Auditing 81.3550Auditing 81.3550

Audit Planning and

the Audit Program

Chapter 10

Audit Planning and

the Audit Program

Chapter 10

HighlightsHighlights

• Examine the four types of audit test commonly used

• Relationship amongst evidence components

• Examine/review the relationships between transaction related and balance related objectives

• Review the design of an audit program

• Examine the four types of audit test commonly used

• Relationship amongst evidence components

• Examine/review the relationships between transaction related and balance related objectives

• Review the design of an audit program

10 - 2Copyright 2003 Pearson Education Canada Inc.

performpreliminaryanalytical

procedures

Steps in audit planningSteps in audit planning

preplan

setmateriality, and

assess acceptableaudit risk andinherent risk

understandinternal control

and assesscontrol risk

obtainbackgroundinformation

obtaininformation

about client’s legal obligations

developoverall audit

plan and auditprogram

Types of TestsTypes of Tests

• Four basic types of test are used to ensure F/S are fairly presented – Procedures to obtain understanding of IC– Tests of Controls– Analytical procedures– Test of details of balances

• First 2 = aid in assessing control risk • Next 2 = substantive tests

• Four basic types of test are used to ensure F/S are fairly presented – Procedures to obtain understanding of IC– Tests of Controls– Analytical procedures– Test of details of balances

• First 2 = aid in assessing control risk • Next 2 = substantive tests

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What are the different What are the different types of audit tests?types of audit tests?

- procedures to obtain an understandingof internal control

The auditor’sunderstanding of in-

ternal control must besupported by evidence.

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EXAMPLES:- enquiries of client

personnel- examination of docu-

ments, records, andreports

- observe control-related activities

- re-perform clientprocedures

Tests ofcontrols examinethe effectiveness

of internalcontrol design and operation.

Test of Controls (review)Test of Controls (review)Tests of controls

are designed, in part, todetermine whether the

auditor’s understanding of internal control is accurate.

Note: often used dual purpose test = procedures that are both test of

controls and substantive procedures on the same acct balances or transaction

for efficiency

Tests of controlsare designed, in part, todetermine whether the

auditor’s understanding of internal control is accurate.

Note: often used dual purpose test = procedures that are both test of

controls and substantive procedures on the same acct balances or transaction

for efficiency

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What are the different What are the different types of audit tests?types of audit tests?

- procedures to obtain an understandingof internal control

- tests of controls- analytical procedures

Analytical proceduresuse comparisons and relation-ships to determine reasonable-

ness of balances.

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What are the different What are the different types of audit tests?types of audit tests?

- procedures to obtain an understandingof internal control

- tests of controls- analytical procedures- tests of details of balances

Tests of detailsof balances examine monetary

misstatements in details offinancial statement accounts.

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What are the different What are the different types of audit tests?types of audit tests?

- procedures to obtain an understandingof internal control

- tests of controls- analytical procedures- tests of details of balances

The primary emphasisof this type of test isthe balance sheet.

Types of Tests & Risk ModelTypes of Tests & Risk Model

AR = IR x CR x (P)DR

UnderstdIC procedures

Test ofControls

Analytical Procedures

Test of Details of Balances

SufficientAppropriate

EvidenceGAAS

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- physical examination - confirmation - documentation (vouching)- observation - enquiries of client - reperformance - analytical procedures

types of evidence types of evidence

What What types of evidencetypes of evidence are producedare producedby the different by the different types of audit teststypes of audit tests??

10 - 24Copyright 2003 Pearson Education Canada Inc.

What What types of evidencetypes of evidence are producedare producedby the different by the different types of audit teststypes of audit tests??

procedures to obtainan understandingof internal control

- documentation- observation - enquiries of client - reperformance

types of audit testtypes of audit testtypes of evidencetypes of evidenceproduced by testproduced by test

10 - 26Copyright 2003 Pearson Education Canada Inc.

What What types of evidencetypes of evidence are producedare producedby the different by the different types of audit teststypes of audit tests??

- documentation- observation - enquiries of client - reperformance

tests of controls

types of audit testtypes of audit testtypes of evidencetypes of evidenceproduced by testproduced by test

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What What types of evidencetypes of evidence are producedare producedby the different by the different types of audit teststypes of audit tests??

analyticalprocedures

- enquiries of client - analytical

procedures

types of audit testtypes of audit testtypes of evidencetypes of evidenceproduced by testproduced by test

10 - 30Copyright 2003 Pearson Education Canada Inc.

What What types of evidencetypes of evidence are producedare producedby the different by the different types of audit teststypes of audit tests??

- physical examination

- confirmation- documentation- enquiries of client - reperformance

tests of detailsof balances

types of audit testtypes of audit testtypes of evidencetypes of evidenceproduced by testproduced by test

Tests & CostsTests & Costs• Tests of details of

balances

• Procedures Understanding IC and test of Controls

• Analytical Procedures

• Tests of details of balances

• Procedures Understanding IC and test of Controls

• Analytical Procedures

What is the evidence mixevidence mix??

thecombination

of the four typesof audit tests used

in the audit of a cycle

Evidence MixEvidence Mix

• In general, if the auditor assesses the controls and accounting system as

relatively effective, the mix will involve more tests of controls and less substantive tests.

• Conversely, if the auditor assesses the controls and accounting system as

relatively ineffective, the mix will involve less tests of controls and more

substantive tests.

• In general, if the auditor assesses the controls and accounting system as

relatively effective, the mix will involve more tests of controls and less substantive tests.

• Conversely, if the auditor assesses the controls and accounting system as

relatively ineffective, the mix will involve less tests of controls and more

substantive tests.

What is an audit program?What is an audit program?

• Set of instructions for the audit specifically related to the collection of evidence

• Includes details on procedures, timing of procedures, sample sizes, items to be tested and associated assertions

• Set of instructions for the audit specifically related to the collection of evidence

• Includes details on procedures, timing of procedures, sample sizes, items to be tested and associated assertions

What is an audit program?What is an audit program?

Many programshave a separate

set of subaudit programs for

each transaction cycle.

Many programshave a separate

set of subaudit programs for

each transaction cycle.

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As discussed in Chapter 5, an audit As discussed in Chapter 5, an audit can be divided into can be divided into four phasesfour phases..

I II

III IV

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II

III IV

I. Plan and designan audit approach.

As discussed in Chapter 5, an audit As discussed in Chapter 5, an audit can be divided into can be divided into four phasesfour phases..

10 - 53Copyright 2003 Pearson Education Canada Inc.

setmateriality, and

assess acceptableaudit risk andinherent risk

understandinternal control

and assesscontrol risk

performpreliminaryanalytical

procedures

preplanobtain

backgroundinformation

obtaininformation

about client’s legal obligations

developoverall audit

plan and auditprogram

I. Plan and designan audit approach.

10 - 54Copyright 2003 Pearson Education Canada Inc.

An audit can be divided An audit can be divided into into four phasesfour phases..

III IV

I. Plan and designan audit approach.

II. Perform testsof controls.

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II. Perform testsof controls.

no

yes

Does theauditor plan to

reduce the assessedlevel of control

risk?

Perform testsof controls

Assess the likelihood ofmisstatements in thefinancial statements

10 - 58Copyright 2003 Pearson Education Canada Inc.

An audit can be divided An audit can be divided into into four phasesfour phases..

I. Plan and designan audit approach.

II. Perform testsof controls.

III. Perform analyt-ical procedures and

tests of details ofbalances.

IV

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III. Perform analyt-ical procedures and

tests of details ofbalances.

Considering the assessedlikelihood of financial state-ment misstatements (low,medium, high, unknown):

Perform analyticalprocedures

Perform testsof key items

Perform additionaltests of details

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An audit can be divided An audit can be divided into into four phasesfour phases..

I. Plan and designan audit approach.

II. Perform testsof controls.

III. Perform analyt-ical procedures and

tests of details ofbalances.

IV. Complete theaudit and issue an

audit report.

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I. Plan and designan audit approach.

Review for contingent liabilities

Review for subsequent events

Accumulatefinal evidence

Evaluate results

Issue audit report

Communicate with auditcommittee and management

IV. Complete theaudit and issue an

audit report.