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Auditing and control

ACC 406

chapter 8

Dr. Dima Abdulhay


Overall Audit Plan
and Audit Program
Learning Objective 1

Use the five types of audit tests


to determine whether financial
statements are fairly stated.
Types of Tests

Procedures to obtain an understanding


of internal control

Tests of control

Substantive tests of transactions

Analytical procedures

Tests of details of balances


Types of Audit Tests and
the Audit Risk Model
Audit risk AAR
model = PDR
IR × CR

Procedures Substantive
Types of Tests of
to obtain an tests of
audit + controls +
understanding transactions
tests (TOC)
of internal control (STOC)
Types of Audit Tests and
the Audit Risk Model
Audit risk AAR
model = PDR
IR × CR

Tests of Sufficient
Types of Analytical
details of competent
audit procedures + balances = evidence
tests (AP)
(TDP) per GASS
Role of all Audit Tests in the Sales
and Collection Cycle
Accounts Cash in
Sales Receivable Bank
Sales Cash receipts
transactions transactions
Audited by Audited by
TOC, STOT, and AP TOC, STOT, and AP

Ending Ending
balance balance
Audited by AP and TDB

TOC + STOT + AP + TDB


= Sufficient competent evidence per GAAS
Learning Objective 2

Select the appropriate types


of audit tests.
Relationship Between Types of
Tests and Evidence Type of Evidence

Documentation
Confirmation
examination

Observation
Physical
Type of Test
Procedures for internal control  
Tests of controls  
Substantive tests of transactions 
Analytical procedures
Tests of details of balances   
Relationship Between Types of
Tests and Evidence Type of Evidence

Reperformance

performance
Inquiries of
the client

Analytic
Type of Test
Procedures for internal control  
Tests of controls  
Substantive tests of transactions  
Analytical procedures  
Tests of details of balances  
Audit Assurance at Different Levels of
Internal Control Effectiveness
Acceptable C3
assurance AUDIT ASSURANCE
Audit assurance
C2 from control risk
assessment and
tests of control
C1
Audit assurance
from substantive
No tests
assurance
A C B
INTERNAL CONTROL EFFECTIVENESS
Weak control Strong control
Reliance on controls: C3 – None, C2 – Some, C1 – Maximum
Learning Objective 3

Understand how information


technology affects audit testing.
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 access
significant information electronically.
Impact of Information Technology
on Audit Testing

Computer assisted audit techniques 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


Learning Objective 4

Understand the concept of


evidence mix and how it
should be varied in
different circumstances.
Variations in Evidence Mix

Procedures to obtain
an understanding Tests
of internal control of controls
Audit 1 E E
Audit 2 M M
Audit 3 M N
Audit 4 M M
Amount of testing: Extensive, Medium, Small, None
Variations in Evidence Mix

Substantive Tests of
tests of Analytical details of
transactions procedures balances
Audit 1 S E S
Audit 2 M E M
Audit 3 E M E
Audit 4 E E E
Amount of testing: Extensive, Medium, Small, None
Learning Objective 5

Design an audit program.


Audit Program

Part 1:
Tests of controls and substantive
tests of transactions

Part 2:
Analytical procedures

Part 3:
Tests of details and balances
Tests of Controls and Substantive
Tests of Transactions
1. Apply the transaction-related audit objectives
to the class of transactions being tested.

2. Identify key controls that should reduce


control risk for each audit objective.

3. Develop appropriate tests of controls.

4. Design substantive tests of transactions.


Methodology for Designing
Controls and Substantive Tests
Design tests of controls
Perform procedures to and substantive tests
understand internal of transactions to meet
control. transaction-related
audit objectives.
Audit procedures
Assess control risk.
Sample size

Items to select
Determine extent of
testing controls. Timing
Four-Step Approach to Designing
Control and Substantive Tests
Identify key controls and
Apply transaction- related
make a preliminary
audit objectives to a class
assessment of control risk.
of transactions. (Step 1)
(Step 2)

Design substantive tests of Design tests of controls.


transactions. (Step 4) (Step 3)
Audit procedures Audit procedures
Sample size Sample size
Items to select Items to select
Timing Timing
Methodology for Designing Tests of
Balances – Accounts Receivable
Identify client Set tolerable Assess control
business risks misstatement and risk for sales
affecting accounts assess inherent risk and collection
receivable. for accounts receivable. cycle.

Design and perform Design and perform tests


analytical procedures of controls and substantive
for accounts tests of transactions for
receivable balance. sales and collection cycle.

Design tests of details of Audit procedures Items to select


accounts receivable balance
to satisfy balance-related
audit objectives. Sample size Timing
Approach to Designing Tests of
Details of Balances
Apply transaction-related Identify key controls
audit objectives to a class and make an assessment
of transactions. of control risk.

Design substantive tests Design tests of controls.


of transactions.
Audit procedures Audit procedures
Sample size Sample size
Items to select Items to select
Timing Timing
Approach to Designing Tests of
Details of Balances
Apply balance- Make preliminary
related audit Decide tolerable
judgment about
objectives to an misstatement.
materiality.
account balance.

Design analytical
procedures.

Assess inherent risk.


Decide acceptable
Design tests audit risk.
of details of Assess client
balances. business risk.
Learning Objective 6

Compare and contrast


transaction-related audit
objectives and balance-related
audit objectives.
Relationship Among Five Key
Evidence-Related Terms
Phases of the audit process

Audit objectives

Types of tests

Evidence decisions

Types of evidence
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.


Audit Objectives
Transaction-related Balance-related
1. Existence 1. Existence
2. Completeness 2. Completeness
3. Accuracy 3. Accuracy
4. Classification 4. Classification
5. Timing 5. Cutoff
6. Posting and 6. Detail tie-in
summarization 7. Realizable value
8. Rights and obligations
9. Presentation and
disclosure
Types of Tests

1. Procedures to obtain an understanding


of internal control

2. Tests of controls

3. Substantive tests of transactions

4. Analytical procedures

5. Tests of details of balances


Evidence Decisions

1. Audit procedures

2. Sample size

3. Items to select

4. Timing of performance
Types of Evidence

1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Observation
6. Inquiry of the client
7. Reperformance
Learning Objective 7

Integrate the four phases


of the audit process.
Summary of the Audit Process

Perform analytical
Plan and design procedures and
Phase I an audit approach. Phase III tests of details
of balances.

Perform tests of
Complete the
controls and
Phase II substantive tests Phase IV audit and issue
an audit report.
of transactions.
Summary of the Audit Process:
Phase I

Accept client and perform initial planning.

Understand the client’s business and industry.

Assess client’s business risk.

Perform preliminary analytical procedures.


Summary of the Audit Process:
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.


Summary of the Audit Process:
Phase II
Plan to reduce
assessed level No
of control risk?

Yes
Perform tests of controls.

Perform substantive tests of transactions.

Assess likelihood of misstatements in


financial statements.
Summary of the Audit Process:
Phase III

High or
Low Medium
unknown

Perform analytical procedures.


Perform tests of key items.
Perform additional tests of details
of balances.
Summary of the Audit Process:
Phase IV
Review for contingent liabilities.

Review for subsequent events.

Accumulate final evidence.

Evaluate results.

Issue audit report.


Communicate with audit
committee and management.
End of Chapter 8

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