Chapter 13
Part 1) Test of controls and substantive tests of transactions Auditors follow a four-step approach to reduce assessed control risk
1. Apply the transaction-related audit objectives to the class of transactions being tested, such as sales. 2. Identify key controls that should reduce control risk for each transaction-related audit objective. 3. Develop appropriate tests of controls for all internal controls that are used to reduce the preliminary assessment of control risk below maximum (audit procedure, sample size, items to select, timing) 4. For potential types of misstatements related to each transaction-related audit objective, design appropriate substantive tests of transactions (audit procedure, sample size, items to select, timing)
(6) things to consider when selecting the appropriate type of audit evidence
1. Availability of Types of Evidence for Further Audit Procedures 2. Relative Cost 3. Relationship Between Tests of Controls and Substantive Tests 4. Relationship Between Substantive Analytical Procedures and Other Substantive Tests 5. Trade-Off Between Tests of Controls and Substantive Tests
Part 3) details of balances (6) key decisions in designing the test of details of balances
1. Identify Significant Risks and Assess Risk of Material Misstatement 2. Set Performance Materiality 3. Assess Control Risk for the Sales and Collection Cycle 4. Design and Perform Tests of Controls and Substantive 5. Tests of Transactions 6. Design and Perform Substantive Analytical Procedures 7. Design Tests of Details of Accounts to Satisfy Balance-8. Related Audit Objectives
The audit program is designed in 3 parts
1. Tests of controls and substantive tests of transactions 2. Substantive analytical procedures 3. Tests of details of balances
4 Types of tests: further audit procedures include
1. test of controls 2. substantive test of transactions 3. substantive analytical procedures 4. test of details of balances
The primary emphasis of tests of balances is on the ______________ .
Balance sheet
Substantive analytical procedures are required to audit an account balance. True/False
False (not required but can be used)
The two most important purposes of substantive analytical procedures are
Indicate possible misstatements in the financial statements Provide substantive evidence
To obtain sufficient appropriate evidence to support a reduced assessment of control risk, the auditor (4)
Makes inquiries of appropriate personnel Examine documents, records and reports Observe control related activities Re-perform client procedures
What is part 2 of the audit program?
Substantive Analytical Procedures
Types of tests (in order of increasing cost)
Substantive analytical procedures Risk assessment procedures Tests of controls Substantive tests of transactions Tests of details of balances
Used to determine whether all six transaction-related audit objectives have been satisfied for each class of transactions.
Substantive tests of transactions
The amount of evidence needed for tests of controls depends on two things
The extent of evidence obtained in gaining the understanding of IC The planned reduction in control risk
Analytical procedures only indicate the likelihood of misstatement True/False
True
When _____________ show deviations that lead the auditor to believe that there may be material misstatements, the auditors then perform ___________ to determine whether a material misstatement actually occurred.
test of controls, substantive tests
During planning, auditors decide whether to assess control risk below the maximum. If they do, they must test _____ .
the controls
Auditors use the results of risk assessment procedures to determine the _____ and ______ of further audit procedures necessary to form an opinion on the fairness of the financial statements.
type, amount
