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Chapter 13 Overall Audit Plan and Audit Program. Presentation Outline. Application of Audit Testing Selecting Tests to Perform Design of the Audit Program A Summary of the Audit Process. I. Application of Audit Testing. Tests of Controls Testing for Monetary Misstatement

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Presentation Transcript
presentation outline
Presentation Outline
  • Application of Audit Testing
  • Selecting Tests to Perform
  • Design of the Audit Program
  • A Summary of the Audit Process
i application of audit testing
I. Application of Audit Testing
  • Tests of Controls
  • Testing for Monetary Misstatement
  • Reduction of Risk
  • Audit Assurance at Different Levels of Internal Control Effectiveness
  • Simultaneous Testing of Controls and Substantive Testing of Transactions
  • Timing of Audit Testing
a tests of controls
A. Tests of Controls

Audit procedures to test the operating effectiveness of control policies and procedures in support of a reduced assessed control risk. Some examples include:

  • Matching of vendor invoices against a purchase order and receiving report before approving invoice for payment.
  • Examination of employee time cards for approval of overtime.
b testing for monetary misstatement
B. Testing for Monetary Misstatement
  • Substantive Tests of
  • Transactions
  • Testing for monetary
  • misstatements to determine
  • if the following 6 transaction-
  • related audit objectives
  • have been met:
  • Existence
  • Completeness
  • Accuracy
  • Classification
  • Timing
  • Posting and Summarization
  • Tests of Details of
  • Balances
  • Testing for monetary
  • misstatements to determine if the
  • following 9 balance-related audit
  • objectives have been met:
  • Existence
  • Completeness
  • Accuracy
  • Classification
  • Cutoff
  • Detail tie-in
  • Realizable value
  • Rights and obligations
  • Presentation and disclosure
c reduction of risk
Control Risk

Procedures to gain an understanding of internal control

Tests of controls

Once the auditor obtains an initial understanding of controls, tests of controls must be performed to obtain evidence regarding the effectiveness of controls. Stronger controls will allow the auditor to assess control risk below the maximum.

Detection Risk

Substantive tests of transactions

Analytical procedures

Tests of details of balances

The more evidence an auditor collects from the above procedures, the lower the detection risk. Detection risk must be lower when control risk is higher.

C. Reduction of Risk
d audit assurance at different levels of internal control effectiveness
D. Audit Assurance at Different Levels of Internal Control Effectiveness

C3

Acceptable

assurance

Audit assurance

from control risk

assessment and

tests of control

C2

Audit

assurance

from

substantive

tests

AUDIT ASSURANCE

C1

No

assurance

A

C

B

INTERNAL CONTROL EFFECTIVENESS

Weak control

Strong control

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

e simultaneous testing of controls and substantive testing of transactions
E. Simultaneous Testing of Controls and Substantive Testing of Transactions
  • The determination of control risk affects the type of procedures and sample size for the substantive testing of transactions.
  • For purposes of convenience, the testing of controls and substantive testing of transactions will often occur simultaneously.
  • In such situations the auditor will make an assumption about the results of tests of controls. If the testing of controls indicates that internal control is worst than expected, substantive testing of transactions will have to be modified accordingly.
f timing of audit testing
F. Timing of Audit Testing

Auditors frequently consider it desirable to perform audit tests prior to year end. Certain procedures may be performed at an interim time (prior to client’s year end) :

  • Update depreciation schedules
  • Examine new loan agreements
  • Vouch transactions
  • Analyze changes in client’s accounting system
  • Review board of director minutes
  • If strong internal controls exist the auditor may also:
    • Observe physical inventories
    • Confirm account balances
ii selecting tests to perform
II. Selecting Tests to Perform
  • The Cost of Testing
  • Appropriate Evidence for Audit Testing
  • Risk and Testing in the Audit Process
a the cost of testing
A. The Cost of Testing

Going from the most to least costly, the types of tests are:

  • Tests of details of balances
  • Substantive tests of transactions
  • Tests of controls
  • Procedures to obtain an understanding of internal controls
  • Analytical procedures
b appropriate evidence for audit testing

Type of Evidence

Reperformance

Analytic

performance

Inquiries of

the client

Physical

Examination

Confirmation

Documentation

Observation

B. Appropriate Evidence for Audit Testing

Type of Test

Procedures for internal control

Tests of controls

Substantive tests of transactions

Analytical procedures

Tests of details of balances

c risk and testing in the audit process
Substantive Testing of Transactions

In some situations it may be more efficient to assess control risk at a higher level and reduce or eliminate tests of controls. This depends on cost of testing controls versus the additional substantive testing that would result from a higher control risk.

Tests of Details of Balances

If tolerable misstatement is low, and inherent risk and control risk are high, planned tests of details of balances must be high.

C. Risk and Testing in the Audit Process
iii design of the audit program
III. Design of the Audit Program
  • Tests of Controls and Substantive Tests of Transactions
  • Analytical Procedures
  • Tests of Details of Balances

Most audits design an audit program in the following three parts:

a tests of controls and substantive tests of transactions
A. Tests of Controls and Substantive Tests of Transactions

A four-step approach when the auditor plans to reduce assessed control risk below the maximum:

  • Transaction related audit objectives are applied to the class of transactions being tested, such as sales.
  • Key controls that should reduce control risk for each transaction-related audit objective are identified.
  • For all internal controls used to reduce the initial assessment of control risk below the maximum (key controls), appropriate tests of controls are developed.
  • Design appropriate substantive tests of transactions, considering weaknesses in internal control and expected results of tests of controls (allows for simultaneous tests of controls and substantive testing).

Note: If control risk is assessed at 1.0, only substantive tests of

transactions will be used in this part of the audit program.

b analytical procedures
B. Analytical Procedures

Analytical procedures may be performed during 3 different stages of the audit:

  • In the planning stage to help the auditor understand the client’s business and determine other evidence needed to satisfy acceptable audit risk.
  • During the audit, especially during substantive testing.
  • Near the end of the audit as a final test of reasonableness.
c tests of details of balances
C. Tests of Details of Balances

If the results of tests of controls, substantive tests of transactions, and analytical procedures are not consistent with the predictions, tests of details of balances will need to be changed as the audit progresses.

Figure 13-6 on page 388 illustrates the testing methodology

using Accounts Receivable

slide18

IV. A Summary

of the Audit

Process

summary of the audit process phase i planning
Summary of the Audit Process - Phase I (Planning)

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 acceptable audit risk

and inherent risk.

Understand internal control and assess control risk.

Develop overall audit plan and audit program.

summary of the audit process phase ii begin field work
Summary of the Audit Process - Phase II (Begin Field Work)

From

Phase I

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 iii end of fieldwork
Summary of the Audit Process Phase III (End of Fieldwork)

From

Phase II

Likelihood of Misstatement

in Financial Statements

Low Medium High or

unknown

Perform analytical procedures.

Perform tests of key items.

Perform additional tests of details of balances.

summary of the audit process phase iv wrap up
Summary of the Audit Process Phase IV (Wrap-Up)

From

Phase III

Review for contingent liabilities.

Review for subsequent events.

Accumulate final evidence.

Evaluate results.

Issue audit report.

Communicate with audit

committee and management.