Audit Plan and Program

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Five Types of Tests to Use. Procedures to obtain an understanding of controlsTests of controlsSubstantive tests of transactionsAnalytical proceduresTests of details of balances. Obtaining an Understanding. Update prior informationMake inquiries of personnelExamine documents and recordsRemembe

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Audit Plan and Program

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1. Audit Plan and Program Chapter 13

2. Five Types of Tests to Use Procedures to obtain an understanding of controls Tests of controls Substantive tests of transactions Analytical procedures Tests of details of balances

3. Obtaining an Understanding Update prior information Make inquiries of personnel Examine documents and records Remember to document with flowchart, questionnaire, and/or narrative Make preliminary CR assessment

4. Tests of Controls Tests the effectiveness of controls May lead to change in CR and therefore the amount of substantive testing Procedures Inquiries Examination of documents and records Observation of control activities Reperformance of client procedures Generally done on a sample basis

5. Examples of Tests of Controls Tests whether credit approval has been checked Look for paired sales invoices and shipping documents Inquire of mail clerk and cashier about cash handling Account for sequencing of documents Verify authorization of write-offs

6. Terminology Clarification Note: To many, substantive tests and tests of details are synonymous In this book, substantive tests are of transactions, tests of details are of balances I will use them synonymously

7. Substantive Tests of Transactions Any misstatement detected means the account is misstated The issue is materiality and tolerable misstatement Used to look at all of the management assertions Often performed at same time as tests of controls

8. Evidence for Transactions Documentation Inquiries Reperformance Rarely, but occasionally, confirmations

9. Examples of Transaction Tests Vouching backward to see if a transaction is supported by documents Tracing forward to see if all transactions are recorded Is amount correct? Were proper accounts used? Generally done on a sample basis

10. Analytical Procedures Compare results to expectations To do so, you must have some expectations! Can be performed on transactions as well as balances Should be drilled down to periodic figures

11. Detailed Tests of Balances Focus on ending balances in the general ledger Sometimes tested by way of a subsidiary ledger The issue is materiality and tolerable misstatement Used to look at all of the management assertions Generally on a sample basis, but audit software can achieve 100% testing

12. Evidence for Detailed Tests Confirmations Reperformance (footing, extensions) Physical examination Observation (contrary to book) Documentation

13. Examples of Tests of Balances Accounts Receivable can use most Confirmations if conditions allow Vouching entries to sales documents Inquiring about related parties Reperformance of aging analysis, bad debt estimates Analytical Procedures even apply

14. Which Types of Tests? Remember audit risk model AR = IR x CR x DR If CR < 100%, must do tests of controls If client subject to 404, must test controls The lower the DR, the more tests of transactions and balances you must do Analytical procedures Required during planning and conclusion Can be a substantive test as well

15. IT Audits Many clients conduct business electronically (many dont!) Think of an on-line catalogue order Customer places order online Pull ticket is sent to shipping electronically Payment is processed online Inventory is updated electronically Wheres the paper trail? EDI (Electronic Data Interchange)

16. Conducting an IT Audit Tests of controls are vital General versus Application controls Parallel simulations False data ACL and IDEA mine for data for substantive tests

17. Results of Tests Control Tests Failure of control implies, but does not guarantee, incorrect amounts Failure rate above tolerable rate raises CR, increases substantive testing Substantive Tests Any discovered errors mean amounts are wrong Amounts must be aggregated and extrapolated If upper limit of error is above tolerable misstatement, adjustment is required

18. Review of Audit Planning Client acceptance decision Understand business and industry Perform analytical procedures Set materiality and assess risks Test controls Perform substantive tests Propose adjustments Final review, AP, and issue reports.

19. Examples Cash Disbursements Program

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