Chap 8Examples of detect controls: Mgmt lv reviews are made of actual performance vs budgets, forecasts, prior periods, competitors and industry benchmark. Mgmts actions in analysizing and following up on unexpected variances is a detect control. The financial controller may review the monthly results and compare the number of days sales outstanding to previous periods to ensure any allowance for doubtful debts is reasonable. Performance indicators related different sets of data, operation or financial, to each other. These indicators, together with an analysis of the relationships and the subsequent follow up of anomalies, are also control activities. For example: purchase price variances, stock ordered but not yet manufactured and percentage of sales returned compared to total sales orders. By investigating unexpected result or unusual trends, the client identify issues in the underlying procurement and manufacturing processes. Reconciliations are prepared, reconciling or unusual items are then investigated, and issues are resolved or corrections made. The performance of reconciliations without following up on reconciling or unusual items is not a control. The control is the follow-up. For example: the bank reconciliation reconciles the bank statement to te cash recorded in the general ledger The trade debtors reconciliation reconciles sales recorded in the trade receivables subsidiary ledger to the trade receivables recorded in the general ledger, Review of exception reports: Reports are automatically produced showing transactions/groups of transactions that fall outside a set of parameters selected by the client. These exceptions are then reviewed and followed up. For example, a report maybe produced that shows all sales made to a customer who has exceeded its credit limit. The credit manager then follows up these sales with the salesperson to ensure no further sales are made until the balance is brought below the credit limit. Alternatively, if necessary a reevaluation of the customers credit limits is performed to increase it.

Chap 7FactorEffect on sample size

1. An increase in the extent to which the auditors risk assessment takes into account relevant controls => Auditor increases testing of that control to ensure it effective. Increase

2. An increase in the tolerable rate of deviation=> if auditor relies heavily on control, set lower tolerable rate, sample size increases => if auditor relies heavily on sub pro, set higher tolerable rate, sample size decreasesDecrease

3. An increase in the expected rate of deviation of the population to be tested => if auditor set the higher rate of deviation (due to changes: new staffs, new programs), increase sample sizeIncrease

4. An increase in the auditors desired level of assurance that the tolerable rate of deviation is not exceeded by the actual rate of deviation in the population => control risk set at low, high level of confidence, increase sample size Increase

5. An increase in the number of sampling units in the population=> no difference since procedures are all same. Negligible

FactorEffect on sample size

1. An increase in the auditors assessment of the risk of material misstatement => high control and inherent risk, high risk of MM=> more sub test=> increase sizeIncrease

2. An increase in the use of other substantive procedures directed at the same assertion => less reliance on evidence provided by one test alone, smaller size Decrease

3. An increase in the auditors desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population => higher control and inherent risk, low detection risk => greater confidence on sub pro => increase sizeIncrease

4. An increase in tolerable misstatement => not relying on that particular test to provide all of the evidence required for a particular assertion=> reduce sample sizeDecrease

5. An increase in the amount of misstatement the auditor expects to find in the population => gain a better estimation of the actual misstatement in the population => increase sample size In the case whereby: Acc required estimation: provision for doubtful debt Acc required complex calculation: forex Difficult valuation technique: fair values Control risk is highIncrease

6. Stratification of the population when appropriate=> more efficient sampling and reduce sample required. Decrease

7. The number of sampling units in the populationNegligible

The difference between tests of controls and substantive proceduresTests of controls: Provides evidence that an internal control procedure exists and is effective Nature: to reperform certain procedures, inspect doc for evidence of procedures carried out by client personnel and observe client personnel performing control procedures. Substantive procedures: Details tests of transactions, balances and analytical procedures. The lower the risk of material misstatement, the more reliance placed upon more efficient, less costly, analytical procedures. The auditor needs to spend time on testing the assertions most at risk of MM for each transaction class and acc bal.

Nature of audit testing: are the purpose of the test ( that is, to test controls, transactions or acc bal) and the procedure used (that is, inspection, observation, enquiry, confirmation, recalculation, re-performance or analytical procedures) and depends on the assertion being tested. The higher the risk of MM, the more reliance placed on substantive pro, the greater the use of audit procedures that access the most persuasive audit evidenceTiming of audit testing: The stage of the audit when procedures are performed and the date, such as within or outside the acc period, that audit evidence relates to. Interim audit: Initial visit to a client before year end, where planning takes place. The higher the risk of MM, the greater the reliance on testing conducted close to year-end. InterimYear end

Tests of controlsBeginExtended

Substantive testing of transactionsBeginExtended

Low-risk accMore work on TOC and Sub TestLess work on Sub Test

More work on Sub Test

High-risk accAt, or after year end Spend most time conducting detailed sub test

Inventory counts Yes

Extent of audit testing: The amount of audit evidence gathered when testing controls and conducting detailed sub pro. Tests of controlsSubstantive procedures

Control risk is lowIncrease reliance Extent the testsReduce reliance

Increase reliance

Control risk is highLittle or no test Increase reliance Extent the pro

Audit working paper: Includes: Client name Period under audit Title describing the content of the working paper File reference indicating where the working paper fits in the audit file Initials identifying the preparer of the working paper together with the dates the working paper was reviewed Cross-referencing between working papers indicating where further work and evidence is summarized elsewhere.