ch11 70 360

Chapter 11: Overall Audit
Plan and Audit Program
1
Copyright © 2007 Pearson Education Canada
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
11-2
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
11-3
Practice problem 11-20 (p. 336)
 Assessing evidence mix
 Why do different work on the same
cycles at different locations?
11-4
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
11-5
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.
11-6
Tests of controls (review)
 Transaction-related audit objectives:
– Occurrence
– Completeness
– Accuracy
– Classification
– Timing
– Posting and Summarization
11-7
Tests of controls
 Audit tests used for tests of controls:
– Inquiry
– Examination
– Observation
– Reperformance
 Similar to procedures used to obtain an
understanding of controls
11-8
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.
11-9
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)
11-10
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
11-11
 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
11-12
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
11-13
 Balance-related audit objectives:
– Existence
– Completeness
– Realizable value
– Accuracy
– Classification
– Cut-off
– Detail Tie-in
– Rights and Obligations
– Presentation & Disclosure
11-14
 Audit tests:
– Physical examination
– Direct communication
– Examine documentation
– Client inquiry
– Reperformance (includes mechanical
accuracy)
11-15
Examples of tests of details
 Examination of vendor invoices in
support of amounts recorded for
purchases of inventories
 Recalculation of payroll amounts
 Physical examination of inventory
11-16
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
11-17
 Check your
understanding of
audit tests
 Identify the
purpose of each
audit test and
identify the
evidence
11-18
Evidence mix: it is a trade-off of
 Low cost versus high quality of the audit
tests
– Tests of controls
– Tests of details
 Auditor uses professional judgment to
determine the mix of audit tests
11-19
 Three different situations
 What type of evidence mix would you
recommend?
11-20
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
– Tests of details
11-21
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
11-22
controls
11-23
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)
11-24
Practice problem 11-16
(pp. 334-35)
 Practice
distinguishing
between manual,
computer-assisted or
fully automated
controls
 Identify how these
controls would be
tested
11-25
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
11-26
details of financial statement balances–
accounts receivable
11-27
Comparing two situations
 Results of assessed  Results of assessed
control risk: Good control risk: Poor
– Results of tests of – No tests of controls
controls: Good completed
 Results of analytical  Results of analytical
procedures: Good procedures: Good
– Minimal tests of – Medium tests of
details required details required
11-28
Comparing two more situations
 Results of assessed  Results of assessed
control risk: Good control risk: Poor
– Results of tests of – No tests of controls
controls: Good completed
 Results of analytical  Results of analytical
procedures: Poor or procedures: Poor or
not performed not performed
– Medium tests of – Extensive tests of
details required details required
11-29
Review of audit phases
1.Plan and design an audit approach

2.Perform tests of controls
3.Perform analytical procedures and tests of
details of balance
4.Complete the audit
11-30
 Test your
understanding of the
audit process
 What is the order of
task completion?
11-31

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Chapter 11: Overall Audit

Plan and Audit Program

 Update and evaluate the auditor’s previous

1.Plan and design an audit approach

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