Overall Audit Plan
and Audit Program
Chapter 10
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
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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
Procedures to obtain an
understanding of internal control
Tests of control
Substantive tests of transactions
Analytical procedures
Tests of details of balances
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Types of Audit Tests and
the Audit Risk Model
Audit
Risk
Model
AAR
= PDR
IR × CR
Procedures
Substantive
Types
Tests of
to obtain an
tests of
+ controls +
of Audit
understanding of
transactions
Tests
(TOC)
internal control
(STOT)
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Types of Audit Tests and
the Audit Risk Model
Audit
Risk
Model
Types
of Audit
Tests
AAR
= PDR
IR × CR
Analytical
procedures
(AP)
Tests of
Sufficient
details of
competent
=
+
balances
evidence
(TDP)
per GASS
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Role of all Audit Tests in the Sales
and Collection Cycle
Accounts
Receivable
Sales
Cash in
Bank
Sales
transactions
Cash receipts
transactions
Audited by
TOC, STOT, and AP
Audited by
TOC, STOT, and AP
Ending
balance
Ending
balance
Audited by AP and TDP
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS
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Learning Objective 2
Select the appropriate
types of audit tests.
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Observation
Documentation
Confirmation
Type of Test
Procedures for internal control
Tests of controls
Substantive tests of transactions
Analytical procedures
Tests of details of balances
Physical
Examination
Type of
Evidence
Relationship Between
Types of Tests and Evidence
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Analytic
performance
Reperformance
Type of Test
Procedures for internal control
Tests of controls
Substantive tests of transactions
Analytical procedures
Tests of details of balances
Inquiries of
the client
Type of
Evidence
Relationship Between
Types of Tests and Evidence
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Acceptable
assurance
No
assurance
AUDIT ASSURANCE
Audit Assurance at Different Levels
of Internal Control Effectiveness
C3
Audit
assurance
from
substantive
tests
C2
C1
Audit assurance
from control risk
assessment and
tests of control
A
C
B
INTERNAL CONTROL EFFECTIVENESS
Weak control
Strong control
Reliance on controls: C3 – None, C2 – Some, C1 – Maximum
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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 94 (AU 319)
provide guidance for auditors of entities
that transmit, process, maintain, or access
significant information electronically.
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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
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Learning Objective 4
Understand the concept of evidence
mix and how it should be varied
in different circumstances.
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Variations in Evidence Mix
Audit 1
Procedures to Obtain
an Understanding
of Internal Control
E
Tests
of
Controls
E
Audit 2
M
M
Audit 3
M
N
Audit 4
M
M
Amount of testing: Extensive, Medium, Small, None
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Variations in Evidence Mix
Audit 1
Substantive
Tests of
Analytical
Transactions Procedures
S
E
Tests of
Details of
Balances
S
Audit 2
M
E
M
Audit 3
E
M
E
Audit 4
E
E
E
Amount of testing: Extensive, Medium, Small, None
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Learning Objective 5
Design an audit program.
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Audit Program
Part 1:
Tests of controls and substantive
tests of transactions
Part 2:
Analytical procedures
Part 3:
Tests of details and balances
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Audit Procedures
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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Four-Step Approach to Designing
Control and Substantive Tests
Apply transactionrelated audit objectives
to a class of transactions
(Step 1).
Identify key controls
and make an assessment
of control risk
(Step 2).
Design substantive tests
of transactions (Step 4).
Design tests of
controls (Step 3).
Audit procedures Sample size Items to select Timing
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Methodology for Designing Tests of
Balances – Accounts Receivable
Identify client business risks
affecting accounts receivable.
Set tolerable misstatement
and assess inherent risk
for accounts receivable.
Assess control risk for sales
and collection cycle.
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Methodology for Designing Tests of
Balances – Accounts Receivable
Design and perform tests of
controls and substantive tests
of transactions for sales and
collection cycle.
Design and perform analytical
procedures for accounts
receivable balance.
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Methodology for Designing Tests of
Balances – Accounts Receivable
Design tests of details of
accounts receivable balance
to satisfy balance-related
audit objectives.
Audit procedures
Sample size
Items to select
Timing
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Approach to Designing Tests of
Details of Balances
Apply transactionrelated audit
objectives to a class
of transactions.
Identify key controls
and make a preliminary
assessment
of control risk.
Design substantive tests
of transactions.
Design tests of
controls.
Audit procedures Sample size Items to select Timing
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
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Approach to Designing Tests of
Details of Balances
Design tests
of controls.
Apply balance-related audit
objectives to an account balance.
Design
substantive
tests of
transactions.
Design tests of details of balances.
Audit procedures
Sample size
Items to select
Timing
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Approach to Designing Tests of
Details of Balances
Apply balancerelated audit
objectives to an
account balance.
Decide tolerable
misstatement.
Make preliminary
judgment about
materiality.
Design analytical
procedures.
Assess inherent risk.
Design tests
of details of
balances.
Assess client
business risk.
Decide acceptable
audit risk.
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Learning Objective 6
Compare and contrast
transaction-related audit
objectives and balancerelated audit objectives.
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Relationship of Transaction- to
Balance-Related Audit Objectives
Transaction-Related Balance-Related Nature of
Audit Objective
Audit Objective Relationship
Existence
Existence or
Direct
completeness
Completeness
Completeness or Direct
existence
Accuracy
Accuracy
Direct
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Relationship of Transaction- to
Balance-Related Audit Objectives
Transaction-Related Balance-Related
Audit Objective
Audit Objective
Classification
Classification
Timing
Posting and
summarization
Cutoff
Detail tie-in
Nature of
Relationship
Direct
Direct
Direct
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Relationship of Transaction- to
Balance-Related Audit Objectives
Transaction-Related Balance-Related
Audit Objective
Audit Objective
Realizable value
Rights and
obligations
Presentation and
disclosure
Nature of
Relationship
None
None
None
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Learning Objective 7
Integrate the four phases
of the audit process.
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Summary of the
Audit Process
Plan and design
Phase I
an audit approach.
Phase II
Perform tests of
controls and
substantive tests
of transactions.
Perform analytical
procedures and
Phase III
tests of details
of balances.
Phase IV
Complete the
audit and issue
an audit report.
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Summary of the Audit Process
Phase I
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.
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Summary of the Audit Process
Phase II
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.
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Summary of the Audit Process
Phase III
Low
Medium
High or
unknown
Perform analytical procedures.
Perform tests of key items.
Perform additional tests of details of balances.
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Summary of the Audit Process
Phase IV
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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End of Chapter 10
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