Auditing and Assurance Services
Seventeenth Edition
Chapter 13
Overall Audit Strategy and Audit
Program
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Learning Objectives (1 of 2)
13.1 Use the five types of audit tests to determine whether
financial statements are fairly stated
13.2 Select the appropriate types of audit tests
13.3 Understand the concept of evidence mix and how it
should be varied in different circumstances
13.4 Design an audit program
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Learning Objectives (2 of 2)
13.5 Compare and contrast transaction-related audit
objectives with balance-related audit objectives,
including those related to presentation and disclosure
13.6 Understand key evidence-related terms
13.7 Integrate the four phases of the audit process
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Learning Objective 13.1
Use the five types of audit tests to determine whether
financial statements are fairly stated
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Types of Tests (1 of 4)
• Auditors use five types of tests to determine whether
financial statements are fairly stated:
– Auditors use risk assessment procedures to identify
significant risks due to fraud or error, and design tests
that address those risks
– The other four types of tests represent further audit
procedures performed in response to the risks
identified
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Types of Tests (2 of 4)
• Tests of control
– Used to determine whether the client’s internal
controls are effective
• Substantive tests of transactions
– Used to determine whether all seven transactionrelated audit objectives have been satisfied for each
class of transactions
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Types of Tests (3 of 4)
• Substantive analytical procedures
– Used to indicate possible misstatements in the
financial statements and to provide substantive
evidence
• Tests of details of balances
– Focus on the ending general ledger balances for both
balance sheet and income statement accounts,
including related disclosures
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Types of Tests (4 of 4)
• Audit data analytics (ADAs) and other technologies are
increasingly being used throughout the audit
• ADAs can be used in each of the five types of tests
– In addition, ADAs are also used as part of the
procedures performed during the completion of the
audit
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Figure 13.1 Further Audit Procedures
and the Audit Risk Model
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Figure 13.2 Role of Audit Tests in the
Audit of the Sales and Collection
Cycle
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Figure 13.3 Use of ADAs Impacts All
Types of Audit Tests
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Learning Objective 13.2
Select the appropriate types of audit tests
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Selecting Which Types of Tests to
Perform (1 of 3)
• Auditors typically use all five types of tests when
performing an audit of the financial statements, but certain
types may be emphasized, depending on the
circumstances
• Several factors influence the auditor’s choice of the
types of tests to select:
– The availability of the types of evidence
– The relative costs of each type of test
– The effectiveness of internal controls, and inherent
risks
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Selecting Which Types of Tests to
Perform (2 of 3)
• The availability of the types of evidence
– Each of the four types of further audit procedures
involves only certain types of evidence (confirmation,
inspection, and so forth)
• Relative cost (1 of 2)
– When auditors must decide which type of test to select
for obtaining sufficient appropriate evidence, the cost
of the evidence is an important consideration
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Selecting Which Types of Tests to
Perform (3 of 3)
• Relative cost (2 of 2)
– The types of tests are listed below in order of
increasing cost:
 Substantive analytical procedures
 Risk assessment procedures, including procedures
to obtain an understanding of internal control
 Tests of controls
 Substantive tests of transactions
 Tests of details of balances
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Figure 13.4 Audit Assurance from Substantive
Tests and Tests of Controls at Different Levels
of Internal Control Effectiveness
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Let’s Discuss (1 of 7)
• What are the five types of tests auditors use to determine
whether financial statements are fairly stated?
– Identify which tests are performed to reduce control
risk and which tests are performed to reduce planned
detection risk.
• In Figure 13.4, explain the differences among C3, C2, and
C1. Explain the circumstances under which it would be a
good decision to obtain audit assurance from substantive
tests at point C1.
– Do the same for points C2 and C3.
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Let’s Discuss (2 of 7)
• What is the purpose of risk assessment procedures, and
how do they differ from the four other types of audit tests?
• Rank the following types of tests from most costly to least
costly:
– Substantive analytical procedures, tests of details of
balances, risk assessment procedures, tests of
controls, and substantive tests of transactions.
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Learning Objective 13.3
Understand the concept of evidence mix and how it should
be varied in different circumstances
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Evidence Mix
• The choice of which types of tests to use and how
extensively they need to be performed can vary widely
among audits for differing levels of internal control
effectiveness and inherent risks
• Evidence Mix
– Auditors employ a combination of the four types of
tests to obtain sufficient appropriate evidence in
response to risks identified through risk assessment
procedures
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Table 13.3 Variations in Evidence Mix
Blank
Audit 1
Tests of
Controls
E
Substantive
Tests of
Transactions
S
Substantive
Analytical
Procedures
E
Tests of
Details of
Balances
S
Audit 2
M
M
E
M
Audit 3
N
E
M
E
Audit 4
M
E
E
E
E = Extensive amount of testing; M = Medium amount of testing; S = Small amount of testing; N = No testing.
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Learning Objective 13.4
Design an audit program
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Design of the Audit Program (1 of 3)
• After the auditor uses risk assessment procedures to
determine the appropriate emphasis on each of the
other four types of tests:
– The specific audit procedures for each type of test
must be designed and combined to form the audit
program
– Each transaction cycle will likely be evaluated using a
separate set of subaudit programs
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Design of the Audit Program (2 of 3)
• In addition to risk assessment procedures, the audit
program for most audits is designed in three
additional parts:
– Tests of controls and substantive tests of transactions
– Substantive analytical procedures
– Tests of details of balances
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Design of the Audit Program (3 of 3)
• Auditing standards require the auditor to use a written
audit program
• Engagement management software helps auditors select
appropriate audit procedures and organize them into an
audit program
• Audit procedures can be added or deleted as the auditor
deems necessary
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Figure 13.5 Methodology for
Designing Tests of Controls and
Substantive Tests of Transactions
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Figure 13.6 Four-Step Approach to
Designing Tests of Controls and
Substantive Tests of Transactions
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Figure 13.7 Methodology for Designing Tests of
Details of Balances—Accounts Receivable
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Figure 13.8 Approach to Designing Tests
of Details of Balances
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Let’s Discuss (3 of 7)
• Assume that the client’s internal controls over the
recording and classifying of fixed asset additions are
considered deficient because the individual responsible
for recording new acquisitions has inadequate technical
training and limited experience in accounting.
– How will this situation affect the evidence you should
accumulate in auditing fixed assets as compared with
another audit in which the controls are excellent? Be
as specific as possible.
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Let’s Discuss (4 of 7)
• Why is it desirable to design tests of details of balances
before performing tests of controls and substantive tests
of transactions?
– State the assumptions that the auditor must make in
doing so.
– What does the auditor do if the assumptions are
wrong?
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Learning Objective 13.5
Compare and contrast transaction-related audit objectives
with balance-related audit objectives, including those related
to presentation and disclosure
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Relationship of Transaction-Related
Audit Objectives to Balance-Related
Audit Objectives (1 of 2)
Tests of details of balances must be designed to satisfy
balance-related audit objectives for each account and the
extent of these tests can be reduced when transactionrelated audit objectives have been satisfied by tests of
controls or substantive tests of transactions
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Relationship of Transaction-Related
Audit Objectives to Balance-Related
Audit Objectives (2 of 2)
• Even when all transaction-related audit objectives are
met, the auditor will still rely primarily on substantive
tests of balances to meet the following balancerelated audit objectives:
– Realizable value
– Rights and obligations
– Presentation
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Learning Objective 13.6
Understand key evidence-related terms
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Summary of Key Evidence-Related
Terms
• Key evidence-related terms:
– Phases of the audit process
– Audit objectives
– Types of tests
– Evidence decisions
– Types of evidence
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Table 13.6 Relationship Among Five
Key Evidence-Related Terms (1 of 4)
Phases of the
Audit Process
Plan and Design
an Audit
Approach
(Phase I)
Audit Objectives
Types of Tests
Blank
Risk assessment
procedures
• Procedures to
understand
client’s business
and industry
• Procedures to
understand
internal control
• Planning
analytical
procedures
Evidence
Decisions
Types of
Evidence
• Audit procedures
• Timing
Inspection
Inquiries of client
Analytical
procedures
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Table 13.6 Relationship Among Five
Key Evidence-Related Terms (2 of 4)
Phases of the
Audit Process
Perform Tests of
Controls and
Substantive
Tests of
Transactions
(Phase II)
Audit Objectives
Types of Tests
Transactionrelated audit
objectives
• Occurrence
• Completeness
• Accuracy
• Posting and
summarization
• Classification
• Timing
• Presentation
Procedures to
obtain an
understanding
and tests of
controls
Substantive tests
of transactions
Evidence
Decisions
Types of
Evidence
• Audit procedures
• Sample size
• Items to select
• Timing
• Audit procedures
• Sample size
• Items to select
• Timing
Inspection
Observation
Inquiries of client
Reperformance
Recalculation
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Table 13.6 Relationship Among Five
Key Evidence-Related Terms (3 of 4)
Phases of the
Audit Process
Perform
Substantive
Analytical
Procedures
and Tests of
Details of
Balances
(Phase III)
Audit Objectives
Types of Tests
Balance-related
audit objectives
• Existence
• Completeness
• Accuracy
• Cutoff
• Detail tie-in
• Realizable value
• Classification
• Rights and
obligations
• Presentation
Substantive
analytical
procedures
Tests of details of
balances
Evidence
Decisions
Types of
Evidence
• Audit procedures
• Timing
Physical
examination
Confirmation
Inspection
Inquiries of client
Reperformance
Analytical
procedures
Recalculation
• Audit procedures
• Sample size
• Items to select
• Timing
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Table 13.6 Relationship Among Five
Key Evidence-Related Terms (4 of 4)
Phases of the
Audit Process
Complete the
Audit and
Issue an Audit
Report
(Phase IV)
Audit Objectives
Types of Tests
Evidence
Decisions
Presentation and
disclosure audit
objectives for
both
transactionrelated and
balance-related
audit objectives
Substantive test
of transactions
Tests of details of
balances
• Audit procedures
• Sample size
• Items to select
• Timing
Analytical
procedures
• Audit procedures
• Timing
Types of
Evidence
Analytical
procedures
Inspection
Inquiries of client
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Let’s Discuss (5 of 7)
• State the four-step approach to designing tests of controls
and substantive tests of transactions.
• Explain the relationship of performance materiality,
inherent risk, and control risk to planned tests of details of
balances.
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Learning Objective 13.7
Integrate the four phases of the audit process
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Summary of the Audit Process
• The four phases of the audit process:
– Phase I: Plan and design an audit approach
– Phase II: Perform tests of controls and substantive
tests of transactions
– Phase III: Perform substantive analytical procedures
and tests of details of balances
– Phase IV: Complete the audit and issue an audit
report
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Table 13.7 Timing of Tests
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Let’s Discuss (6 of 7)
• Explain the relationship between the occurrence
transaction-related audit objective and the existence and
completeness balance-related audit objectives.
• Indicate the four phases of the audit process.
– In which phase does the auditor perform tests of
controls?
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Let’s Discuss (7 of 7)
• Why do auditors often consider it desirable to perform
audit tests throughout the year rather than wait until year
end?
– List several examples of evidence that can be
accumulated before year end.
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