Overall Audit Plan and Audit Program

1. Overall Audit Planand Audit Program Chapter 13

2. Learning Objective 1 Use the five types of audit tests to determine whether financial statements are fairly stated.

3. Types of Tests Procedures to obtain an understanding of internal control Tests of control Substantive tests of transactions Analytical procedures Tests of details of balances

4. Audit risk model AAR IR × CR = PDR Types of audit tests Procedures to obtain an understanding of internal control + Tests of controls (TOC) + Substantive tests of transactions (STOT) Types of Audit Tests andthe Audit Risk Model

5. Types of Audit Tests andthe Audit Risk Model Audit risk model AAR IR × CR = PDR Types of audit tests Analytical procedures (AP) + Tests of details of balances (TDP) = Sufficient competent evidence per GASS

6. Sales Accounts Receivable Cash in Bank Sales transactions Cash receipts transactions Audited by TOC,STOT, and AP Audited by TOC, STOT, and AP Ending balance Ending balance Audited by AP and TDB TOC+STOT+AP+TDB = Sufficient competent evidence per GAAS Role of all Audit Tests in the Sales and Collection Cycle

7. Learning Objective 2 Select the appropriate types of audit tests.

8. Type of Evidence Physical examination Confirmation Documentation Observation Type of Test Procedures for internal control   Tests of controls   Substantive tests of transactions  Analytical procedures Tests of details of balances    Relationship BetweenTypes of Tests and Evidence

9. Relationship BetweenTypes of Tests and Evidence Type of Evidence Analytic performance Inquiries of the client Reperformance Type of Test Procedures for internal control   Tests of controls   Substantive tests of transactions   Analytical procedures   Tests of details of balances  

10. C3 Acceptable assurance Audit assurance from control risk assessment and tests of control C2 Audit assurance from substantive tests AUDIT ASSURANCE C1 No assurance A C B INTERNAL CONTROL EFFECTIVENESS Weak control Strong control Reliance on controls: C3 – None, C2 – Some, C1 – Maximum Audit Assurance at Different Levels of Internal Control Effectiveness

11. Learning Objective 3 Understand how information technology affects audit testing.

12. Impact of Information Technology on Audit Testing SAS 80 (AU 326) and SAS 94 (AU 319) provide guidance for auditors of entities that transmit, process, maintain, or access significant information electronically.

13. Program change controls Access controls Impact of Information Technology on Audit Testing Computer assisted audit techniques may be used to test automated controls or data. Reports produced by IT may be used to test the effectiveness of IT general controls.

14. Learning Objective 4 Understand the concept of evidence mix and how it should be varied in different circumstances.

15. Procedures to obtain an understanding of internal control Tests of controls Audit 1 E E Audit 2 M M Audit 3 M N Audit 4 M M Amount of testing: Extensive, Medium, Small, None Variations in Evidence Mix

16. Variations in Evidence Mix Substantive tests of transactions Analytical procedures Tests of details of balances Audit 1 S E S Audit 2 M E M Audit 3 E M E Audit 4 E E E Amount of testing: Extensive, Medium, Small, None

17. Learning Objective 5 Design an audit program.

18. Audit Program Part 1: Tests of controls and substantive tests of transactions Part 2: Analytical procedures Part 3: Tests of details and balances

19. Tests of Controls and Substantive Tests of Transactions • Apply the transaction-related audit objectives • to the class of transactions being tested. 2. Identify key controls that should reduce control risk for each audit objective. 3. Develop appropriate tests of controls. 4. Design substantive tests of transactions.

20. Design tests of controls and substantive tests of transactions to meet transaction-related audit objectives. Assess control risk. Evaluate cost-benefit of testing controls. Methodology for Designing Controls and Substantive Tests Perform procedures to understand internal control. Audit procedures Sample size Items to select Timing

21. Apply transaction- related audit objectives to a class of transactions. (Step 1) Identify key controls and make an assessment of control risk. (Step 2) Design substantive tests of transactions. (Step 4) Design tests of controls. (Step 3) Audit procedures Audit procedures Sample size Sample size Items to select Items to select Timing Timing Four-Step Approach to Designing Control and Substantive Tests

22. Set tolerable misstatement and assess inherent risk for accounts receivable. Assess control risk for sales and collection cycle. Design and perform analytical procedures for accounts receivable balance. Design and perform tests of controls and substantive tests of transactions for sales and collection cycle. Design tests of details of accounts receivable balance to satisfy balance-related audit objectives. Audit procedures Items to select Sample size Timing Methodology for Designing Tests of Balances – Accounts Receivable Identify client business risks affecting accounts receivable.

23. Apply transaction- related audit objectives to a class of transactions. Identify key controls and make an assessment of control risk. Design substantive tests of transactions. Design tests of controls. Audit procedures Audit procedures Sample size Sample size Items to select Items to select Timing Timing Approach to Designing Tests of Details of Balances

24. Approach to Designing Tests of Details of Balances Apply balance- related audit objectives to an account balance. Decide tolerable misstatement. Make preliminary judgment about materiality. Design analytical procedures. Assess inherent risk. Decide acceptable audit risk. Design tests of details of balances. Assess client business risk.

25. Learning Objective 6 Compare and contrast transaction-related audit objectives and balance- related audit objectives.

26. Transaction-related audit objective Balance-related audit objective Nature of relationship Existence Existence or completeness Direct Completeness Completeness or existence Direct Accuracy Accuracy Direct Classification Classification Direct Timing Cutoff Direct Posting and summarization Detail tie-in Direct Realizable value None Rights and obligations None Presentation and disclosure None Relationship of Transaction- toBalance-Related Audit Objectives

27. Learning Objective 7 Integrate the four phases of the audit process.

28. Phase I Plan and design an audit approach. Phase III Perform analytical procedures and tests of details of balances. Phase II Perform tests of controls and substantive tests of transactions. Phase IV Complete the audit and issue an audit report. Summary of theAudit Process

29. Understand the client’s business and industry. Assess client’s business risk. Perform preliminary analytical procedures. Summary of the Audit ProcessPhase I Accept client and perform initial planning.

30. Understand internal control and assess control risk. Gather information to assess fraud risks. Develop overall audit plan and audit program. Summary of the Audit ProcessPhase I Set materiality and assess acceptable audit risk and inherent risk.

31. Yes No Perform tests of controls. Perform substantive tests of transactions. Assess likelihood of misstatements in financial statements. Summary of the Audit ProcessPhase II Plan to reduce assessed level of control risk?

32. Summary of the Audit ProcessPhase III Low Medium High or unknown Perform analytical procedures. Perform tests of key items. Perform additional tests of details of balances.

33. Review for subsequent events. Accumulate final evidence. Evaluate results. Issue audit report. Communicate with audit committee and management. Summary of the Audit ProcessPhase IV Review for contingent liabilities.

34. End of Chapter 13