright 2003 Pearson Education Canada Inc. 10 - 11

EXAMPLES: Tests of controls examine the effectiveness of internal control design and operation. - enquiries of client personnel - examination of documents, records, and reports - observe controlrelated activities - re-perform client procedures Copyright 2003 Pearson Education Canada Inc. 10 - 12

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls How are these two types of tests related? Copyright 2003 Pearson Education Canada Inc. 10 - 13

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls Tests of controls are designed, in part, to determine whether the auditor’s understanding of internal control is accurate. Copyright 2003 Pearson Education Canada Inc. 10 - 14

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls For efficiency, tests of controls and substantive tests of transactions are frequently performed at the same time. Copyright 2003 Pearson Education Canada Inc. 10 - 15

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - analytical procedures ? Copyright 2003 Pearson Education Canada Inc. 10 - 16

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - analytical procedures Analytical procedures use comparisons and relationships to determine reasonableness of balances. Copyright 2003 Pearson Education Canada Inc. 10 - 17

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - analytical procedures - tests of details of balances ? Copyright 2003 Pearson Education Canada Inc. 10 - 18

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - analytical procedures - tests of details of balances Tests of details of balances examine monetary misstatements in details of financial statement accounts. Copyright 2003 Pearson Education Canada Inc. 10 - 19

What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - analytical procedures - tests of details of balances The primary emphasis of this type of test is the balance sheet. Copyright 2003 Pearson Education Canada Inc. 10 - 20

As discussed in chapter 6, there are six types of evidence - inspection - confirmation - documentation - observation - enquiries of client - reperformance - analytical procedures Copyright 2003 Pearson Education Canada Inc. 10 - 21

types of evidence - physical examination - confirmation - documentation (vouching) - observation - enquiries of client - reperformance - analytical procedures What types of evidence are produced by the different types of audit tests? Copyright 2003 Pearson Education Canada Inc. 10 - 22

What types of evidence are produced by the different types of audit tests? types of audit test procedures to obtain an understanding of internal control types of evidence produced by test ? Copyright 2003 Pearson Education Canada Inc. 10 - 23

What types of evidence are produced by the different types of audit tests? types of audit test types of evidence produced by test procedures to obtain an understanding of internal control - documentation - observation - enquiries of client - reperformance Copyright 2003 Pearson Education Canada Inc. 10 - 24

What types of evidence are produced by the different types of audit tests? types of audit tests of controls types of evidence produced by test ? Copyright 2003 Pearson Education Canada Inc. 10 - 25

What types of evidence are produced by the different types of audit tests? types of audit tests of controls types of evidence produced by test - documentation - observation - enquiries of client - reperformance Copyright 2003 Pearson Education Canada Inc. 10 - 26

What types of evidence are produced by the different types of audit tests? types of audit test analytical procedures types of evidence produced by test ? Copyright 2003 Pearson Education Canada Inc. 10 - 27

What types of evidence are produced by the different types of audit tests? types of audit test analytical procedures types of evidence produced by test - enquiries of client - analytical procedures Copyright 2003 Pearson Education Canada Inc. 10 - 28

What types of evidence are produced by the different types of audit tests? types of audit tests of details of balances types of evidence produced by test ? Copyright 2003 Pearson Education Canada Inc. 10 - 29

What types of evidence are produced by the different types of audit tests? types of audit tests of details of balances types of evidence produced by test - physical examination - confirmation - documentation - enquiries of client - reperformance Copyright 2003 Pearson Education Canada Inc. 10 - 30

The types of audit tests vary in their relative costs. Copyright 2003 Pearson Education Canada Inc. 10 - 31

The types of audit tests vary in their relative costs. Which type of audit test is most expensive? Copyright 2003 Pearson Education Canada Inc. 10 - 32

The types of audit tests vary in their relative costs. Tests of details of balances are the most expensive type of audit test, e. g. , confirmations, physical examination. Copyright 2003 Pearson Education Canada Inc. 10 - 33

The types of audit tests vary in their relative costs. Which type of audit test is least expensive? Copyright 2003 Pearson Education Canada Inc. 10 - 34

The types of audit tests vary in their relative costs. Analytical procedures are least expensive because of the relative ease of calculating and comparing, particularly if software is employed. Copyright 2003 Pearson Education Canada Inc. 10 - 35

What is the evidence mix? Copyright 2003 Pearson Education Canada Inc. 10 - 36

What is the evidence mix? the combination of the four types of audit tests used in the audit of a cycle Copyright 2003 Pearson Education Canada Inc. 10 - 37

What is the evidence mix? In general, if the auditor assesses the controls and accounting system as relatively effective, the combination mix will involve more tests of controls of the four types and less of audit tests used substantive tests. in the audit of a cycle Copyright 2003 Pearson Education Canada Inc. 10 - 38

What is the evidence mix? Conversely, if the auditor assesses the controls and accounting system as relatively ineffective, the mix will involve less combination tests of controls of the four types and more of audit tests used substantive tests. in the audit of a cycle Copyright 2003 Pearson Education Canada Inc. 10 - 39

What is an audit program? Copyright 2003 Pearson Education Canada Inc. 10 - 40

What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. Copyright 2003 Pearson Education Canada Inc. 10 - 41

What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. includes: - procedures to perform observation analytical procedures enquiries examination of documents and records Copyright 2003 Pearson Education Canada Inc. 10 - 42

What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. $ $ includes: - sample sizes $ $ $ $ $ Copyright 2003 Pearson Education Canada Inc. 10 - 43

What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. $ $ includes: - items to select $ $ $ $ $ Copyright 2003 Pearson Education Canada Inc. 10 - 44

What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. $ $ includes: - timing of tests $ $ $ $ $ Copyright 2003 Pearson Education Canada Inc. 10 - 45

What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. Many programs have a separate set of subaudit programs for each transaction cycle. Copyright 2003 Pearson Education Canada Inc. 10 - 46

The audit program for most audits is designed in three parts. Copyright 2003 Pearson Education Canada Inc. 10 - 47

The audit program for most audits is designed in three parts. tests of controls Copyright 2003 Pearson Education Canada Inc. 10 - 48

The audit program for most audits is designed in three parts. tests of controls analytical procedures Copyright 2003 Pearson Education Canada Inc. 10 - 49

The audit program for most audits is designed in three parts. tests of controls analytical procedures tests of details of balances Copyright 2003 Pearson Education Canada Inc. 10 - 50

As discussed in Chapter 5, an audit can be divided into four phases. I II IV Copyright 2003 Pearson Education Canada Inc. 10 - 51

As discussed in Chapter 5, an audit can be divided into four phases. I. Plan and design an audit approach. II IV Copyright 2003 Pearson Education Canada Inc. 10 - 52

preplan obtain background information obtain information about client’s legal obligations perform preliminary analytical procedures I. Plan and design an audit approach. set materiality, and assess acceptable audit risk and inherent risk understand internal control and assess control risk develop overall audit plan and audit program Copyright 2003 Pearson Education Canada Inc. 10 - 53

An audit can be divided into four phases. I. Plan and design an audit approach. III II. Perform tests of controls. IV Copyright 2003 Pearson Education Canada Inc. 10 - 54

Does the auditor plan to reduce the assessed level of control risk? II. Perform tests of controls. no yes Copyright 2003 Pearson Education Canada Inc. 10 - 55

Does the auditor plan to reduce the assessed level of control risk? II. Perform tests of controls. no yes Perform tests of controls Copyright 2003 Pearson Education Canada Inc. 10 - 56

II. Perform tests of controls. Does the auditor plan to reduce the assessed level of control risk? no yes Perform tests of controls Assess the likelihood of misstatements in the financial statements Copyright 2003 Pearson Education Canada Inc. 10 - 57

An audit can be divided into four phases. I. Plan and design an audit approach. III. Perform analytical procedures and tests of details of balances. II. Perform tests of controls. IV Copyright 2003 Pearson Education Canada Inc. 10 - 58

III. Perform analytical procedures and tests of details of balances. Considering the assessed likelihood of financial statement misstatements (low, medium, high, unknown): Copyright 2003 Pearson Education Canada Inc. 10 - 59

Considering the assessed likelihood of financial statement misstatements (low, medium, high, unknown): III. Perform analytical procedures and tests of details of balances. Perform analytical procedures Copyright 2003 Pearson Education Canada Inc. 10 - 60

Considering the assessed likelihood of financial statement misstatements (low, medium, high, unknown): III. Perform analytical procedures and tests of details of balances. Perform analytical procedures Perform tests of key items Copyright 2003 Pearson Education Canada Inc. 10 - 61

Considering the assessed likelihood of financial statement misstatements (low, medium, high, unknown): III. Perform analytical procedures and tests of details of balances. Perform analytical procedures Perform tests of key items Perform additional tests of details Copyright 2003 Pearson Education Canada Inc. 10 - 62

An audit can be divided into four phases. I. Plan and design an audit approach. III. Perform analytical procedures and tests of details of balances. II. Perform tests of controls. IV. Complete the audit and issue an audit report. Copyright 2003 Pearson Education Canada Inc. 10 - 63

Review for contingent liabilities I. IV. Plan and design Complete the an audit andapproach. issue an audit report. Copyright 2003 Pearson Education Canada Inc. 10 - 64

Review for contingent liabilities Review for subsequent events I. IV. Plan and design Complete the an audit andapproach. issue an audit report. Copyright 2003 Pearson Education Canada Inc. 10 - 65

Review for contingent liabilities Review for subsequent events I. IV. Plan and design Complete the an audit andapproach. issue an Accumulate final evidence audit report. Copyright 2003 Pearson Education Canada Inc. 10 - 66

Review for contingent liabilities Review for subsequent events I. IV. Plan and design Complete the an audit andapproach. issue an audit report. Accumulate final evidence Evaluate results Copyright 2003 Pearson Education Canada Inc. 10 - 67

Review for contingent liabilities Review for subsequent events I. IV. Plan and design Complete the an audit andapproach. issue an audit report. Accumulate final evidence Evaluate results Issue audit report Copyright 2003 Pearson Education Canada Inc. 10 - 68

Review for contingent liabilities Review for subsequent events I. Plan and design an audit approach. Accumulate final evidence Evaluate results Issue audit report Communicate with audit committee and management Copyright 2003 Pearson Education Canada Inc. 10 - 69