Audit Plan and Program Chapter 13
Five Types of Tests to Use Procedures to obtain an understanding of controls Tests of controls Substantive tests of transactions Analytical procedures 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
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
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
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 don’t!) 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 Where’s 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 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.

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Audit plan and program

  • 1. Audit Plan and Program Chapter 13
  • 2. Five Types of Tests to Use Procedures to obtain an understanding of controls Tests of controls Substantive tests of transactions Analytical procedures Tests of details of balances
  • 3. 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
  • 4. 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
  • 5. 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
  • 6. 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
  • 7. Evidence for Transactions Documentation Inquiries Reperformance Rarely, but occasionally, confirmations
  • 8. 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
  • 9. 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
  • 10. Evidence for Detailed Tests Confirmations Reperformance (footing, extensions) Physical examination Observation (contrary to book) Documentation
  • 11. 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
  • 12. IT Audits Many clients conduct business electronically (many don’t!) 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 Where’s the paper trail? EDI (Electronic Data Interchange)
  • 13. 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
  • 14. 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
  • 15. Review of Audit Planning 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.