10 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley...

10 - 1©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley

Overall Audit Planand Audit Program

Chapter 10


Learning Objective 1

Use the five types of audit tests

to determine whether financial

statements are fairly stated.


Types of Tests

Procedures to obtain anunderstanding of internal control

Tests of control

Substantive tests of transactions

Analytical procedures

Tests of details of balances


Types of Audit Tests andthe Audit Risk Model

AuditRisk

Model

Proceduresto obtain an

understanding ofinternal control

Tests ofcontrols(TOC)

Substantivetests of

transactions(STOT)

Typesof Audit

Tests+ +

AARIR × CR

= PDR


Types of Audit Tests andthe Audit Risk Model

Analyticalprocedures

(AP)

Tests ofdetails ofbalances(TDP)

Sufficientcompetentevidence

per GASS

+ =

AARIR × CR

= PDRAuditRisk

Model

Typesof Audit

Tests


Role of all Audit Tests in the Sales and Collection Cycle

SalesAccounts

ReceivableCash inBank

Salestransactions

Cash receiptstransactions

Endingbalance

Endingbalance

TOC + STOT + AP + TDP= Sufficient competent evidence per GAAS

Audited byTOC, STOT, and AP

Audited by AP and TDP

Audited byTOC, STOT, and AP



Select the appropriate

types of audit tests.


Relationship BetweenTypes of Tests and Evidence

Type of Test

Procedures for internal controlTests of controlsSubstantive tests of transactionsAnalytical proceduresTests of details of balances

Ph

ysic

alE

xam

inat

ion

Con

firm

atio

n

Doc

um

enta

tion

Ob

serv

atio

n

Typ

e of

Evi

den

ce


Relationship BetweenTypes of Tests and Evidence

Type of Test

Procedures for internal controlTests of controlsSubstantive tests of transactionsAnalytical proceduresTests of details of balances

Inq

uir

ies

ofth

e cl

ien

t

Rep

erfo

rman

ce

An

alyt

icp

erfo

rman

ce

Typ

e of

Evi

den

ce


Audit Assurance at Different Levels of Internal Control Effectiveness

Acceptableassurance

Noassurance

INTERNAL CONTROL EFFECTIVENESSWeak control Strong control

Reliance on controls: C3 – None, C2 – Some, C1 – Maximum

Audit assurancefrom control riskassessment andtests of control

Auditassurancefromsubstantivetests

A C B

C3

C2

C1

AU

DIT

AS

SU

RA

NC

E



Understand how information

technology affects audit testing.


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 accesssignificant information electronically.


Impact of Information Technology on Audit Testing

Computer assisted audit techniques may beused to test automated controls or data.

Reports produced by IT may be used to testthe effectiveness of IT general controls.

Program changecontrols

Accesscontrols



Understand the concept of evidence

mix and how it should be varied

in different circumstances.


Variations in Evidence Mix

Procedures to Obtainan Understandingof Internal Control

Testsof

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

SubstantiveTests of

TransactionsAnalyticalProcedures

Tests ofDetails ofBalances

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



Design an audit program.


Audit Program

Part 1:Tests of controls and substantive

tests of transactions

Part 2:Analytical procedures

Part 3:Tests of details and balances


Audit Procedures

1. Apply the transaction-related audit objectivesto the class of transactions being tested.

2. Identify key controls that should reducecontrol risk for each audit objective.

3. Develop appropriate tests of controls.

4. Design substantive tests of transactions.


Four-Step Approach to Designing Control and Substantive Tests

Apply transaction-related audit objectives

to a class of transactions(Step 1).

Identify key controlsand make an assessment

of control risk(Step 2).

Design tests ofcontrols (Step 3).

Design substantive testsof transactions (Step 4).

Audit procedures Sample size Items to select Timing


Methodology for Designing Tests ofBalances – Accounts Receivable

Identify client business risksaffecting accounts receivable.

Set tolerable misstatementand assess inherent riskfor accounts receivable.

Assess control risk for salesand collection cycle.



Design and perform tests ofcontrols and substantive testsof transactions for sales and

collection cycle.

Design and perform analyticalprocedures for accounts

receivable balance.



Design tests of details ofaccounts receivable balance

to satisfy balance-relatedaudit objectives.

Audit proceduresSample size

Items to selectTiming


Approach to Designing Tests of Details of Balances

Apply transaction-related audit

objectives to a classof transactions.

Identify key controlsand make a preliminary

assessmentof control risk.

Design tests ofcontrols.

Design substantive testsof transactions.

Audit procedures Sample size Items to select Timing



Design testsof controls.

Designsubstantive

tests oftransactions.

Apply balance-related auditobjectives to an account balance.

Audit proceduresSample size

Items to selectTiming

Design tests of details of balances.



Apply balance-related audit

objectives to anaccount balance.

Design testsof details of

balances.

Decide tolerablemisstatement.

Make preliminaryjudgment about

materiality.

Design analyticalprocedures.

Decide acceptableaudit risk.

Assess inherent risk.

Assess clientbusiness risk.



Compare and contrast

transaction-related audit

objectives and balance-

related audit objectives.


Relationship of Transaction- toBalance-Related Audit Objectives

Transaction-Related Balance-Related Nature ofAudit Objective Audit Objective Relationship

Existence Existence or Directcompleteness

Completeness Completeness or Directexistence

Accuracy Accuracy Direct




Classification Classification Direct

Timing Cutoff Direct

Posting and Detail tie-in Directsummarization




Realizable value None

Rights and Noneobligations

Presentation and Nonedisclosure



Integrate the four phases

of the audit process.


Summary of theAudit Process

Phase IPlan and design

an audit approach.

Phase II

Perform tests ofcontrols and

substantive testsof transactions.

Phase III

Perform analyticalprocedures andtests of detailsof balances.

Phase IVComplete the

audit and issuean audit report.


Summary of the Audit ProcessPhase I

Accept client and perform initial planning.Understand the client’s business and industry.

Assess client’s business risk.Perform preliminary analytical procedures.

Set materiality and assess acceptableaudit risk and inherent risk.

Understand internal control and assess control risk.Develop overall audit plan and audit program.


Summary of the Audit ProcessPhase II

Assess likelihood of misstatementsin financial statements.

Plan to reduce assessedlevel of control risk?

Perform tests of controls.

Yes

Perform substantive tests of transactions.

No


Summary of the Audit ProcessPhase III

Perform tests of key items.

Perform additional tests of details of balances.

Perform analytical procedures.

Low Medium High orunknown


Summary of the Audit ProcessPhase IV

Review for contingent liabilities.

Review for subsequent events.

Accumulate final evidence.

Evaluate results.

Issue audit report.

Communicate with auditcommittee and management.


End of Chapter 10

10 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley...

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