Overall Audit Plan
and Audit Program
Chapter 13
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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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 of
Tests of
to obtain an
tests of
audit
controls +
+
understanding
transactions
tests
(TOC)
of internal control
(STOC)
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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
Sales
Accounts
Cash in
Receivable
Bank
Sales
Cash receipts
transactions
transactions
Audited by
TOC, STOT, and AP
Ending
balance
Audited by
TOC, STOT, and AP
Ending
balance
Audited by AP and TDB
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS
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Learning Objective 2
Select the appropriate types
of audit tests.
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Observation




Substantive tests of transactions

Analytical procedures
Tests of details of balances
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
Confirmation
Procedures for internal control
Tests of controls
Type of Test
Physical
examination
Documentation
Relationship Between Types of
Tests and Evidence Type of Evidence


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Reperformance
Procedures for internal control
Tests of controls




Substantive tests of transactions


Analytical procedures
Tests of details of balances


Type of Test
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Analytic
performance
Inquiries of
the client
Relationship Between Types of
Tests and Evidence Type of Evidence


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Acceptable
assurance
No
assurance
AUDIT ASSURANCE
Audit Assurance at Different Levels of
Internal Control Effectiveness
C3
C2
Audit assurance
from control risk
assessment and
tests of control
C1
Audit assurance
from substantive
tests
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
Procedures to obtain
an understanding
of internal control
Tests
of controls
Audit 1
E
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
Substantive
tests of
transactions
Analytical
procedures
Tests of
details of
balances
Audit 1
S
E
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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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
Perform procedures to
understand internal
control.
Design tests of controls
and substantive tests
of transactions to meet
transaction-related
audit objectives.
Audit procedures
Assess control risk.
Sample size
Items to select
Determine extent of
testing controls.
Timing
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Four-Step Approach to Designing
Control and Substantive Tests
Apply transaction- related
audit objectives to a class
of transactions. (Step 1)
Identify key controls and
make a preliminary
assessment of control risk.
(Step 2)
Design substantive tests of
transactions. (Step 4)
Design tests of controls.
(Step 3)
Audit procedures
Audit procedures
Sample size
Sample size
Items to select
Items to select
Timing
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.
Design and perform
analytical procedures
for accounts
receivable balance.
Design tests of details of
accounts receivable balance
to satisfy balance-related
audit objectives.
Assess control
risk for sales
and collection
cycle.
Design and perform tests
of controls and substantive
tests of transactions for
sales and collection cycle.
Audit procedures
Items to select
Sample size
Timing
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Approach to Designing Tests of
Details of Balances
Apply transaction-related
audit objectives to a class
of transactions.
Identify key controls
and make an assessment
of control risk.
Design substantive tests
of transactions.
Design tests of controls.
Audit procedures
Audit procedures
Sample size
Sample size
Items to select
Items to select
Timing
Timing
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13 - 23
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.
Decide acceptable
audit risk.
Assess client
business risk.
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Learning Objective 6
Compare and contrast
transaction-related audit
objectives and balance-related
audit objectives.
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Relationship Among Five Key
Evidence-Related Terms
Phases of the audit process
Audit objectives
Types of tests
Evidence decisions
Types of evidence
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Phases of the Audit Process
1. Plan and design an audit approach.
2. Perform tests of controls and substantive
tests of transactions.
3. Perform analytical procedures and tests
of details of balances.
4. Complete the audit and issue an audit report.
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Audit Objectives
Transaction-related
Balance-related
1. Existence
2. Completeness
3. Accuracy
4. Classification
5. Timing
6. Posting and
summarization
1. Existence
2. Completeness
3. Accuracy
4. Classification
5. Cutoff
6. Detail tie-in
7. Realizable value
8. Rights and obligations
9. Presentation and
disclosure
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Types of Tests
1. Procedures to obtain an understanding
of internal control
2. Tests of controls
3. Substantive tests of transactions
4. Analytical procedures
5. Tests of details of balances
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
13 - 29
Evidence Decisions
1. Audit procedures
2. Sample size
3. Items to select
4. Timing of performance
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Types of Evidence
1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Observation
6. Inquiry of the client
7. Reperformance
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Learning Objective 7
Integrate the four phases
of the audit process.
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Summary of the Audit Process
Phase I
Plan and design
an audit approach.
Perform analytical
procedures and
Phase III tests of details
of balances.
Phase II
Perform tests of
controls and
substantive tests
of transactions.
Complete the
Phase IV 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.
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Summary of the Audit Process:
Phase I
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.
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13 - 35
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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13 - 38
End of Chapter 13
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
13 - 39