copyright © 2007 pearson education canada 1 chapter 11: overall audit plan and audit program

Copyright © 2007 Pearson Education Canada1

Chapter 11: Overall Audit Plan and Audit Program

Copyright © 2007 Pearson Education Canada11-2

Chapter 11 objectives

Examine the four different types of audit tests

How does the auditor choose evidence mix: the types of audit tests to be completed?

Discuss the process for designing an audit program

Describe the audit strategy and the four phases of the financial statement audit


Types of audit tests

Procedures to obtain an understanding of internal control+

Tests of controls+

Analytical procedures+

Tests of details of balances=

Sufficient competent evidence per GAAS


Practice problem 11-20 (p. 336)

Assessing evidence mixWhy do different work on the same

cycles at different locations?


Procedures to obtain an understanding of internal control

Update and evaluate the auditor’s previous experience with the entity

Inquiries of client personnel Review of client’s policy and systems

manuals Examine documents and records Observe entity activities and operations


What is the purpose of tests of controls?

To obtain evidence regarding the effectiveness of controls (which may allow the auditor to assess control risk at a level below maximum).

If controls are to be relied upon then substantive evidence may be reduced.


Tests of controls (review)

Transaction-related audit objectives:– Occurrence– Completeness– Accuracy– Classification– Timing– Posting and Summarization


Tests of controls

Audit tests used for tests of controls:– Inquiry– Examination– Observation– Reperformance

Similar to procedures used to obtain an understanding of controls


Tests of controls are …

Audit procedures designed to verify whether the client’s controls match the auditor’s understanding of those controls (as documented in flowcharts or questionnaires).

Examples include:– Examination of employee time cards for

approval of overtime hours worked.– Examination of journal entries for proper

approval.


Methodology for designing tests of controls

Perform procedures to understand internal control

Assess control risk Evaluate cost-benefit of testing controls Design tests of controls to meet

transaction-related audit objectives (audit procedures, sample size, items to select, timing)


Dual-purpose tests

A substantive test is a procedure designed to test for dollar amounts of errors or fraud and other irregularities directly affecting the correctness of financial statement balances

When an auditor conducts an auditing procedure that is both an internal control test and a substantive procedure it is a dual-purpose test


Tests of details of balances

Substantive procedures are performed in order to detect material misstatements at the assertion level. Consist of:– Tests of details of balances, that focus on the

ending general ledger balances and – Analytical procedures– Dual-purpose tests


Analytical procedures (review)

Purpose:– Understand business– Assess going concern– Identify potential misstatements– Reduce tests of detail

Procedures:– Compare to industry– Compare to prior years– Calculate ratios/trends– Inquiry for follow up



Balance-related audit objectives:– Existence– Completeness– Realizable value– Accuracy– Classification– Cut-off– Detail Tie-in– Rights and Obligations– Presentation & Disclosure



Audit tests:– Physical examination– Direct communication– Examine documentation– Client inquiry– Reperformance (includes mechanical

accuracy)


Examples of tests of details

Examination of vendor invoices in support of amounts recorded for purchases of inventories

Recalculation of payroll amountsPhysical examination of inventory


Which evidence is used for which type of audit test?

Physical examination (tests of details) Confirmation (tests of details) Observation (Understanding of & tests of

controls) Inquiry (all four types) Mechanical accuracy or reperformance

(tests of controls and tests of details) Analytical procedures



Check your understanding of audit tests

Identify the purpose of each audit test and identify the evidence


Evidence mix: it is a trade-off of

Low cost versus high quality of the audit tests– Analytical procedures– Tests of controls– Tests of details

Auditor uses professional judgment to determine the mix of audit tests



Three different situations What type of evidence mix would you

recommend?


Designing the audit program

Most audits use a combined approach: includes both tests of controls and substantive procedures

The audit program is normally split into three parts:– Tests of controls– Analytical procedures– Tests of details


Analytical procedures

Are conducted at each phase of the audit:– During knowledge of business would include

overview calculations and comparisons to other business or within the industry

– Use of analytical procedures during other phases is discussed in Chapter 6 and within each chapter that examines specific transaction cycles


Methodology for designing tests of controls


Tests of controls audit program

Based upon the descriptive section documenting the understanding obtained about internal control

If cost-beneficial, tests of controls would be conducted for key controls upon which the auditor intends to rely

Audit program is normally listed in a performance format (i.e. in the order in which tests will be conducted)


Practice problem 11-16 (pp. 334-35)

Practice distinguishing between manual, computer-assisted or fully automated controls

Identify how these controls would be tested


Before we design substantive tests for accounts receivable we

need to: Set audit risk (overall) Set materiality (overall and assertion) Assess inherent risk (overall and assertion) Assess control risk for sales and collection

cycle and at the assertion level Design, predict results for and conduct

tests of controls and analytical procedures for sales and collection cycle


Methodology for designing tests of details of financial statement balances–

accounts receivable


Comparing two situations

Results of assessed control risk: Good– Results of tests of

controls: Good Results of analytical

procedures: Good– Minimal tests of

details required

Results of assessed control risk: Poor– No tests of controls

completed Results of analytical

procedures: Good– Medium tests of

details required


Comparing two more situations

Results of assessed control risk: Good– Results of tests of

controls: Good Results of analytical

procedures: Poor or not performed– Medium tests of

details required

Results of assessed control risk: Poor– No tests of controls

completed Results of analytical

procedures: Poor or not performed– Extensive tests of

details required


Review of audit phases

1.Plan and design an audit approach2.Perform tests of controls3.Perform analytical procedures and tests of

details of balance4.Complete the audit



Test your understanding of the audit process

What is the order of task completion?

copyright © 2007 pearson education canada 1 chapter 11: overall audit plan and audit program

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