Transcript Overall Audit Plan and Audit Program

Overall Audit Plan
and Audit Program
Chapter 13
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
12 - 1
Learning Objective 1
Use the five types of audit tests
to determine whether financial
statements are fairly stated.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
12 - 2
Types of Tests
Risk assessment: BR, FR, AR, IR, CR, and DR
Note: BR and FR feed into AR, IR, and CR
Tests of control-credit check performed → CR → DR
Substantive tests of transactions- trace doc. from
ship. to g/l (comp) trace from g/l to ship. (exist)
Analytical procedures – compare sales acct. to expect.
Tests of details of balances – confirm A/R accounts
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
12 - 3
Types of Audit Tests and
the Audit Risk Model
Audit
Risk
Model
AAR
= PDR
IR × CR
Procedures
Substantive
Types
Tests of
to obtain an
tests of
+ controls +
of Audit
understanding of
transactions
Tests
(TOC)
internal control
(STOT)
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
12 - 4
Types of Audit Tests and
the Audit Risk Model
Audit
Risk
Model
Types
of Audit
Tests
AAR
= PDR
IR × CR
Analytical
procedures
(AP)
Tests of
Sufficient
details of appropriate
=
+
balances
evidence
(TDB)
per GAAS
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
12 - 5
Role of all Audit Tests in the
Sales and Collection Cycle
Accounts
Receivable
Sales
Cash in
Bank
Sales
transactions
Cash receipts
transactions
Audited by
TOC, STOT
Audited by
TOC, STOT
Ending
balance
Ending
balance
Audited by AP and TDB
Ending
balance
Audited by AP and TDB
TOC + STOT + AP + TDB
= Sufficient appropriate evidence per GAAS
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
12 - 6
Learning Objective 2
Select the appropriate
types of audit tests.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
12 - 7
Relationship Between
Types of Tests and Evidence
Observation
Documentation
Confirmation
Type of Test
Procedures for internal control
Tests of controls
Substantive tests of transactions
Analytical procedures
Tests of details of balances
Physical
Examination
Type of Evidence








©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
12 - 8
Relationship Between
Types of Tests and Evidence





Recalculation



Analytic
procedures
Reperformance
Type of Test
Procedures for internal control
Tests of controls
Substantive tests of transactions
Analytical procedures
Tests of details of balances
Inquiries of
the client
Type of Evidence



©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley

12 - 9
Acceptable
assurance
No
assurance
AUDIT ASSURANCE
Audit Assurance at Different Levels
of Internal Control Effectiveness
C3
Audit
assurance
from
substantive
tests
C2
C1
Audit assurance
from control risk
assessment and
tests of control
A
C
B
INTERNAL CONTROL EFFECTIVENESS
Weak control
Strong control
Reliance on controls: C3 – None, C2 – Some, C1 – Maximum
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 10
Learning Objective 3
Understand how information
technology affects audit testing.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 11
Impact of Information
Technology on Audit Testing
SAS 80 (AU 326) and SAS 94 (AU 319) and
SAS 109 provide guidance for auditors of entities
that transmit, process, maintain, or access
significant information electronically.
Computer assisted audit techniques may be
used to test automated controls or data. Examples?
IT audit specialists, timing of tests/availability
of ONLINE/INTERNAL documentation,
MAX CR? – Can’t get DR low enough w/ subst. tests
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 12
Learning Objective 4
Understand the concept of evidence
mix and how it should be varied
in different circumstances.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 13
Variations in Evidence Mix
Audit 1
Audit 4
Procedures to Obtain
an Understanding
of Internal Control
E
M
Tests
of
Controls
E
M
Amount of testing: Extensive, Medium, Small, None
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 14
Variations in Evidence Mix
Audit 1
Audit 4
Substantive
Analytical
Tests of
Transactions Procedures
S
E
E
E
Tests of
Details of
Balances
S
E
Amount of testing: Extensive, Medium, Small, None
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 15
Learning Objective 5
Design an audit program.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 16
Audit Program
Part 1:
Tests of controls and substantive
tests of transactions
Part 2:
Analytical procedures
Part 3:
Tests of details and balances
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 17
Audit Procedures - Transactions
1. Apply the transaction-related audit objectives
to the class of transactions (cycle) being tested.
Ex. All shipments are recorded as sales (completeness)
2. Identify key controls that should reduce
control risk for each audit objective: checklist
and matrix. Ex. Weekly rec of units shipped
to units billed
3. Develop appropriate tests of controls –> final CR
4. Given DR, design substantive tests of transactions.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 18
Methodology for Designing Controls
and Substantive Tests of Transactions
Perform procedures
to understand
internal control.
P. Assess control risk.
Evaluate cost-benefit
of testing controls.
Design tests of controls
and substantive tests
of transactions to meet
transaction-related
audit objectives.
Audit procedures/Staffing
Sample size/Budget
Items to select
Timing
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 19
Why ToC and ToT at the Same
Time??
Efficiencies!!!! Time = Cost!
 Take a sample of 25 sales journal entries:
Dr. A/R $xxxxx
Cr. Sales
$xxxxx
ToC for Occurrence – test for credit check/cust.
approval.
ToT for Occurrence – trace AMOUNT from J/E to
invoice to shipping doc to Purchase Order.
Simultaneous testing requires us to have a prel. CR!!

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 20
Methodology for Designing Tests of
Balances – Accounts Receivable
Determine acceptable
audit risk.
Set tolerable misstatement
and assess inherent risk
for accounts receivable.
Assess control risk for sales
and collection cycle.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 21
Methodology for Designing Tests of
Balances – Accounts Receivable
Design and perform tests of
controls and substantive tests
of transactions for sales and
collection cycle. Get final CR.
Design and perform analytical
procedures for accounts
receivable balance.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 22
Methodology for Designing Tests of
Balances – Accounts Receivable
Design tests of details of Audit procedures/Staffing
accounts receivable balance Sample size/Budget
Items to select
to satisfy balance-related
audit objectives.
Timing
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 23
Approach to Designing Tests
of Details of Balances
Apply balancerelated audit
objectives to an
account balance.
Decide tolerable
misstatement.
Make preliminary
judgment about
materiality.
Design analytical
procedures, ToT
and
assess CR
Assess inherent risk.
Design tests
of details of
balances.
Assess client
business risk.
Decide acceptable
audit risk.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 24
Learning Objective 6
Compare and contrast
transaction-related audit
objectives with balancerelated audit objectives and
presentation and disclosure-related
audit objectives.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 25
Relationship of Transaction-related Audit
Objectives to Balance-related Audit
Objectives
Transactionrelated
Audit
Objective
Balancerelated
Audit
Objective
Nature of
Relationship
Occurrence
Completeness
Accuracy
Posting and
summarization
Classification
Timing
Existence or completeness
Completeness or existence
Accuracy
Detail tie-in
Direct
Direct
Direct
Direct
Classification
Cutoff
Realizable value
Rights and obligation
Direct
Direct
None
None
What about Presentation and Disclosure Objectives??
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 26
Learning Objective 7
Integrate the four phases
of the audit process.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 27
Summary of the
Audit Process
Plan and design
Phase I
an audit approach.
Phase II
Perform tests of
controls and
substantive tests
of transactions.
Perform analytical
procedures and
Phase III
tests of details
of balances.
Phase IV
Complete the
audit and issue
an audit report.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 28
Summary of the Audit Process
Phase I
Accept client and perform initial planning.
Understand the client’s business and industry.
Assess client’s business risk and fraud risk.
Perform preliminary analytical procedures.
Set materiality and assess acceptable audit risk
and inherent risk.
Understand internal control and pr. assess control risk.
Develop overall audit plan and audit program.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 29
Summary of the Audit Process
Phase II
Plan to
reduce assessed level of control
risk below max?
Yes
No
Perform tests of controls.
Perform substantive tests of transactions.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 30
Summary of the Audit Process
Phase III
Low
Medium High
Dependent upon CR/DR and ToT
Perform analytical procedures.
Perform tests of details of balances.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 31
Summary of the Audit Process
Phase IV
Perform additional tests for presentation and disclosure
Review for contingent liabilities.
Review for subsequent events.
Evaluate results / audit adjustments.
Issue audit report. SOX – opinion on I/C
Communicate with audit
committee
and
©2003 Prentice Hall Business
Publishing, Auditing
and management.
Assurance Services 9/e, Arens/Elder/Beasley
12 - 32
End of Chapter 13
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 33