1 CHAPTER 10 Overall Audit Plan and Audit Program.

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CHAPTER 10Overall Audit

Plan and Audit Program

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performpreliminaryanalytical

procedures

Steps in audit planningSteps in audit planning

preplan

setmateriality, and

assess acceptableaudit risk andinherent risk

understandinternal control

and assesscontrol risk

obtainbackgroundinformation

obtain information about client’s legal obligations

developoverall audit

plan and auditprogram

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What are the different What are the different types of audit tests?types of audit tests?

- procedures to obtain an understanding of internal control

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The auditormust focus on both

design and operationof internal controls.

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The auditor’sunderstanding of in-

ternal control must besupported by evidence.

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- procedures to obtain an understanding of internal control- tests of controls

Tests ofcontrols examinethe effectiveness

of internalcontrol design and operation.

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EXAMPLES:- inquiries of client personnel



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EXAMPLES:- inquiries of client personnel- examination of documents, records, and reports



JobDescription

Memo:

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EXAMPLES:- inquiries of client personnel- examination of documents, records, and reports- observe control- related activities



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EXAMPLES:- inquiries of client personnel- examination of documents, records, and reports- observe control- related activities- reperform client procedures



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How are thesetwo types of

tests related?

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Tests of controlsare designed, in part, to

determine whether the au-ditor’s understanding of in-ternal control is accurate.

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- procedures to obtain an understanding of internal control- tests of controls- substantive tests of transactions

Substantivetests of transactionsexamine monetary

errors and irregularitiesin a class of transactions.

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- procedures to obtain an understanding of internal control- tests of controls- substantive tests of transactions

For efficiency,tests of controls and sub-

stantive tests of transactionsare frequently performed

at the same time.

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- procedures to obtain an understanding of internal control- tests of controls- substantive tests of transactions- analytical procedures

Analytical proceduresuse comparisons and relation-ships to determine reasonable-

ness of balances.

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- procedures to obtain an understanding of internal control- tests of controls- substantive tests of transactions- analytical procedures- tests of details of balances

Tests of detailsof balances examine monetary

errors and irregularities indetails of financial statements.

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- procedures to obtain an understanding of internal control- tests of controls- substantive tests of transactions- analytical procedures- tests of details of balances

The primary emphasisof this type of test isthe balance sheet.

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- physical examination - confirmation - documentation- observation - inquiries of client - reperformance - analytical procedures

As discussed in chapter 6, there are sixAs discussed in chapter 6, there are six

types of evidence types of evidence

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- physical examination - confirmation - documentation (vouching)- observation - inquiries of client - reperformance - analytical procedures

types of evidence types of evidence

What What types of evidencetypes of evidence are produced are producedby the different by the different types of audit teststypes of audit tests??

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procedures to obtain an understanding of internal control

- documentation- observation - inquiries of client - reperformance

types of audit testtypes of audit testtypes of evidencetypes of evidenceproduced by testproduced by test

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- documentation- observation - inquiries of client - reperformance

tests of controls


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- documentation- inquiries of client - reperformance

substantive testsof transactions


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analyticalprocedures

- inquiries of client - analytical procedures


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- physical examination- confirmation- documentation- inquiries of client - reperformance

tests of detailsof balances


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The types of audit testsThe types of audit testsvary in their vary in their relative costsrelative costs..

Which typeof audit test is

most expensive?

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Tests of detailsof balances are the most ex-

pensive type of audit test, e.g.,confirmations, physical

examination.

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Which typeof audit test is

least expensive?

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Analytical proceduresare least expensive because of the

relative ease of calculating andcomparing, particularly if

software is employed.

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What is theevidence mixevidence mix??

thecombination

of the five typesof audit tests used

in the audit of a cycle

In general, if the auditorassesses the controls andaccounting system as relatively effective, the mix will involve more tests of controls and less substantive tests.

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What is theevidence mixevidence mix??

thecombination

of the five typesof audit tests used

in the audit of a cycle

Conversely, if the auditorassesses the controls andaccounting system as relatively ineffective, the mix will involve less tests of controls and more substantive tests.

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What is an What is an audit audit programprogram??

The audit program is the set of detailedinstructions for the entire collection of

evidence for an audit.

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includes:- procedures to perform

inquiries examinationof documentsand records


observation

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includes:- sample sizes

$ $$$

$$

$$$

$ $$

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includes:- items to select

$ $$$

$$

$$$

$ $$

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includes:- timing of tests

$ $$$

$$

$$$

$ $$

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Many programshave a separate set of subaudit programs foreach transaction cycle.

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The audit program for most The audit program for most audits is designed in three parts.audits is designed in three parts.

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testsof controls and


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tests ofdetails ofbalances

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As discussed in Chapter 5, an audit As discussed in Chapter 5, an audit can be divided into can be divided into four phasesfour phases..

I IIIII IV

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IIIII IV

I. Plan and designan audit approach.

As discussed in Chapter 5, an audit As discussed in Chapter 5, an audit can be divided into can be divided into four phasesfour phases..

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setmateriality, and

assess acceptableaudit risk andinherent risk

understandinternal control

and assesscontrol risk

performpreliminaryanalytical

procedures

preplanobtain

backgroundinformation

obtain information about client’s legal obligations

developoverall audit

plan and auditprogram


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An audit can be divided An audit can be divided into into four phasesfour phases..

III IV


II. Perform testsof controls and sub-

stantive tests oftransactions.

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no

yes

Does theauditor plan to

reduce the assessedlevel of control

risk?

Perform testsof controls

Perform substantivetests of transactions

Assess the likelihood ofmisstatements in thefinancial statements

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III. Perform analyt-ical procedures and

tests of details ofbalances. IV

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tests of details ofbalances.

Considering the assessedlikelihood of financial state-ment misstatements (low,medium, high, unknown):

Perform analyticalprocedures

Perform testsof key items

Perform additionaltests of details

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IV. Complete theaudit and issue an

audit report.

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IV. Complete theaudit and issue an

audit report.

Review for contingent liabilities

Review for subsequent events

Accumulatefinal evidence

Evaluate results

Issue audit report

Communicate with auditcommittee and management

1 CHAPTER 10 Overall Audit Plan and Audit Program.

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Transcript of 1 CHAPTER 10 Overall Audit Plan and Audit Program.