jzanzig_auditing ch 13 lecture

7/30/2019 Jzanzig_Auditing Ch 13 Lecture

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Chapter 13 Overall Audit Plan

and Audit Program



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Presentation Outline

I. Application of Audit Testing

II. Selecting Tests to Perform

III. Design of the Audit Program

IV. A Summary of the Audit Process



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I. Application of Audit Testing

A. Tests of Controls

B. Testing for Monetary Misstatement

C. Reduction of Risk

D. Audit Assurance at Different Levels of Internal Control Effectiveness

E. Simultaneous Testing of Controls andSubstantive Testing of Transactions

F. Timing of Audit Testing



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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 examplesinclude:

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.



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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

CompletenessAccuracy

Classification

Timing

Posting and Summarization

Tests of Details of

BalancesTesting 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



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C. Reduction of Risk

Control Risk

Procedures to gain anunderstanding of internal

control

Tests of controls

Once the auditor obtains aninitial understanding of

controls, tests of controls must be performed to obtain

evidence regarding theeffectiveness of controls.Stronger controls will allowthe 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, thelower the detection risk.

Detection risk must be

lower when control risk

is higher.


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D. Audit Assurance at Different Levels of Internal

Control Effectiveness

Acceptableassurance

Noassurance

INTERNAL CONTROL EFFECTIVENESS

Weak control Strong control

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

Audit assurance

from control risk

assessment andtests of control

Auditassurance

from

substantive

tests

A C B

C3

C2

C1

A

U D I T A S S U

R A N C E



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 andsubstantive 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

Auditors frequently consider it desirable to perform audittests 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

A. The Cost of Testing

B. Appropriate Evidence for Audit Testing

C. Risk and Testing in the Audit Process



A. The Cost of Testing

Going from the most to leastcostly, the types of tests

are:

Tests of details of balancesSubstantive tests of

transactions

Tests of controls

Procedures to obtain anunderstanding of internal

controls




B. Appropriate Evidence for Audit Testing

Type of Test

Procedures for internal control

Tests of controls

Substantive tests of transactions


Tests of details of balances

P h y s i c a

l

E x a m i n

a t i o n

C o n f i r m

a t i o n

D o c u m e n t a t i o n

O b s e r v a t i o n

Type of Evidence

I n q u i r i e s o f

t h e c l i e n t

R e p e r f o r m a n c e

A n a l y t i

c

p e r f o r m

a n c e



C. Risk and Testing in the Audit Process

Substantive Testing of

Transactions

In some situations it may be moreefficient 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 misstatementis low, and inherent risk

and control risk are

high, planned tests of

details of balances must be high.



III. Design of the Audit Program

A. Tests of Controls and Substantive Tests of

Transactions

B. Analytical ProceduresC. Tests of Details of Balances

Most audits design an audit program in the

following three parts:

A f C l d S b i f i



A. Tests of Controls and Substantive Tests of Transactions

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

Transaction related audit objectives are applied to the classof transactions being tested, such as sales.

Key controls that should reduce control risk for eachtransaction-related audit objective are identified.

For all internal controls used to reduce the initial assessmentof 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 expectedresults 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

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 satisfyacceptable 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

If the results of tests of

controls, substantive

tests of transactions, andanalytical procedures

are not consistent with

the predictions, tests of

details of balances willneed to be changed as

the audit progresses.

Figure 13-6 on page 388 illustrates the testing methodologyusing Accounts Receivable



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)

Perform tests of controls.

Perform substantive tests of transactions.

Assess likelihood of misstatements in

financial statements.

Plan to reduce assessed

level of control risk?

Yes

No

From

Phase I



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Summary of the Audit Process Phase III (End of Fieldwork)

Perform analytical procedures.

Perform tests of key items.

Perform additional tests of details of balances.

Likelihood of Misstatement

in Financial Statements

Low Medium High or

unknown

FromPhase II

S f th A dit P Ph IV (W U )



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Summary of the Audit Process Phase IV (Wrap-Up)

Review for contingent liabilities.

Review for subsequent events.

Accumulate final evidence.

Evaluate results.

Issue audit report.

Communicate with audit

committee and management

From

Phase III

jzanzig_auditing ch 13 lecture

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