1. Chapter 13 Overall Audit Plan and Audit Program

2. Presentation Outline Application of Audit Testing
Selecting Tests to Perform
Design of the Audit Program
A Summary of the Audit Process

3. I. Application of Audit Testing
Tests of Controls
Testing for Monetary Misstatement
Reduction of Risk
Audit Assurance at Different Levels of Internal Control Effectiveness
Simultaneous Testing of Controls and Substantive Testing of Transactions
Timing of Audit Testing

4. Examination of employee time cards for approval of overtime.
A. Tests of Controls
Audit procedures to test the operating effectiveness of control policies and procedures in support of a reduced assessed control risk. Some examples include:
Matching of vendor invoices against a purchase order and receiving report before approving invoice for payment.
Examination of employee time cards for approval of overtime.

5. B. Testing for Monetary Misstatement
Substantive Tests of
Transactions
Testing for monetary
misstatements to determine
if the following 6 transaction-
related audit objectives
have been met:
Existence
Completeness
Accuracy
Classification
Timing
Posting and Summarization
Tests of Details of
Balances
Testing for monetary
misstatements to determine if the
following 9 balance-related audit
objectives have been met:
Existence
Completeness
Accuracy
Classification
Cutoff
Detail tie-in
Realizable value
Rights and obligations
Presentation and disclosure

6. C. Reduction of Risk Control Risk
Procedures to gain an understanding of internal control
Tests of controls
Once the auditor obtains an initial understanding of controls, tests of controls must be performed to obtain evidence regarding the effectiveness of controls. Stronger controls will allow the auditor to assess control risk below the maximum.
Detection Risk
Substantive tests of transactions
Analytical procedures
Tests of details of balances
The more evidence an auditor collects from the above procedures, the lower the detection risk. Detection risk must be lower when control risk is higher.

7. D. Audit Assurance at Different Levels of Internal Control Effectiveness
Acceptable
assurance
Audit assurance
from control risk
assessment and
tests of control C2
Audit
assurance
from
substantive
tests
AUDIT ASSURANCE C1 No
assurance A C B
INTERNAL CONTROL EFFECTIVENESS
Weak control
Strong control
Reliance on controls: C3 – None, C2 – Some, C1 – Maximum

8. E. Simultaneous Testing of Controls and Substantive Testing of Transactions
The determination of control risk affects the type of procedures and sample size for the substantive testing of transactions.
For purposes of convenience, the testing of controls and substantive testing of transactions will often occur simultaneously.
In such situations the auditor will make an assumption about the results of tests of controls. If the testing of controls indicates that internal control is worst than expected, substantive testing of transactions will have to be modified accordingly.

9. F. Timing of Audit Testing
Auditors frequently consider it desirable to perform audit tests prior to year end. Certain procedures may be performed at an interim time (prior to client’s year end) :
Update depreciation schedules
Examine new loan agreements
Vouch transactions
Analyze changes in client’s accounting system
Review board of director minutes
If strong internal controls exist the auditor may also:
Observe physical inventories
Confirm account balances

10. II. Selecting Tests to Perform
The Cost of Testing
Appropriate Evidence for Audit Testing
Risk and Testing in the Audit Process

11. A. The Cost of Testing
Going from the most to least costly, the types of tests are:
Tests of details of balances
Substantive tests of transactions
Tests of controls
Procedures to obtain an understanding of internal controls
Analytical procedures

12. B. Appropriate Evidence for Audit Testing
Examination
Physical
Confirmation
Documentation
Observation
Type of Evidence
Inquiries of
the client
Reperformance
performance
Analytic
Type of Test
Procedures for internal control 
Tests of controls 
Substantive tests of transactions 
Analytical procedures 
Tests of details of balances 

13. C. Risk and Testing in the Audit Process
Substantive Testing of Transactions
In some situations it may be more efficient to assess control risk at a higher level and reduce or eliminate tests of controls. This depends on cost of testing controls versus the additional substantive testing that would result from a higher control risk.
Tests of Details of Balances
If tolerable misstatement is low, and inherent risk and control risk are high, planned tests of details of balances must be high.

14. III. Design of the Audit Program
Most audits design an audit program in the following three parts:
Tests of Controls and Substantive Tests of Transactions
Analytical Procedures
Tests of Details of Balances

15. A. Tests of Controls and Substantive Tests of Transactions
A four-step approach when the auditor plans to reduce assessed control risk below the maximum:
Transaction related audit objectives are applied to the class of transactions being tested, such as sales.
Key controls that should reduce control risk for each transaction-related audit objective are identified.
For all internal controls used to reduce the initial assessment of control risk below the maximum (key controls), appropriate tests of controls are developed.
Design appropriate substantive tests of transactions, considering weaknesses in internal control and expected results of tests of controls (allows for simultaneous tests of controls and substantive testing).
Note: If control risk is assessed at 1.0, only substantive tests of
transactions will be used in this part of the audit program.

16. B. Analytical Procedures
Analytical procedures may be performed during 3 different stages of the audit:
In the planning stage to help the auditor understand the client’s business and determine other evidence needed to satisfy acceptable audit risk.
During the audit, especially during substantive testing.
Near the end of the audit as a final test of reasonableness.

17. C. Tests of Details of Balances
If the results of tests of controls, substantive tests of transactions, and analytical procedures are not consistent with the predictions, tests of details of balances will need to be changed as the audit progresses.
Figure 13-6 on page 388 illustrates the testing methodology
using Accounts Receivable

18. IV. A Summary
of the Audit
Process

19. Summary of the Audit Process - Phase I (Planning)
Accept client and perform initial planning.
Understand the client’s business and industry.
Assess client’s business risk.
Perform preliminary analytical procedures.
Set materiality and assess acceptable audit risk
and inherent risk.
Understand internal control and assess control risk.
Develop overall audit plan and audit program.

20. Summary of the Audit Process - Phase II (Begin Field Work)
From
Phase I
Plan to reduce assessed
level of control risk? No
Yes
Perform tests of controls.
Perform substantive tests of transactions.
Assess likelihood of misstatements in
financial statements.

21. Summary of the Audit Process Phase III (End of Fieldwork)
From
Phase II
Likelihood of Misstatement
in Financial Statements
Low Medium High or
unknown
Perform analytical procedures.
Perform tests of key items.
Perform additional tests of details of balances.

22. Summary of the Audit Process Phase IV (Wrap-Up)
From
Phase III
Review for contingent liabilities.
Review for subsequent events.
Accumulate final evidence.
Evaluate results.
Issue audit report.
Communicate with audit
committee and management.