Audit Chapter 13

design of the audit program

after the auditor uses risk assessment procedures to determine the appropriate emphasis on each of the other four types of tests ... this is very specific - the specific audit procedures for each type of test must be designed and combined to form the audit program - each transaction cycle will likely be evaluated using a separate set of subaudit programs

dual-purpose test

an audit procedure that can be used as both a test of controls and a substantive test can use the same sample for different tests

Further audit procedures and the audit risk model

audit risk model (initial assessment) AAR/(IR*CR) = PDR Control Tests provide information relating to CR Substantive tests (of transactions, analytical procedures, and details of the balances) give evidence -- the amount of evidence relates inversely to planned detection risk substantive tests of controls also relates (secondary) to CR because if an error in the transaction is found that means the internal controls did not catch it and there is an issue with internal controls that may need to be looked at

Selecting which types of tests to perform

auditors typically use all five types of tests when performing an audit of the financial statements, but certain types may be emphasized, depending on the circumstances several factors influence the auditor's choice of the types of tests to select 1. the availability of the types of evidence 2. the relative costs of each type of test 3. the effectiveness of internal controls and inherent risks obtain sufficient, appropriate evidence at the lowest cost

Types of Tests

auditors use five types of tests to determine whether financial statements are fairly stated 1. risk assessment procedures - identify significant risks due to fraud or error, and design tests that address those risks 2-5. further audit procedures - performed in response to the risks identified Audit Data Analytics (ADAs) and other technologies can be used

types of tests (further audit procedures) - substantive analytical procedures

dollar balances used to indicate possible misstatements in financial statements and to provide substantive evidence comparison or recorded amounts to expectations developed by the auditor relationships

selecting types of tests - availability of evidence

each of four type of further audit procedures involves only certain types of evidence (confirmation, inspection, and so forth) hard to get = costs more

types of tests (further audit procedures) - tests of details of balances

focus on the ENDING general ledger balances for both balance sheet and income statement accounts, including related disclosures all ending dollar balances are fair game satisfy balance related objectives

design of the audit program - three additional parts

in addition to the risk assessment procedures, the audit program is designed in three additional parts 1. tests of controls and substantive tests of transactions 2. substantive analytical procedures 3. tests of details of balances auditing standards require the auditor to use a written audit program --> before you start the audit, customized for every client engagement management software helps auditors select appropriate audit procedures and organize them into an audit program audit procedures can be added or deleted as the auditor deems necessary

Types of Tests (further audit procedures) - Tests of controls

jump in and test the operating effectiveness of internal controls used to determine whether the client's internal controls are effective need to prove effectiveness

key evidence-related terms

phases of the audit process (I, II, III, IV) audit objectives (transaction/balance) types of tests (risk assessment, TOC, STOT, SAP, TDB) evidence decisions (audit procedures, sample size, items to select, timing) types of evidence (inspection, inquires of client, observation, reperformance, recalculation, physical examination, inspection)

Evidence mix

proportion of tests (for each audit objective) what's the biggest risk - what do we need to prove? the choice of which types of tests to use and how extensively they need to be performed can vary widely among audits for differing levels of internal control effectiveness and inherent risks auditors employ a combination of the four types of tests to obtain sufficient appropriate evidence in response to risks identified through risk assessment procedures

relationship of transaction-related audit objectives to balance-related audit objectives

tests fo details of balances must be designed to satisfy balance-related audit objectives for each account and the extent of these tests can be reduces when transaction-related audit objectives have been satisfied by tests of controls or substantive tests of transactions 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 - realizable value - rights and obligations - presentation

Role of audit tests in the audit of sales and collection cycle

tests of controls and substantive tests of transactions are used when looking at TRANSACTIONS --> performed throughout the year Tests of the details of the balances are used when looking at ENDING BALANCES --> most useful at year end/balance sheet date substantive analytical procedures bridge the game between TOC/STOT and TDB --> look at relationships

selecting types of tests - relative costs

when auditors must decide which type of test to select for obtaining sufficient appropriate evidence, the cost of the evidence is an important consideration the types tests are listed below in order of increasing costs 1. substantive analytical procedures 2. risk assessment procedures, including procedures to obtain an understanding of internal control (observe) 3. tests of controls 4. substantive tests of transactions (3 and 4 can be done together) 5. tests of details of balances --> evidence like sending out confirmations and counting end of year inventory (time, travel...)

audit assurance from substantive tests and test of controls at different levels of internal control effectiveness

when control risk is set at max (there is no reliance on internal controls), audit assurance is accomplished entirely through substantive tests when there is some reliance on controls, less substantive tests are required to acquire acceptable assurance when there is maximum reliance on internal controls, audit assurance from control risk assessment and tests of controls is at its max, and even less substantive tests are needed

Types of tests (further audit procedures) - substantive tests of transactions

Dollar balances used to determine whether all seven transaction-related audit objectives have been satisfied for each class of transactions transaction related audit objectives are the $$ amounts right gather EVIDENCE for material misstatements -- PDR If an error is found, control risk may need evaluating

four phases of the audit process

I: plan and design an audit approach II: perform tests of controls and substantive tests of transactions III: perform substantive analytical procedures and tests of details of balances IV: complete the audit and issue an audit report