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Presentation Outline
I. Application of Audit Testing II. Selecting Tests to Perform III. Design of the Audit Program IV. A Summary of the Audit Process
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A. Tests of Controls B. Testing for Monetary Misstatement C. Reduction of Risk D. Audit Assurance at Different Levels of Internal Control Effectiveness E. Simultaneous Testing of Controls and Substantive Testing of Transactions F. Timing of Audit Testing
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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.
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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. 13 - 6
No assurance
A C B INTERNAL CONTROL EFFECTIVENESS Weak control Strong control Reliance on controls: C3 None, C2 Some, C1 Maximum
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A. The Cost of Testing B. Appropriate Evidence for Audit Testing C. Risk and Testing in the Audit Process
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Observation
Type of Test
Procedures for internal control Tests of controls Substantive tests of transactions Analytical procedures Tests of details of balances
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.
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Most audits design an audit program in the following three parts: A. Tests of Controls and Substantive Tests of Transactions B. Analytical Procedures C. Tests of Details of Balances
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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. 13 - 15
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 clients 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.13 - 16
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
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Summary of the Audit Process - Phase I (Planning) Accept client and perform initial planning. Understand the clients business and industry.
Plan to reduce assessed level of control risk? Yes Perform tests of controls.
No
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Perform analytical procedures. Perform tests of key items. Perform additional tests of details of balances.
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Review for contingent liabilities. Review for subsequent events. Accumulate final evidence. Evaluate results.
Issue audit report. Communicate with audit committee and management.
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