Download - Copyright © 2007 Pearson Education Canada 1 Chapter 11: Overall Audit Plan and Audit Program
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Chapter 11: Overall Audit Plan and Audit Program
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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
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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
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Practice problem 11-20 (p. 336)
Assessing evidence mixWhy do different work on the same
cycles at different locations?
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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
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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.
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Tests of controls (review)
Transaction-related audit objectives:– Occurrence– Completeness– Accuracy– Classification– Timing– Posting and Summarization
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Tests of controls
Audit tests used for tests of controls:– Inquiry– Examination– Observation– Reperformance
Similar to procedures used to obtain an understanding of controls
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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.
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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)
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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
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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
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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
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Tests of details of balances
Balance-related audit objectives:– Existence– Completeness– Realizable value– Accuracy– Classification– Cut-off– Detail Tie-in– Rights and Obligations– Presentation & Disclosure
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Tests of details of balances
Audit tests:– Physical examination– Direct communication– Examine documentation– Client inquiry– Reperformance (includes mechanical
accuracy)
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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
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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
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Practice problem 11-15 (p. 334)
Check your understanding of audit tests
Identify the purpose of each audit test and identify the evidence
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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
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Practice problem 11-19 (p. 335)
Three different situations What type of evidence mix would you
recommend?
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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
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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
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Methodology for designing tests of controls
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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)
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Practice problem 11-16 (pp. 334-35)
Practice distinguishing between manual, computer-assisted or fully automated controls
Identify how these controls would be tested
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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
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Methodology for designing tests of details of financial statement balances–
accounts receivable
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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
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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
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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
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Practice problem 11-21 (p. 336)
Test your understanding of the audit process
What is the order of task completion?