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Overall Audit Plan and Audit Program

Overall Audit Plan and Audit Program

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Overall Audit Plan and Audit Program

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  1. Overall Audit Planand Audit Program Chapter 13

  2. Learning Objective 1 • Use the five types of audit tests • to determine whether financial • statements are fairly stated.

  3. Types of Tests Procedures to obtain an understanding of internal control Tests of control Substantive tests of transactions Analytical procedures Tests of details of balances

  4. Audit risk model AAR IR × CR = PDR Types of audit tests Procedures to obtain an understanding of internal control + Tests of controls (TOC) + Substantive tests of transactions (STOC) Types of Audit Tests andthe Audit Risk Model

  5. Audit risk model AAR IR × CR = PDR Types of audit tests Analytical procedures (AP) + Tests of details of balances (TDP) = Sufficient competent evidence per GASS Types of Audit Tests andthe Audit Risk Model

  6. Sales Accounts Receivable Cash in Bank Sales transactions Cash receipts transactions Audited by TOC, STOT, and AP Audited by TOC, STOT, and AP Ending balance Ending balance Audited by APand TDB TOC + STOT + AP + TDB = Sufficient competent evidence per GAAS Role of all Audit Tests in the Sales and Collection Cycle

  7. Learning Objective 2 • Select the appropriate types • of audit tests.

  8. Type of Evidence Physical examination Confirmation Documentation Observation Type of Test Procedures for internal control   Tests of controls   Substantive tests of transactions  Analytical procedures Tests of details of balances    Relationship Between Types of Tests and Evidence

  9. Relationship Between Types of Tests and Evidence Type of Evidence Analytic performance Inquiries of the client Reperformance Type of Test Procedures for internal control   Tests of controls   Substantive tests of transactions   Analytical procedures   Tests of details of balances  

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

  11. Learning Objective 3 • Understand how information • technology affects audit testing.

  12. 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.

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

  14. Learning Objective 4 • Understand the concept of • evidence mix and how it • should be varied in • different circumstances.

  15. Procedures to obtain an understanding of internal control Tests of controls Audit 1 E E Audit 2 M M Audit 3 M N Audit 4 M M Amount of testing: Extensive, Medium, Small, None Variations in Evidence Mix

  16. Variations in Evidence Mix Substantive tests of transactions Analytical procedures Tests of details of balances Audit 1 S E S Audit 2 M E M Audit 3 E M E Audit 4 E E E Amount of testing: Extensive, Medium, Small, None

  17. Learning Objective 5 • Design an audit program.

  18. Audit Program Part 1: Tests of controls and substantive tests of transactions Part 2: Analytical procedures Part 3: Tests of details and balances

  19. Tests of Controls and Substantive Tests of Transactions • Apply the transaction-related audit objectives • to the class of transactions being tested. 2. Identify key controls that should reduce control risk for each audit objective. 3. Develop appropriate tests of controls. 4. Design substantive tests of transactions.

  20. Design tests of controls and substantive tests of transactions to meet transaction-related audit objectives. Assess control risk. Determine extent of testing controls. Methodology for Designing Controls and Substantive Tests Perform procedures to understand internal control. Audit procedures Sample size Items to select Timing

  21. Identify key controls and make a preliminary assessment of control risk. (Step 2) Design substantive tests of transactions. (Step 4) Design tests of controls. (Step 3) Audit procedures Audit procedures Sample size Sample size Items to select Items to select Timing Timing Four-Step Approach to Designing Control and Substantive Tests Apply transaction- related audit objectives to a class of transactions. (Step 1)

  22. Set tolerable misstatement and assess inherent risk for accounts receivable. Assess control risk for sales and collection cycle. Design and perform analytical procedures for accounts receivable balance. Design and perform tests of controls and substantive tests of transactions for sales and collection cycle. Design tests of details of accounts receivable balance to satisfy balance-related audit objectives. Audit procedures Items to select Sample size Timing Methodology for Designing Tests of Balances – Accounts Receivable Identify client business risks affecting accounts receivable.

  23. Identify key controls and make an assessment of control risk. Design substantive tests of transactions. Design tests of controls. Audit procedures Audit procedures Sample size Sample size Items to select Items to select Timing Timing Approach to Designing Tests of Details of Balances Apply transaction-related audit objectives to a class of transactions.

  24. Apply balance- related audit objectives to an account balance. Decide tolerable misstatement. Make preliminary judgment about materiality. Design analytical procedures. Assess inherent risk. Decide acceptable audit risk. Design tests of details of balances. Assess client business risk. Approach to Designing Tests of Details of Balances

  25. Learning Objective 6 • Compare and contrast • transaction-related audit • objectives and balance-related • audit objectives.

  26. Relationship Among Five Key Evidence-Related Terms Phases of the audit process Audit objectives Types of tests Evidence decisions Types of evidence

  27. 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.

  28. Transaction-related Balance-related 1. Existence 2. Completeness 3. Accuracy 4. Classification 5. Timing 6. Posting and summarization 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 Audit Objectives

  29. Types of Tests 1. Procedures to obtain an understanding of internal control 2. Tests of controls 3. Substantive tests of transactions 4. Analytical procedures 5. Tests of details of balances

  30. Evidence Decisions • Audit procedures 2. Sample size 3. Items to select 4. Timing of performance

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

  32. Learning Objective 7 • Integrate the four phases • of the audit process.

  33. 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

  34. Understand the client’s business and industry. Assess client’s business risk. Perform preliminary analytical procedures. Summary of the Audit Process:Phase I Accept client and perform initial planning.

  35. 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 I Set materiality and assess acceptable audit risk and inherent risk.

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

  37. Low Medium High or unknown Summary of the Audit Process:Phase III Perform analytical procedures. Perform tests of key items. Perform additional tests of details of balances.

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

  39. End of Chapter 13