chapter 13

1. chapter 13 Overall Audit Strategy and Audit Program

2. Partner Terry Partner Terry: Auditors must understand internal control in every audit. … For all public companies and for nonpublic companies where control risk is assessed below maximum, the auditor must perform tests of controls. But, don’t forget that auditing standards also require that substantive tests be performed in all audits.

3. Carly what is the objective of AU-C section 315?

4. AU-C 315 Understanding the Entity & Its Environment & Assessing RoMM .03 The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.

5. December 2006 Statement on Auditing Standards 109 AICPA Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement

6. Page 160/169 (what is a sufficient understanding?) For all significant classes of transactions, accounts and disclosures Evaluate Risks related to all relevant assertions Identify points in the transactions where material misstatements could occur How each significant class of transactions • Initiated &Authorized • Recorded • Documents & records • Processed through the accounting system into the GL • Reported in financial state & disclosures

7. Understanding Internal Controls Risk assessment procedures Evaluate design of internal controls Document understanding Assess Control Risk (preliminary) Test Operating Effectiveness of controls Assess Control Risk (after ToC’s) Substantive Tests of Transactions Substantive Analytical Procedures Tests of Details of Balances

8. Jose what is the definition of control risk?

9. Control Risk The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

10. Tests of Controls if a control is properly designed test if control is operating effectively

11. Assess control risk Identify: • Significant classes of transactions • Use managements’ assertions to determine points where errors or fraud could occur • Controls that would prevent or detect these errors • Link specific controls to related assertions • Evaluate the design of the control • Test the operating effectiveness of the control

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13. Final Assessment CR < Max

14. Sandra What is the objective of AU-C section 500?

15. AU-C 500Audit Evidence .04 The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.

16. Tests of Controls p. 205 Make inquiries of client personnel Examine documents for evidence the control was implemented Observe control activities Reperform control activities

17. Table 1 p. 207 ties to CR Matrix p. 176 1 Credit is approved for each sale 2 Recorded sales are supported by an authorized shipping document • An approved sales order 4 Shipping documents are forwarded to billing daily and a billing invoice is created • Shipping documents are pre-numbered and accounted for weekly 7 Unit selling prices are obtained from the master price list

18. Table 1 page 207 Occur (accuracy) Occurrence Occurrence Occurrence cutoff Completeness accuracy 1 Credit is approved for each sale 2 Recorded sales are supported by an authorized shipping document 2 An approved sales order 4 Shipping documents are forwarded to billing daily and a billing invoice is created 5 Shipping documents are prenumbered and accounted for weekly 7 Unit selling prices are obtained from the master price list

19. Vouch & Trace Project Table 1 on page 207 45 transactions discuss how V&T could be used to test controls in Table 1

24. Substantive Tests Provide substantive evidence help establish the monetary correctness

25. page 216 Accounts Receivable Set Performance Materiality (tolerable misstatement) Assess control risk for • credit sales transactions preliminary • cash receipts transactions (collection) preliminary Design and perform Tests of Controls Assess control risk • credit sales transactions final • cash receipts transactions (collection) final Design and perform Subst Tests of Transactions Subst Analytical Procedures Subst Test of Details of Acc Rec Balance Conclude on Accounts Receivable

26. Substantive tests • Substantive tests of transactions • Substantive analytical procedures • Tests of details of account balances

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28. Substantive analytical procedures Indicate possible misstatements Provide substantive evidence help establish the monetary correctness (only indicate the likelihood of misstatement)

29. Substantive analytical procedures • Use the sales example from web site

31. Substantive analytical procedures • Supplies • Prepaid rent • Depreciation expense

32. Substantive Tests of Details of Balances Provide substantive evidence help establish the monetary correctness Bank reconciliations Confirmation of accounts receivables Inventory observation

33. Audit Approaches

34. for private companiesnon-SEC companiesnot covered by Sarbanes-Oxley

36. Private Company non SEC When you reflect on similar audit clients You believe it would cost less to perform Tests of Contols than $ubstantive Test$

37. Matthew After evaluating the design of the controls you DO NOT believe the client’s controls would effectively prevent or detect and correct misstatements even if they are implemented You preliminarily assess CR = Which audit approach will you take?

38. Dominik Which types of audit tests will you perform evaluate design of controls Tests of Controls test operating effectivenessnone some extensive Substantive Tests analytical procedures test of details of account balances none limitedextensive

39. Private Company non SEC When you reflect on similar audit clients You believe it would cost less to perform $ubstantive Test$ than Tests of Contols

40. Marilyn After evaluating the design of the controls you believe the controls would prevent, or detect and correct misstatements if they are properly implemented You will preliminarily assess CR = Which audit approach will you take?

41. Blair Which types of audit tests will you perform evaluate design of controls Tests of Controls test operating effectivenessnone some extensive Substantive Tests analytical procedures test of details of account balances none limited extensive

42. Iterative Process analysis of audit 4 page 214 Analysis of Audit 4 Demonstrates the iterative nature of the audit process Planned CR = med ToC medium Anal Proc extensive PDR = med Subst medium

43. Iterative Process analysis of audit 4 Auditor found deviations during tests of controls significant misstatements while performing substantive tests. The auditor must conclude that controls are ineffective and that control risk is MAX, regardless the results of their previous tests of controls and control risk assessment. The auditor must perform extensive Substantive Tests

44. Private Company non SEC When you reflect on similar audit clients You believe it would cost less to perform Tests of Contols than $ubstantive Test$

45. Ronni After evaluating the design of the controls you believe the controls would prevent, or detect and correct misstatements if they are properly implemented You will preliminarily assess CR = Which audit approach will you take?

46. who Which types of audit tests will you perform evaluate design of controls Tests of Controls test operating effectivenessnone some extensive Substantive Tests analytical procedures test of details of account balances none limited extensive Go To Next Slide

47. Elizabeth While you are performing tests of controls you encounter control deficiencies. Do you need to change you audit approach? You will assess CR = Which audit approach will you take?

48. Zack Which types of audit tests will you perform evaluate design of controls Tests of Controls test operating effectivenessnone some extensive Substantive Tests analytical procedures test of details of account balances none limited extensive

50. Understand internal controls Document understanding Evaluate the design of the controls Preliminarily assess control risk Document prelim CR assessment If CR < Max & $ToC < $Sub$t Tests Design and perform ToC Document results of ToC and CR assessment Design and perform limited Subst Tests Document results of Subst Tests If CR = Max or $Sub$t < $ToC Design and perform extensive Subst Tests Document results of Subst Tests