Overall Audit Plan and Audit Program Chapter 13

Learning Objective 1 Use the five types of audit tests to determine whether financial

Types of Tests Ø Risk assessment procedures Ø Further audit procedures © 2010 Prentice

Further Audit Procedures and the Audit Risk Model Audit risk model Tests of controls

Risk Assessment Procedures A major part of these procedures are done to obtain an

Role of All Audit Tests in the Sales and Collection Cycle Sales Accounts Cash

Learning Objective 2 Select the appropriate types of audit tests. © 2010 Prentice Hall

Relationship Between Further Audit Procedures and Evidence Tests of controls Substantive tests of transactions

Relationship Between Further Audit Procedures and Evidence © 2010 Prentice Hall Business Publishing, Auditing

Acceptable assurance No assurance AUDIT ASSURANCE Audit Assurance at Different Levels of Internal Control

Learning Objective 3 Understand how information technology affects audit testing. © 2010 Prentice Hall

Impact of Information Technology on Audit Testing SAS 80 (AU 326) and SAS 109

Impact of Information Technology on Audit Testing Computer assisted audit techniques may be used

Learning Objective 4 Understand the concept of evidence mix and how it should be

Variations in Evidence Mix Tests of Controls Substantive Tests of Transactions Analytical Procedures Tests

Learning Objective 5 Design an audit program. © 2010 Prentice Hall Business Publishing, Auditing

Audit Program Part 1: Tests of controls and substantive tests of transactions Part 2:

Tests of Controls and Substantive Tests of Transactions 1. Apply the transaction-related audit objectives

Methodology for Designing Controls and Substantive Tests © 2010 Prentice Hall Business Publishing, Auditing

Four-Step Approach to Designing Control and Substantive Tests © 2010 Prentice Hall Business Publishing,

Methodology for Designing Tests of Balances – Accounts Receivable © 2010 Prentice Hall Business

Learning Objective 6 Compare and contrast trasnsaction-related audit objectives with balance-related and presentation and

Relationship of Transaction-related Audit Objectives to Balance-related Audit Objectives Transactionrelated Audit Objective Balancerelated Audit

Relationship Among Five Key Evidence-related Terms Ø Phases of the audit process Ø Audit

Phases of the Audit Process I. Plan and design an audit approach. II. Perform

Audit Objectives Ø Transaction-related Ø Balance-related Ø Presentation and disclosure-related © 2010 Prentice Hall

Types of Tests Ø Risk assessment procedures Ø Tests of controls Ø Substantive tests

Evidence Decisions Ø Audit procedures Ø Sample size Ø Items to select Ø Timing

Types of Evidence Ø Ø Ø Ø Documentation Inquiries of the client Analytical procedures

Learning Objective 7 Integrate the four phases of the audit process. © 2010 Prentice

Summary of the Audit Process Plan and design Phase I an audit approach Phase

Summary of the Audit Process: Phase I Accept client and perform initial planning Understand

Summary of the Audit Process: Phase I Set materiality and assess acceptable audit risk

Summary of the Audit Process: Phase II Plan to reduce assessed level of control

Summary of the Audit Process: Phase III Low Medium High or unknown Perform analytical

Summary of the Audit Process: Phase IV Perform additional tests for presentation and disclosure

End of Chapter 13 © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13

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Further Audit Procedures and the Audit Risk Model Audit risk model Tests of controls AAR IR × CR = PDR Substantive Analytical tests of + + procedures + transactions Tests of details of balances Sufficient appropriate = evidence per GASS Further audit procedures © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 4

Risk Assessment Procedures A major part of these procedures are done to obtain an understanding of internal control. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 5

Role of All Audit Tests in the Sales and Collection Cycle Sales Accounts Cash in Receivable Bank Sales Cash receipts transactions Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence per GAAS © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 6

Relationship Between Further Audit Procedures and Evidence Tests of controls Substantive tests of transactions Analytical procedures Tests of details of balances © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Observation Documentation Confirmation Further Audit Procedures Physical examination Type of Evidence 13 - 8

Relationship Between Further Audit Procedures and Evidence © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Recalculation Analytical Procedures Tests of controls Substantive tests of transactions Analytical procedures Tests of details of balances Reperformance Further Audit Procedures Inquiries of the Client Type of Evidence 13 - 9

Acceptable assurance No assurance AUDIT ASSURANCE Audit Assurance at Different Levels of Internal Control Effectiveness C 3 C 2 C 1 Audit assurance from control risk assessment and tests of control Audit assurance from substantive tests A C B INTERNAL CONTROL EFFECTIVENESS Weak control Strong control Reliance on controls: C 3 – None, C 2 – Some, C 1 – Maximum © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 10

Impact of Information Technology on Audit Testing SAS 80 (AU 326) and SAS 109 (AU 319) provide guidance for auditors of entities that transmit, process, maintain, or access significant information electronically. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 12

Impact of Information Technology on Audit Testing Computer assisted audit techniques may be used to test automated controls or data. Reports produced by IT may be used to test the effectiveness of IT general controls. Ø Program change controls Ø Access controls © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 13

Learning Objective 4 Understand the concept of evidence mix and how it should be varied in different circumstances. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 14

Variations in Evidence Mix Tests of Controls Substantive Tests of Transactions Analytical Procedures Tests of Details of Balances Audit 1 E S Audit 2 M M E M Audit 3 N E M E Audit 4 M E E E Amount of testing: Extensive, Medium, Small, None © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 15

Audit Program Part 1: Tests of controls and substantive tests of transactions Part 2: Analytical procedures Part 3: Tests of details and balances © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 17

Tests of Controls and Substantive Tests of Transactions 1. Apply the transaction-related audit objectives to the class of transactions being tested. 2. Identify key controls that should reduce control risk for each audit objective. 3. Develop appropriate tests of controls. 4. Design substantive tests of transactions. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 18

Learning Objective 6 Compare and contrast trasnsaction-related audit objectives with balance-related and presentation and disclosure-related audit objectives. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 22

Relationship of Transaction-related Audit Objectives to Balance-related Audit Objectives Transactionrelated Audit Objective Balancerelated Audit Objective Nature of Relationship Existence Completeness Accuracy Posting and summarization Classification Timing Existence or completeness Completeness or existence Accuracy Detail tie-in Direct Classification Cutoff Realizable value Rights and obligation Direct None © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 23

Relationship Among Five Key Evidence-related Terms Ø Phases of the audit process Ø Audit objectives Ø Types of tests Ø Evidence decisions Ø Types of evidence © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 24

Phases of the Audit Process I. Plan and design an audit approach. II. Perform tests of controls and substantive tests of transactions. III. Perform analytical procedures and tests of details of balances. IV. Complete the audit and issue an audit report. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 25

Types of Tests Ø Risk assessment procedures Ø Tests of controls Ø Substantive tests of transactions Ø Analytical procedures Ø Tests of details of balances © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 27

Types of Evidence Ø Ø Ø Ø Documentation Inquiries of the client Analytical procedures Observation Reperformance Recalculation Physical examination Confirmation © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 29

Summary of the Audit Process Plan and design Phase I an audit approach Phase II Perform tests of controls and substantive tests of transactions Perform analytical procedures and Phase III tests of details of balances Phase IV © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Complete the audit and issue an audit report 13 - 31

Summary of the Audit Process: Phase I Accept client and perform initial planning Understand the client’s business and industry Assess client’s business risk Perform preliminary analytical procedures © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 32

Summary of the Audit Process: Phase I Set materiality and assess acceptable audit risk and inherent risk Understand internal control and assess control risk Gather information to assess fraud risks Develop overall audit plan and audit program © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 33

Summary of the Audit Process: Phase II Plan to reduce assessed level of control risk? No Yes Perform tests of controls Perform substantive tests of transactions Assess likelihood of misstatements in financial statements © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 34

Summary of the Audit Process: Phase III Low Medium High or unknown Perform analytical procedures Perform tests of key items Perform additional tests of details of balances © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 35

Summary of the Audit Process: Phase IV Perform additional tests for presentation and disclosure Accumulate final evidence Evaluate results Issue audit report Communicate with audit committee and management © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 36