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A424: Chapter 13 Overall Audit Plan and Audit Program

I. Introduction Chapter is primarily review and integration of the audit framework. II. Types of Tests used to determine fair presentation of financial statements. A. Procedures to assess risk

Procedures to understand entity and environment (see Chapter 8) Procedures to obtain an understanding of internal controls see chapter 10, procedures used to gather information on the design, policies, and procedures of the internal control system.

B. Tests of controls (TC) see chapter 10, procedures testing the effectiveness of internal controls.

C. Substantive tests of transactions (ST of T) procedures testing the monetary values of transactions for satisfaction of the TRAOs.

D. Analytical procedures (AP) use of comparisons and relationships to determine whether account balances or other data appear reasonable.

E. Tests of details of balances (TD of B) procedures testing the monetary values of ending balances for satisfaction of the BRAOs.

F. Preparation Questions (Use Figure 13-7 as a reference see page 7 of outline):

1. What is the difference between a test of control and a substantive test of transactions?

2. What is the difference between a substantive test of transactions and a test of

details of balances? 3. As a matter of convenience and efficiency auditors simultaneously perform

some tests of controls and substantive tests of transactions. How is this possible when the extent of the STofT is dependent on the outcomes of the TC?

4. What is the relationship between tests of controls and substantive tests in

relation to high assurance? 5. What are the relationships among tests of controls, substantive tests of

transactions, analytical procedures, and tests of details of balances?

III. Evidence Mix - See table on next page. IV. Design of the Audit Program - See tables on pages 3 and 4.

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Level of Assurance Obtained in Different Ways (1 Audit Risk)

Achieved Level of Assurance

Audit A Audit B Audit C

Assessed Control Risk Including Tests of Controls

30% -- 30%

Substantive Tests of Transactions 15% 25% 16%

Analytical Procedures 30% 10% 30%

Tests of Details of Balances 22% 62% 23%

Total 97% 97% 99%

Achieved Audit Risk 3% 3% 1%

Preparation Questions: 1. Explain the differences between Audit A and C. 2. Explain the differences between Audit A and B Table 13-3 Variations in Evidence Mix

Procedures to Obtain an Understanding

Tests of Controls

Substantive Tests of

Transactions

Analytical

Procedures

Tests of Details of Balances

Audit 1 E E S E S

Audit 2 M M M E M

Audit 3 M N E M E

Audit 4 M M E E E

E= extensive amount of testing; M = medium amount of testing; S = small amount of testing; N = no testing.

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Developing an Audit Program A General Framework for Evidence and Procedures: Goal: To gather sufficient competent evidential matter to provide a high level of assurance on the financial statements. Key: For each cycle satisfy all the audit objectives. For each cycle being examined think about the:

1. Documents involved, information they provide, and their flow through the information system. 2. Accounts involved in the cycle and the transfer of information into and out-of the account.

Need to meet audit objectives

Types of Tests

Typical Types of Evidence

Procedures to obtain understanding of internal controls

Documentation, observation, inquiries, reperformance

TRAO Tests of controls Documentation, observation, inquiries, reperformance

Substantive tests of transactions Documentation, inquiries, reperformance

BRAO Analytical procedures Analytical procedures and inquiries

Tests of the Details of Balances Physical examination, confirmation, documentation, inquiries, reperformance and recalculation

PDAO Tests for Presentation and Disclosure

Auditor decisions on evidence accumulation: 1. Audit procedures to meet audit objectives 2. Sample size 3. Items to select 4. Timing

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Transaction Related Audit Objectives Balance Related Audit Objectives

1. Occurence 1. Existence 2. Completeness 2. Completeness 3. Accuracy 3. Accuracy 4. Classification 4. Classification 5. Timing 5. Cutoff 6. Posting and summarization 6. Detail tie-in 7. Realizable value 8. Rights and obligations

Presentation and Disclosure Audit Objectives

1. Occurrence and Rights and obligations

2. Completeness 3. Valuation and allocation 4. Classification and understandability

Types of evidence Procedures

1. Physical examination 1. Examine 2. Confirmation 2. Scan 3. Documentation 3. Read 4. Observation 4. Compute 5. Inquiries of the client 5. Recompute 6. Recalculation 6. Foot 7. Reperformance 7. Trace 8. Analytical procedures 8. Compare 9. Count 10. Observe 11. Inquire

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