Ch.13 Procedures and Tests

-Identify significant risks and assess risk of MM -Set Performance Materiality -Assess CR for the Sales & Collection Cycle -Design/Perform TOC & STOT -Design/Perform SAP -Design tests of details of accounts to satisfy balance-related audit objectives

The key decisions involved in designing TDB:

Balance Sheet

The primary emphasis of TOC of balances is on the ________.

- Indicate possible misstatements in the F/S - Provide substantive evidence

The two most important purposes of SAP are:

Levels of Internal Control Effectiveness & Inherent Risk

The types of evidence chosen and the extent of use by the auditor varies widely from audit to audit, based on _________.

Inquiry Observation Inspection of Records & Documents (Documentation) Recalculation Reperformance Confirmation Inspection of Tangible Assets (Physical Examination) Analytical Procedures

Types of Evidence:

Substantive Analytical Procedures Risk Assessment Procedures Tests of Controls Substantive Tests of Transactions Tests of Details of Balances

Types of tests in order of Increasing Costs:

SAP & TDB

Used to satisfy planned detection risk.

TDB

What is the primary test to reduce detection risk to an acceptable level?

Relationship between TOC & Substantive Tests

When TOC show deviations that lead auditor to believe there may be material misstatements, auditors then perform tests to determine whether a material misstatement has occurred.

Emphasize satisfying the transaction-related audit objectives

When designing TOC & STOT, auditors _________.

STOT

_______ are designed by the auditor to determine whether misstatements have occurred in the processing of transactions.

TOC

________ are designed by the auditor to determine whether controls over the processing of transactions are working or not working.

Further Audit Procedures

Auditors use the results of Risk Assessment Procedures to determine the type and amount of _______ necessary to form an opinion on the fairness of the F/S.

SAP

Because _________ are relatively inexpensive, many auditors perform them on all audits.

-TOC & STOT -SAP -TDB

Besides the Risk Assessment Procedures, the Audit Program is designed in 3 additional parts:

Test the controls

During Planning, auditors decide whether to assess CR below the maximum. If they do, they must _______.

Evidence

Each of the four types of Further Audit Procedures involves only certain types of _______.

-Realizable Value -Rights & Obligations

Even when all transaction-related audit objectives are met, the auditor will still rely primarily on Substantive Tests of Balances to meet the following balance-related audit objectives:

Tests of Controls were NOT CONDUCTED OR tested controls are NOT WORKING

Expanded Substantive tests if:

Procedures to gain an understanding of internal control

Focus on the design and implementation of internal control and are used to assess control risk for each transaction-related audit objective

-Tests of Controls (TOC) -Substantive Tests of Transactions (STOT) -Substantive Analytical Procedures (SAP) -Tests of Details of Balances (TDB)

Further Audit Procedures:

Unusual Fluctuations

Indicate an increase in the likelihood of misstatement.

Analytical Procedures

Indicate the likelihood of misstatement.

"Control" the processing of transactions

Internal controls are implemented by the client to _______.

The results of TOC

Make the decision to perform expanded or reduced substantive tests based upon _______.

Substantive Analytical Procedures

May be used to audit an account balance, although not required. Auditors develop an expectation of recorded amounts or ratios to provide evidence supporting an account balance.

--

Methodology is showing in Figure 13-6 Overall design approach shown in Figure 13-7

TOC

Performed to support or reduce assessed control risk.

Substantive Tests of Transactions

Procedures testing for dollar (monetary) misstatements. Used to determine whether all 6 of the transaction related audit objectives have been satisfied.

Tests of Details of Balances

Procedures testing for monetary misstatements. Used to determine whether all 8 of the balance related audit objectives have been satisfied.

Risk Assessment Procedures

Procedures used to obtain an understanding of an entity and its environment, including internal controls by gathering sufficient evidence

Levels of Disaggregation of Planning Activities

Range from overall audit to balance-related audit objectives.

Tests of Controls were CONDUCTED AND tested controls are WORKING

Reduced Substantive tests if:

--

See Scenarios in Table 13-3

WEAK OR IT IS NOT cost effective to test

Skip TOC if controls appear:

Inquiries of Client Analytical Procedures

Substantive Analytical Procedures (Evidence):

Inspection Inquiries of Client Reperformance Recalculation

Substantive Tests of Transactions (Evidence):

-Do controls appear to be strong vs. weak? -Is it cost effective to test controls?

Test Controls? 2 Factors:

STRONG AND IT IS cost effective to test

Test controls if controls appear:

Inspection Observation Inquiries of Client Reperformance

Test of Controls (Evidence):

Inspection Inquiries of Client Reperformance Recalculation Confirmation Physical Examinations

Tests of Details of Balances (Evidence):

Dual Purpose Tests

Tests that take advantage of the common purpose of TOC and STOT.

Tests of Controls

Tests used to obtain sufficient evidence in support of a reduced assessed Control Risk; tests the effectiveness of controls

Transaction-Related & Balance-Related Objectives

The Audit Program will include procedures to satisfy all audit objectives, but here we focus on designing Audit Programs to satisfy _________.

--

The Design Process is shown in Figure 13-4

- The extent of evidence obtained in gaining an understand of internal control - The planned reduction in control risk

The amount of evidence needed for TOC depends on:

Cost

The auditor must decide which type of test to select for obtaining sufficient appropriate evidence and the ______ of the evidence is an important consideration.

Audit Program

The auditor uses Risk Assessment Procedures to determine the appropriate emphasis on each of the other four types of tests, & design the specific audit procedures for each type of test. These audit procedures are combined to form the _______.

Evidence Mix

The combination the decisions about types of tests and types of evidence given different risk assessment procedures and results of analytical procedures

STOT

Affect both control risk and planned detection risk bc they test effectiveness of internal control and other amounts of transactions.

Illustrative Audit Program

Auditing standards require the auditor to use a written audit program.

1. Apply the transaction-related audit objectives to the class of transaction being tested, such as Sales. 2. Identify key controls that should reduce controls risk for each transaction-related audit. 3. Develop appropriate TOC for all internal controls that are used to reduce the preliminary assessment of CR below maximum (key controls). 4. For potential types of misstatements related to each transaction-related audit objective, design appropriate STOT, considering deficiencies in internal control and expected results of the TOC in step 3.

Auditors follow a four-step approach to reduce assessed CR: