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Audit Program

Audit Program

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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