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Audit Program

Audit Program. Describes all the audit procedures the auditor considers necessary Based on auditor judgment Reflects risk assessment procedures Should be modified if circumstances change, i.e., Analytical procedures indicate errors more likely Controls less effective than planned.

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Audit Program

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  1. Audit Program • Describes all the audit procedures the auditor considers necessary • Based on auditor judgment • Reflects risk assessment procedures • Should be modified if circumstances change, i.e., • Analytical procedures indicate errors more likely • Controls less effective than planned

  2. Test Name CR DR • TOCTest of Controls x • STOT Substantive Tests of Transactions x x • AP Analytical Procedures x • TODB Tests of Details of Balances x

  3. 13-22(c) • The auditor faces a risk the audit will not detect material misstatements that occur in the accounting process. In regard to minimizing this risk, the auditor relies primarily on: • 1) Substantive tests • 2) Tests of controls • 3) Internal control • 4) Statistical analysis

  4. Substantive TestsTests of Transactions • Analytical proceduresTests of controls • Substantive tests ofSubstantive tests • transactionsof transactions • Tests of details of • balances

  5. Substantive Tests Tests of Transactions • Analytical procedures Tests of controls • Substantive tests of Substantive tests • transactions of transactions • Tests of details of • balances

  6. Tests of Controls • Tests of controls must be performed if CR < maximum (100%) • Most involve examining evidence of performance (i.e., initials) • The auditor may reperform the procedure, which is a dual-purposetest (TOC and STOT) • Some controls can only be tested by observation (i.e., separation of duties)

  7. 13-22(a) • The auditor looks for an indication on duplicate sales invoices to see if they have been verified. This is an example of: • 1) A test of details of balances • 2) A test of control • 3) A substantive test of transactions • 4) Both TOC and STOT (dual-purpose)

  8. Prob. 13-28 • 1. Recalculate vendor invoice Accuracy • 2. Approved price list used Accuracy • 3. Rec. report used Occurrence • Prenumbered, acctd forCompleteness • 4. Dates on rec. report Timing • compared to invoice

  9. Prob. 13-28 • 5. AP master file reconciled Posting & • Summarization • 6. Classification reviewed Classification • 7. Checks signed by ownerOccurrence

  10. Prob. 13-28 • 8. Check signer compares Occurrence check to support Accuracy • 9. Documents canceled Occurrence • 10. Checks mailed by Occurrence • owner

  11. Substantive Tests of Transactions (STOT) • Test for monetary correctness of transactions • Applied to transactions and relate to transaction objectives • Substantive test since evidence of monetary errors • Also relevant to control risk since indicate if controls are effective

  12. STOT and TODB • Audit objective • STOT relate to transactions/transaction objectives • TODB relate to balances and balance objectives • Evaluation • TODB errors are projected as dollar amounts to population • STOT projected as occurrence rates

  13. TOC and STOT • Inverse Relationship • TOC increases, STOT decreases • (CRDREvidence • Sample • usually performed on same • sample (both relate to transactions)

  14. STOT and TOC • Evidence • TOC indirect evidence of errors • STOT directly indicate errors in transactions • Both indicate likelihood of error in financial statements (indirect evidence of f/s errors) • Both are projected as occurrence rates

  15. TOC STOT Reduction in • Results Results TODB • GoodGoodSubstantial • PoorGoodFairly substantial • Good Poor No reduction • Poor Poor No reduction

  16. TOC STOT Reduction in • Results Results TODB • GoodGood Substantial • Poor Good Fairly substantial • Good Poor No reduction • Poor Poor No reduction

  17. Audit Assurance at Different Levels of Internal Control Effectiveness - Figure 13-3 (p. 410) C3 Acceptable assurance Audit assurance from control risk assessment and tests of control C2 Audit assurance from substantive tests AUDIT ASSURANCE C1 No assurance A C B INTERNAL CONTROL EFFECTIVENESS Weak control Strong control Reliance on controls: C3 – None, C2 – Some, C1 – Maximum

  18. 13-22(c) • Before reducing control risk, the auditor obtains reasonable assurance control procedures are operating as planned by performing: • 1) Tests of details of balances • 2) Substantive tests of transactions • 3) Tests of controls • 4) Tests of trends and ratios

  19. Dual-Purpose Tests • Some procedures are a tests of control and substantive test of transaction - a dual-purpose test • these usually involve reperformance of client procedures • ex. re-add client invoice • TOC - was client verification procedure effective? • STOT - was transaction accurate?

  20. Analytical Procedures • Direct Test - Test reasonableness of accrued commissions/expense by multiplying sales x rate • eliminates need for detailed testing of account • Indirect test- Compute gross margin • Good results reduce, but don’t eliminate substantive tests

  21. TODB • Test for monetary errors in account balances • Primary source of reduction in DR • Accordingly, poor results in other tests necessitate increase in TODB • Projected to population as a dollar amount

  22. Problem 13-24: • Type of Test • 1. TODB Foot AP t/b • 2. TODB Invoices in ending AP • APCompare payroll expense to prior year • 4. TOC Initials on bank rec. • 5. STOT Invoices in journal • (compare with #7) • 6. AP Est. commissions • (sales x rate)

  23. Type of Test • 7. TODB Invoices in R&M account • 8. TOC Observe controls over • bank rec. • 9. TODB Confirm AP balances • 10. TOCAccount for check seq. • TOC Inquiry re: AP matching • exception report

  24. Timing of Tests • Risk assessment procedures, including understaning controls • TOC & STOT • (simultaneous) • 3. TODB & AP

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