1. Audit Strategy and Audit Program

2. Types of Audit Tests Five types of tests: Risk assessment
2. Understanding internal control +
3. Tests of controls
4. Analytical procedures
5. Tests of details of balances =
Sufficient competent evidence per GAAS

3. Risk Assessment Canadian Auditing Standards (CAS)
Identify risk of material misstatement
Understanding of client’s business risk
Thus part of clients risk profile:

4. Procedures to Obtain an Understanding of Internal Control
Update and evaluate the auditor’s previous experience with the entity
Inquiries of client personnel
Review of client’s policy and systems manuals
Examine documents and records
Observe entity activities and operations

5. Tests of Controls The purpose of test of controls
If controls are to be relied upon then substantive evidence may be reduced.

6. Transaction-related audit objectives:
Occurrence
Completeness
Accuracy
Posting and Summarization
Classification
Timing (Cutoff)

7. Audit tests used for tests of controls:
Similar to procedures used to obtain an understanding of controls

8. What are tests of controls?
Audit procedures designed to
Examples include:

9. Methodology for Designing Tests of Controls
Perform procedures to understand internal control
Evaluate cost-benefit of testing controls
Design tests of controls to meet transaction-related audit objectives
Assess control risk

10. Dual-Purpose Tests What is a substantive test?
What is a dual purpose test?

11. Tests of Details of Balances
Why are substantive procedures performed?
The fundamental substantive procedures

12. Balance-related audit objectives:
Existence
Rights and Obligations
Completeness
Valuation or realizable value
Allocation
Accuracy of adjustment
Adjustment to correct accounts

13. Typical audit tests: Physical examination Direct communication
Examine documentation
Client inquiry
Reperformance

14. Which Evidence is Used for Which Type of Audit Test?
Physical examination
Confirmation
Observation
Inquiry
Mechanical accuracy or reperformance
Analytical procedures

15. The Trade-off of Evidence Mix
What is evidence mix?
The proportion of:
Low cost versus high quality of the audit tests
Auditor must use professional judgment to determine the mix of audit tests

16. Presentation & Disclosure Related Audit Objectives
Used to examine financial statements
Seven objectives
Occurrence
Rights and Obligations (Ownership)
Completeness
Accuracy
Valuation
Classification
Understandability

17. Designing the Audit Program
Most audits use a combined approach:
The audit program is normally split into three parts:

18. Analytical Procedures
Are conducted at each phase of the audit:
During knowledge of business phase
Purpose therefore:
Use of analytical procedures during other phases
Purpose:
Typical procedures

19. Methodology for Designing Tests of Controls
Understand internal controls
Control risk
Cost benefit
Design tests

20. Tests of Controls Audit Program
The actual tests must be based upon
If cost-beneficial, tests of controls would be conducted for key controls
Audit program is normally listed in a performance format

21. Substantive Tests Consider an example of Accounts Receivable
Set audit risk
Set materiality
Assess inherent risk
Assess control risk for sales and collection cycle
Design, predict results for and conduct tests of controls and analytical procedures for sales and collection cycle

22. Four Different Situations
control risk: good
good results for analytical procedures in planning
Situation 2:
control risk: poor
good results for analytical procedures in planning

23. Situation: 3 Situation 4: control risk: good
poor results for analytical procedures in planning. Or not performed
Situation 4:
control risk: poor
poor results for analytical procedures in planning. Or not performed

24. Remember the audit phases
Plan and design an audit approach
Perform tests of controls
Perform analytical procedures and tests of details of balance
4. Complete the audit

25. Problem 10-16, page 331
The following are 11 audit procedures taken from an audit program:
Add the supplier balances in the accounts payable master file, and compare the total with the general ledger.
Examine vendors’ invoices to verify the ending balance in accounts payable.
Compare the balance in employee benefits expense with previous years’. The comparison takes the increase in the employee benefit rates into account.
Discuss the duties of the cash disbursements bookkeeper with him or her, and observe whether he or she has responsibility for handling cash or preparing the bank reconciliation.
Confirm accounts payable balance directly with vendors.
Use generalized audit software to run a gap test on the cheques issued during the year. (Print a list of cheque numbers omitted from the normal cheque number sequencing.)
Examine the treasurer’s initials on monthly bank reconciliations as an indication of whether they have been reviewed.
Examine vendors’ invoices and other documentation in support of recorded transactions in the acquisitions journal.
Multiply the commission rate by total sales, and compare the result with the commission expense.
Examine vendors’ invoices and other supporting documents to determine whether large amounts in the repairs and maintenance account should be capitalized.
Examine the initials on vendors’ invoices that indicate internal verification of pricing, extending, and footing by a clerk.
Required:
Indicate whether each procedure is a test of controls, an analytical procedure, or a test of details of balances.
Identify the type of evidence for each procedure.

26. Problem 10-21, page 332
The following are audit procedures from different transaction cycles
Use audit software to foot and cross-foot the cash disbursements journal, and trace the balance to the general ledger.
Select a sample of entries in the acquisitions journal, and trace each one to a related vendors’ invoice to determine whether one exists.
Examine documentation for acquisition transactions before and after the balance sheet date to determine whether they are recorded in the proper period.
Inquire of the credit manager whether each account receivable on the aged trial balance is collectible.
Compute inventory turnover for each major product, and compare with that of previous years.
Confirm with lenders a sample of notes payable balances, interest rates, and collateral.
Use audit software to foot the accounts payable trial balance, and compare the balance with the general ledger.
Required:
For each audit procedure, identify the transaction cycle being audited.
For each audit procedure , identify the type of evidence.
For each audit procedure, identify whether it is a test of control or substantive test (indicating whether it is a test of details of balances or an analytical procedure.)
For each audit procedure, identify the related audit objective(s).
Specifically assess the purpose of each audit procedure, as follows:
For tests of control, state the risk (potential error) that is being assessed.
For analytical procedures, state a possible result that you would expect.
For tests of detail, state the type of material error that you would be quantifying.

27. Problem 12-21, page 406, Canadian 11th. Edition
The following internal controls for the acquisition and payment cycle were selected from a standard internal control questionnaire:
Vendors’ invoices are recalculated prior to payment.
Approved price lists are used for acquisitions.
Prenumbered receiving reports are prepared as support for purchases and are numerically accounted for.
Dates on receiving reports are compared with vendors’ invoices before entry into the accounts payable system.
The accounts payable system is updated, balanced, and reconciled to the general ledger monthly.
Account classifications are reviewed by someone other than the preparer.
All cheques are signed by the owner or the manager.
The cheque signer compares data on the supporting documents with the cheques.
All supporting documents are cancelled after entry.
After they are signed, cheques are mailed by the owner or manager, or a person under his or her supervision.
Required:
For each control, state which transaction-related audit objective(s) is (are) applicable.
For each control, write an audit procedure that could be used to test the control for effectiveness.
For each control, identify a likely misstatement, assuming the control does not exist or is not functioning.
For each likely misstatement, identify a substantive audit procedure to determine if the misstatement exists.