Overall Audit Plan and Audit Program Chapter 13

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

Types of Audit Tests Procedures to obtain an understanding of internal control (Ch 10) Focused on understanding the design and operation of aspects of I/C necessary to plan the rest of the audit Tests of control (Ch 10) Procedures used to obtain evidence needed to assess control risk.

Types of Audit Tests Substantive tests of transactions Procedures designed to test for dollar misstatements of financial statement balances. Analytical procedures (Ch 8) To indicate possible misstatements To reduce tests of details of balances Tests of details of balances Focus on ending G/L balances

Types of Audit Tests and the Audit Risk Model Procedures to obtain an understanding of internal control Tests of controls (TOC) Substantive tests of transactions (STOC) + AAR IR × CR = PDR

Types of Audit Tests and the Audit Risk Model Analytical procedures (AP) Tests of details of balances (TDP) Sufficient competent evidence per GASS + = AAR IR × CR = PDR

Relationship Between Types of Tests and Evidence (Table 13-2) Type of Test Procedures for I/C Tests of controls Substantive T.O.T. Analytical procedures Tests of details examination Physical Confirmation Documentation Observation  Type of Evidence Inquiries of the client Reperformance Analytical          

Audit Assurance at Different Levels of Internal Control Effectiveness (Figure 13-3) Acceptable assurance No INTERNAL CONTROL EFFECTIVENESS Weak control Strong control Reliance on controls: C3 – None, C2 – Some, C1 – Maximum Audit assurance from control risk assessment and tests of control from substantive tests A C B C3 C2 C1 AUDIT ASSURANCE

Impact of Information Technology on Audit Testing SAS 80 (AU 326) and SAS 94 (AU 319) provide guidance for auditors of entities that transmit, process, maintain, or access significant information electronically.

Impact of Information Technology on Audit Testing Computer assisted audit techniques (CAATS) may be used to test automated controls or data. Reports produced by IT may be used to test the effectiveness of IT general controls. Program change controls Access controls

Variations in Evidence Mix

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

Audit Program It is convenient to think of the audit program as consisting of the three major classes of tests: Tests of controls and substantive tests of transactions Analytical procedures Tests of details and balances

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

Designing Controls and Substantive Tests of Transactions (Figure 13-4) Design tests of controls and substantive tests of transactions to meet transaction-related audit objectives. Perform procedures to understand internal control. Assess control risk. Audit procedures Sample size Determine extent of testing controls. Items to select Timing

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

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

Phases of the Audit Process Plan and design an audit approach. 2. Perform tests of controls and substantive tests of transactions. 3. Perform analytical procedures and tests of details of balances. 4. Complete the audit and issue an audit report.

Audit Objectives (Ch. 6) Transaction-related 1. Existence 2. Completeness 3. Accuracy 4. Classification 5. Timing 6. Posting and summarization Balance-related 1. Existence 2. Completeness 3. Accuracy 4. Classification 5. Cutoff 6. Detail tie-in 7. Realizable value 8. Rights and obligations 9. Presentation and disclosure

Types of Evidence (Ch. 7) 1. Physical examination 2. Confirmation 3. Documentation 4. Analytical procedures 5. Observation 6. Inquiry of the client 7. Reperformance

Summary of the Audit Process Phase I Plan and design an audit approach. Phase III Perform analytical procedures and tests of details of balances. Phase II Perform tests of controls and substantive tests of transactions. Phase IV Complete the audit and issue an audit report.

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.

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.

Summary of the Audit Process: Phase II Plan to reduce assessed level of control risk? Perform substantive tests of transactions. No Yes Perform tests of controls. Assess likelihood of misstatements in financial statements.

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.

Summary of the Audit Process: Phase IV Review for contingent liabilities. Review for subsequent events. Accumulate final evidence. Evaluate results. Issue audit report. Communicate with audit committee and management.