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Audit Strategy and Audit Program

Audit Strategy and Audit Program

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Audit Strategy and Audit Program

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  1. Audit Strategy and Audit Program CAS 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with CASs CAS 300 – Planning and Audit of Financial Statements. CAS 315 – Identify and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment. CAS 330 – The Auditor’s Response to Assessed Risks. CAS 240 – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. CAS 260 – Communication with Those Charged with Governance CAS 500 – Audit Evidence

  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 • Situation 1: • 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 • 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 10-21, page 317 The following are audit procedures from different transaction cycles • Examine sales invoices for evidence of internal verification of prices, quantities, and extensions. • Select items from the client’s perpetual inventory records and examine the items in the company’s warehouse. • 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 a sample of notes payable balances, interest rates, and collateral with lenders. • 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 . • For each substantive audit procedure, identify whether it is a test of transactions, a test of details of balances or an analytical procedure. • For each test of control or substantive test of transactions procedure, identify the transaction-related audit objective or objectives being satisfied. • For each analytical procedure or test of details of balances procedure, identify the balance-related audit objective or objectives being satisfied.

  26. Problem 10-23, page 318 Kim Bryan, a new staff auditor, is confused by the inconsistency of the three audit partners to whom she has been assigned on her first three audit engagements. On the first engagement, she spent a considerable amount of time in the audit of cash disbursements by examining cancelled cheques and supporting documentation, but almost no time was spent on the verification of capital assets. On the second engagement, a different partner had her do less intensive tests in the cash disbursements area and take smaller sample sizes than in the first audit even though the company was much larger. On her most recent engagement under a third audit partner, there was a thorough test of cash disbursement transactions, far beyond that of the other two audits, and an extensive verification of capital assets. In fact, this partner insisted on a complete physical examination of all capital assets recorded on the books. The total audit time on the most recent audit was longer than that of either of the first two audits in spite of the smaller size of the company. Bryan’s conclusion is that the amount of evidence to accumulate depends on the audit partner in charge of the engagement. Required: • State the differences in risk assessments that could affect the amount of evidence accumulated in each of the three audit engagements as well as the total time spent. • What could the audit partners have done to help Bryan understand the differences in the audit emphasis on the three audits? • Explain how these three audits are useful in developing Bryan’s professional judgment. How could the quality of her judgment have been improved by the audits?

  27. Problem 10-24, page 318 Assume that the client’s internal controls over the recording and classifying of fixed assets additions are considered deficient because the individual responsible for recording new acquisitions has inadequate technical training and limited experience ion accounting. Required: • What value would you assign to control risk? Why? • How will this situation affect the evidence you should accumulate in auditing fixed assets as compared with another audit in which controls are excellent? Be as specific as possible.