2Learning Objective 1 Use the five types of audit tests to determine whether financialstatements are fairly stated.
3Types of TestsRisk assessment proceduresFurther audit procedures
4Further Audit Procedures and the Audit Risk Model AARIR × CR= PDRTests ofcontrols+Substantivetests oftransactions+Analyticalprocedures+Tests ofdetails ofbalances=Sufficientappropriateevidenceper GASSFurther audit procedures
5Risk Assessment Procedures A major part of these procedures aredone to obtain an understandingof internal control.
6Role of All Audit Tests in the Sales and Collection Cycle AccountsReceivableCash inBankSalestransactionsCash receiptstransactionsAudited byTOC, STOT, and APAudited byTOC, STOT, and APEndingbalanceEndingbalanceAudited by AP and TDBTOC + STOT + AP + TDB= Sufficient appropriate evidence per GAAS
7Learning Objective 2Select the appropriate typesof audit tests.
8Relationship Between Further Audit Procedures and Evidence Type of EvidenceexaminationPhysicalConfirmationDocumentationObservationFurther Audit ProceduresTests of controlsSubstantive tests of transactionsAnalytical proceduresTests of details of balances
9Relationship Between Further Audit Procedures and Evidence Type of EvidenceInquiries ofthe ClientReperformanceProceduresAnalyticalRecalculationFurther Audit ProceduresTests of controlsSubstantive tests of transactionsAnalytical proceduresTests of details of balances
10Audit Assurance at Different Levels of Internal Control Effectiveness AcceptableassuranceAudit assurancefrom control riskassessment andtests of controlC2AUDIT ASSURANCEC1Audit assurancefrom substantivetestsNoassuranceACBINTERNAL CONTROL EFFECTIVENESSWeak controlStrong controlReliance on controls: C3 – None, C2 – Some, C1 – Maximum
11Learning Objective 3 Understand how information technology affects audit testing.
12Impact of Information Technology on Audit Testing SAS 80 (AU 326) and SAS 109 (AU 319)provide guidance for auditors of entitiesthat transmit, process, maintain, or accesssignificant information electronically.
13Impact 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 change controlsAccess controls
14Learning Objective 4 Understand the concept of evidence mix and how it should be varied indifferent circumstances.
15Variations in Evidence Mix TestsofControlsSubstantiveTests ofTransactionsAnalyticalProceduresTests ofDetails ofBalancesAudit 1Audit 2Audit 3Audit 4EMNSMEEMSMEAmount of testing: Extensive, Medium, Small, None
17Audit Program Part 1: Tests of controls and substantive tests of transactionsPart 2:Analytical proceduresPart 3:Tests of details and balances
18Tests of Controls and Substantive Tests of Transactions 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.
19Methodology for Designing Controls and Substantive Tests
20Four-Step Approach to Designing Control and Substantive Tests
21Methodology for Designing Tests of Balances – Accounts Receivable
22Learning Objective 6Compare and contrast trasnsaction-related audit objectives with balance-related and presentation and disclosure-related audit objectives.
23Relationship of Transaction-related Audit Objectives to Balance-related Audit Objectives Nature ofRelationshipExistenceCompletenessAccuracyPosting andsummarizationClassificationTimingExistence or completenessCompleteness or existenceAccuracyDetail tie-inClassificationCutoffRealizable valueRights and obligationDirectNone
24Relationship Among Five Key Evidence-related Terms Phases of the audit processAudit objectivesTypes of testsEvidence decisionsTypes of evidence
25Phases of the Audit Process Plan and design an audit approach.Perform tests of controls andsubstantive tests of transactions.Perform analytical procedures andtests of details of balances.Complete the audit and issue anaudit report.
26Audit Objectives Transaction-related Balance-related Presentation and disclosure-related
27Types of Tests Risk assessment procedures Tests of controls Substantive tests of transactionsAnalytical proceduresTests of details of balances
28Evidence DecisionsAudit proceduresSample sizeItems to selectTiming
29Types of Evidence Documentation Inquiries of the client Analytical proceduresObservationReperformanceRecalculationPhysical examinationConfirmation
30Learning Objective 7Integrate the four phasesof the audit process.
31Summary of the Audit Process Phase IPlan and designan audit approachPhase IIIPerform analyticalprocedures andtests of detailsof balancesPhase IIPerform tests ofcontrols andsubstantive testsof transactionsPhase IVComplete theaudit and issuean audit report
32Summary of the Audit Process: Phase I Accept client and perform initial planningUnderstand the client’s business and industryAssess client’s business riskPerform preliminary analytical procedures
33Summary of the Audit Process: Phase I Set materiality and assess acceptableaudit risk and inherent riskUnderstand internal control and assess control riskGather information to assess fraud risksDevelop overall audit plan and audit program
34Summary of the Audit Process: Phase II Plan to reduce assessedlevel of control risk?NoYesPerform tests of controlsPerform substantive tests of transactionsAssess likelihood of misstatements infinancial statements
35Summary of the Audit Process: Phase III LowMediumHigh orunknownPerform analytical proceduresPerform tests of key itemsPerform additional testsof details of balances
36Summary of the Audit Process: Phase IV Perform additional tests forpresentation and disclosureAccumulate final evidenceEvaluate resultsIssue audit reportCommunicate with auditcommittee and management