Chapter 13 auditing and assurance services

7/28/2019 Chapter 13 auditing and assurance services

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Overall Audit Plan

and Audit Program

Chapter 13


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Midterm topic guide will be ready andposted to the website by sometime

Saturday (2/25)


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Types of Audit Tests

Procedures to obtain an understanding

of internal control (Ch 10)Focused on understanding the design and

operation of aspects of I/C necessary to planthe rest of the audit

Tests of control (Ch 10)Procedures used to obtain evidenceneeded to assess control risk.


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Types of Audit Tests

Analytical procedures (Ch 8)

To indicate possible misstatements

To reduce tests of details of balances

Tests of details of balances

Focus on ending G/L balances

Substantive tests of transactions

Procedures designed to test for dollar

misstatements of financial statement

balances.


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Types of Audit Tests and the

Audit Risk Model

Audit riskmodel

Types ofaudittests

Proceduresto obtain anunderstanding

of internal control

Tests ofcontrols(TOC)

Substantivetests oftransactions

(STOC)

+ +

AAR

IR CR= PDR


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Types of Audit Tests and

the Audit Risk Model

Audit riskmodel

Types ofaudittests

Analyticalprocedures

(AP)

Tests ofdetails ofbalances

(TDP)

Sufficientcompetentevidenceper GASS

+ =

AAR

IR CR= PDR


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Relationship Between Types of

Tests and Evidence (Table 13-2)

Type of Test

Procedures for I/C

Tests of controls

Substantive T.O.T.

Analytical procedures

Tests of details

Physical

examina

tion

Confirmation

Docume

ntation

Observation

Type of Evidence

Inquiries

of

theclien

t

Reperfo

rmance

Analytic

al


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Audit Assurance at Different Levels of

Internal Control Effectiveness (Figure 13-3)

Acceptableassurance

Noassurance

INTERNAL CONTROL EFFECTIVENESSWeak control Strong control

Reliance on controls: C3 None, C2 Some, C1 Maximum

Audit assurancefrom control riskassessment andtests of control

Audit assurancefrom substantivetests

A C B

C3

C2

C1

AUDITASS

URANCE


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Impact of Information Technology on

Audit Testing

SAS 80 (AU 326) and SAS 94 (AU 319)

provide guidance for auditors of entities

that transmit, process, maintain, or accesssignificant information electronically.


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Impact of Information Technology on

Audit Testing

Computer assisted audit techniques (CAATS)

may be used to test automated controls or data.

Reports produced by IT may be used to test

the effectiveness of IT general controls.

Program change controls Access controls


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Variations in Evidence Mix


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Chapter 13 starts putting thepieces of the audit together.


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Audit Program

Tests of controls andsubstantive tests of transactions

Analytical procedures

Tests of details and balances

It is convenient to think of the audit program as

consisting of the three major classes of tests:


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Role of Audit Tests: Sales & Collection

Cycle Example(Fig 13-2)


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Designing Controls and Substantive Tests

of Transactions (Figure 13-4)

Perform procedures to

understand internal

control.

Audit procedures

Sample size

Items to select

Timing

Assess control risk.

Determine extent of

testing controls.

Design tests of controls

and substantive tests

of transactions to meet

transaction-relatedaudit objectives.


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Approach to Designing

Tests of Details of

Balances (Figure 13-6)


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Partial View of Table 13-4

Tests of Details of Balances Audit Program


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Phases of the Audit Process

1. Plan and design an audit approach.

2. Perform tests of controls and substantive

tests of transactions.

3. Perform analytical procedures and tests

of details of balances.

4. Complete the audit and issue an audit report.


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Audit Objectives (Ch. 6)

Transaction-related1. Existence

2. Completeness

3. Accuracy

4. Classification

5. Timing

6. Posting and

summarization

Balance-related1. Existence

2. Completeness

3. Accuracy

4. Classification

5. Cutoff

6. Detail tie-in

7. Realizable value8. Rights and obligations

9. Presentation and

disclosure


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Types of Evidence (Ch. 7)

1. Physical examination

2. Confirmation

3. Documentation4. Analytical procedures

5. Observation

6. Inquiry of the client7. Reperformance


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Summary of the Audit Process

Phase IPlan and designan audit approach.

Phase II

Perform tests of

controls andsubstantive testsof transactions.

Phase III

Perform analyticalprocedures andtests of detailsof balances.

Phase IV

Complete the

audit and issuean audit report.


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Summary of the Audit Process:

Phase I

Accept client and perform initial planning.

Understand the clients business and industry.

Assess clients business risk.

Perform preliminary analytical procedures.


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Phase I

Set materiality and assess acceptable

audit risk and inherent risk.

Understand internal control and assess control risk.

Gather information to assess fraud risks.

Develop overall audit plan and audit program.


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Phase II

Perform substantive tests of transactions.

No

Yes

Perform tests of controls.

Assess likelihood of misstatements infinancial statements.

Plan to reduceassessed levelof control risk?


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Phase III

Perform analytical procedures.

Perform tests of key items.Perform additional tests of detailsof balances.

Low MediumHigh or

unknown


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Phase IVReview for contingent liabilities.

Review for subsequent events.

Accumulate final evidence.

Evaluate results.

Issue audit report.

Communicate with auditcommittee and management.

Documents

Chapter 13 auditing and assurance services