Audit Plan and Program
Chapter 13
Five Types of Tests to Use
1. Procedures to obtain an understanding of controls 2. Tests of controls 3. Substantive tests of transactions 4. Analytical procedures 5. Tests of details of balances
Obtaining an Understanding
Update prior information Make inquiries of personnel Examine documents and records Remember to document with flowchart, questionnaire, and/or narrative Make preliminary CR assessment
Tests of Controls
Tests the effectiveness of controls May lead to change in CR and therefore the amount of substantive testing Procedures
Inquiries Examination of documents and records Observation of control activities Reperformance of client procedures
Generally done on a sample basis
Examples of Tests of Controls
Tests whether credit approval has been checked Look for paired sales invoices and shipping documents Inquire of mail clerk and cashier about cash handling Account for sequencing of documents Verify authorization of write-offs
Terminology Clarification
Note: To many, substantive tests and tests of details are synonymous In this book, substantive tests are of transactions, tests of details are of balances I will use them synonymously
Substantive Tests of Transactions Any misstatement detected means the account is misstated The issue is materiality and tolerable misstatement Used to look at all of the management assertions Often performed at same time as tests of controls
Evidence for Transactions
Documentation Inquiries Reperformance Rarely, but occasionally, confirmations
Examples of Transaction Tests
Vouching backward to see if a transaction is supported by documents Tracing forward to see if all transactions are recorded Is amount correct? Were proper accounts used? Generally done on a sample basis
Analytical Procedures
Compare results to expectations To do so, you must have some expectations! Can be performed on transactions as well as balances Should be drilled down to periodic figures
Detailed Tests of Balances
Focus on ending balances in the general ledger Sometimes tested by way of a subsidiary ledger The issue is materiality and tolerable misstatement Used to look at all of the management assertions Generally on a sample basis, but audit software can achieve 100% testing
Evidence for Detailed Tests
Confirmations Reperformance (footing, extensions) Physical examination Observation (contrary to book) Documentation
Examples of Tests of Balances
Accounts Receivable can use most Confirmations if conditions allow Vouching entries to sales documents Inquiring about related parties Reperformance of aging analysis, bad debt estimates Analytical Procedures even apply
Which Types of Tests?
Remember audit risk model
AR = IR x CR x DR
If CR < 100%, must do tests of controls If client subject to 404, must test controls The lower the DR, the more tests of transactions and balances you must do Analytical procedures
Required during planning and conclusion Can be a substantive test as well
IT Audits
Many clients conduct business electronically (many dont!) Think of an on-line catalogue order
Customer places order online Pull ticket is sent to shipping electronically Payment is processed online Inventory is updated electronically
Wheres the paper trail? EDI (Electronic Data Interchange)
Conducting an IT Audit
Tests of controls are vital General versus Application controls Parallel simulations False data ACL and IDEA mine for data for substantive tests
Results of Tests
Control Tests
Failure of control implies, but does not guarantee, incorrect amounts Failure rate above tolerable rate raises CR, increases substantive testing
Substantive Tests
Any discovered errors mean amounts are wrong Amounts must be aggregated and extrapolated If upper limit of error is above tolerable misstatement, adjustment is required
Review of Audit Planning
1. 2. 3. 4. 5. 6. 7. 8. Client acceptance decision Understand business and industry Perform analytical procedures Set materiality and assess risks Test controls Perform substantive tests Propose adjustments Final review, AP, and issue reports.
Examples
Cash Disbursements Program
