1 CHAPTER 10 Overall Audit Plan and Audit Program.

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Presentation transcript:

1 CHAPTER 10 Overall Audit Plan and Audit Program

2 perform preliminary analytical procedures Steps in audit planning preplan set materiality, and assess acceptable audit risk and inherent risk understand internal control and assess control risk obtain background information obtain information about client’s legal obligations develop overall audit plan and audit program

3 What are the different types of audit tests? - procedures to obtain an understanding of internal control

4 What are the different types of audit tests? - procedures to obtain an understanding of internal control The auditor must focus on both design and operation of internal controls.

5 What are the different types of audit tests? - procedures to obtain an understanding of internal control The auditor’s understanding of internal control must be supported by evidence.

6 What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls Tests of controls examine the effectiveness of internal control design and operation.

7 EXAMPLES: - inquiries of client personnel Tests of controls examine the effectiveness of internal control design and operation.

8 EXAMPLES: - inquiries of client personnel - examination of documents, records, and reports Tests of controls examine the effectiveness of internal control design and operation. Job Description Memo:

9 EXAMPLES: - inquiries of client personnel - examination of documents, records, and reports - observe control- related activities Tests of controls examine the effectiveness of internal control design and operation.

10 EXAMPLES: - inquiries of client personnel - examination of documents, records, and reports - observe control- related activities - reperform client procedures Tests of controls examine the effectiveness of internal control design and operation.

11 What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls How are these two types of tests related?

12 What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls Tests of controls are designed, in part, to determine whether the auditor’s understanding of internal control is accurate.

13 What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - substantive tests of transactions Substantive tests of transactions examine monetary errors and irregularities in a class of transactions.

14 What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - substantive tests of transactions For efficiency, tests of controls and substantive tests of transactions are frequently performed at the same time.

15 What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - substantive tests of transactions - analytical procedures Analytical procedures use comparisons and relation- ships to determine reasonable- ness of balances.

16 What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - substantive tests of transactions - analytical procedures - tests of details of balances Tests of details of balances examine monetary errors and irregularities in details of financial statements.

17 What are the different types of audit tests? - procedures to obtain an understanding of internal control - tests of controls - substantive tests of transactions - analytical procedures - tests of details of balances The primary emphasis of this type of test is the balance sheet.

18 - physical examination - confirmation - documentation - observation - inquiries of client - reperformance - analytical procedures As discussed in chapter 6, there are six types of evidence

19 - physical examination - confirmation - documentation (vouching) - observation - inquiries of client - reperformance - analytical procedures types of evidence What types of evidence are produced by the different types of audit tests?

20 What types of evidence are produced by the different types of audit tests? procedures to obtain an understanding of internal control - documentation - observation - inquiries of client - reperformance types of audit test types of evidence produced by test

21 What types of evidence are produced by the different types of audit tests? - documentation - observation - inquiries of client - reperformance tests of controls types of audit test types of evidence produced by test

22 What types of evidence are produced by the different types of audit tests? - documentation - inquiries of client - reperformance substantive tests of transactions types of audit test types of evidence produced by test

23 What types of evidence are produced by the different types of audit tests? analytical procedures - inquiries of client - analytical procedures types of audit test types of evidence produced by test

24 What types of evidence are produced by the different types of audit tests? - physical examination - confirmation - documentation - inquiries of client - reperformance tests of details of balances types of audit test types of evidence produced by test

25 The types of audit tests vary in their relative costs. Which type of audit test is most expensive?

26 The types of audit tests vary in their relative costs. Tests of details of balances are the most expensive type of audit test, e.g., confirmations, physical examination.

27 The types of audit tests vary in their relative costs. Which type of audit test is least expensive?

28 The types of audit tests vary in their relative costs. Analytical procedures are least expensive because of the relative ease of calculating and comparing, particularly if software is employed.

29 What is the evidence mix? the combination of the five types of audit tests used in the audit of a cycle In general, if the auditor assesses the controls and accounting system as relatively effective, the mix will involve more tests of controls and less substantive tests.

30 What is the evidence mix? the combination of the five types of audit tests used in the audit of a cycle Conversely, if the auditor assesses the controls and accounting system as relatively ineffective, the mix will involve less tests of controls and more substantive tests.

31 What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit.

32 What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. includes: - procedures to perform inquiriesexamination of documents and records analytical procedures observation

33 What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. includes: - sample sizes $ $ $ $ $ $ $ $$ $$ $

34 What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. includes: - items to select $ $ $ $ $ $ $ $$ $$ $

35 What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. includes: - timing of tests $ $ $ $ $ $ $ $$ $$ $

36 What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. Many programs have a separate set of subaudit programs for each transaction cycle.

37 The audit program for most audits is designed in three parts.

38 The audit program for most audits is designed in three parts. tests of controls and substantive tests of transactions

39 The audit program for most audits is designed in three parts. tests of controls and substantive tests of transactions analytical procedures

40 The audit program for most audits is designed in three parts. tests of controls and substantive tests of transactions analytical procedures tests of details of balances

41 As discussed in Chapter 5, an audit can be divided into four phases. III III IV

42 II III IV I. Plan and design an audit approach. As discussed in Chapter 5, an audit can be divided into four phases.

43 set materiality, and assess acceptable audit risk and inherent risk understand internal control and assess control risk perform preliminary analytical procedures preplan obtain background information obtain information about client’s legal obligations develop overall audit plan and audit program I. Plan and design an audit approach.

44 An audit can be divided into four phases. III IV I. Plan and design an audit approach. II. Perform tests of controls and substantive tests of transactions.

45 II. Perform tests of controls and substantive tests of transactions. no yes Does the auditor plan to reduce the assessed level of control risk? Perform tests of controls Perform substantive tests of transactions Assess the likelihood of misstatements in the financial statements

46 An audit can be divided into four phases. I. Plan and design an audit approach. II. Perform tests of controls and substantive tests of transactions. III. Perform analytical procedures and tests of details of balances. IV

47 III. Perform analytical procedures and tests of details of balances. Considering the assessed likelihood of financial statement misstatements (low, medium, high, unknown): Perform analytical procedures Perform tests of key items Perform additional tests of details

48 An audit can be divided into four phases. I. Plan and design an audit approach. II. Perform tests of controls and substantive tests of transactions. III. Perform analytical procedures and tests of details of balances. IV. Complete the audit and issue an audit report.

49 I. Plan and design an audit approach. III. Perform analytical procedures and tests of details of balances. IV. Complete the audit and issue an audit report. Review for contingent liabilities Review for subsequent events Accumulate final evidence Evaluate results Issue audit report Communicate with audit committee and management