Overall Audit Plan

and Audit Program

Chapter 13

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 1

 Learning Objective 1
Use the five types of audit tests
to determine whether financial
statements are fairly stated.

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 Types of Tests

 Risk assessment procedures

 Further audit procedures

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 Further Audit Procedures
and the Audit Risk Model
Audit risk AAR
model = PDR
IR × CR

Sufficient
Substantive Tests of
Tests of Analytical appropriate
+ tests of + procedures + details of = evidence
controls
transactions balances
per GASS

Further audit procedures

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 4

 Risk Assessment Procedures

A major part of these procedures are

done to obtain an understanding
of internal control.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 5

 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 appropriate evidence per GAAS
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 6
 Learning Objective 2
Select the appropriate types
of audit tests.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 7

 Relationship Between Further Audit
Procedures and Evidence
Type of Evidence

Documentation
Confirmation
examination

Observation
Physical
Further Audit Procedures
Tests of controls  
Substantive tests of transactions 
Analytical procedures
Tests of details of balances   

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 8

 Relationship Between Further Audit
Procedures and Evidence
Type of Evidence

Reperformance

Recalculation
Procedures
Inquiries of

Analytical
the Client
Further Audit Procedures
Tests of controls  
Substantive tests of transactions   
Analytical procedures  
Tests of details of balances   

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 9

 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
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 10
 Learning Objective 3
Understand how information
technology affects audit testing.

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 Impact of Information
Technology on Audit Testing
SAS 80 (AU 326) and SAS 109 (AU 319)
provide guidance for auditors of entities
that transmit, process, maintain, or access
significant information electronically.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 12

 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

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 13

 Learning Objective 4
Understand the concept of
evidence mix and how it
should be varied in
different circumstances.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 14

 Variations in Evidence Mix
Tests Substantive Tests of
of Tests of Analytical Details of
Controls Transactions Procedures Balances
Audit 1 E S E S
Audit 2 M M E M
Audit 3 N E M E
Audit 4 M E E E
Amount of testing: Extensive, Medium, Small, None

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 15

 Learning Objective 5
Design an audit program.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 16

 Audit Program

Part 1:
Tests of controls and substantive
tests of transactions

Part 2:
Analytical procedures

Part 3:
Tests of details and balances

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 17

 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.

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 Methodology for Designing Controls
and Substantive Tests

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 Four-Step Approach to Designing
Control and Substantive Tests

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 Methodology for Designing Tests of
Balances – Accounts Receivable

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 Learning Objective 6
Compare and contrast trasnsaction-related
audit objectives with balance-related and
presentation and disclosure-related audit
objectives.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 22

 Relationship of Transaction-related
Audit Objectives to Balance-related
Audit Objectives
Transaction- Balance-
related related
Audit Audit Nature of
Objective Objective Relationship
Existence Existence or completeness Direct
Completeness Completeness or existence Direct
Accuracy Accuracy Direct
Posting and Detail tie-in Direct
summarization
Classification Classification Direct
Timing Cutoff Direct
Realizable value None
Rights and obligation None

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 23

 Relationship Among Five Key
Evidence-related Terms
 Phases of the audit process

 Audit objectives

 Types of tests

 Evidence decisions

 Types of evidence

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 24

 Phases of the Audit Process

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.

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 Audit Objectives

 Transaction-related

 Balance-related

 Presentation and disclosure-related

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 26

 Types of Tests

 Risk assessment procedures

 Tests of controls

 Substantive tests of transactions

 Analytical procedures

 Tests of details of balances

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 27

 Evidence Decisions

 Audit procedures

 Sample size

 Items to select

 Timing

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 Types of Evidence

 Documentation
 Inquiries of the client
 Analytical procedures
 Observation
 Reperformance
 Recalculation
 Physical examination
 Confirmation

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 29

 Learning Objective 7
Integrate the four phases
of the audit process.

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 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 Phase IV audit and issue
substantive tests
an audit report
of transactions

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 31

 Summary of the Audit Process:

Accept client and perform initial planning

Understand the client’s business and industry

Assess client’s business risk

Perform preliminary analytical procedures

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 32

 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

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 33

 Plan to reduce assessed No
level of control risk?

Yes
Perform tests of controls

Perform substantive tests of transactions

Assess likelihood of misstatements in

financial statements
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 34
 High or
Low Medium
unknown
Perform analytical procedures
Perform tests of key items
Perform additional tests
of details of balances

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 35

 Perform additional tests for
presentation and disclosure

Accumulate final evidence

Evaluate results

Issue audit report

Communicate with audit

committee and management
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 36
 End of Chapter 13

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 13 - 37