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
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

6
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

7
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

8
Evidence for Transactions

• Documentation
• Inquiries
• Reperformance
• Rarely, but occasionally, confirmations

9
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

10
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

11
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

12
Evidence for Detailed Tests

• Confirmations
• Reperformance (footing, extensions)
• Physical examination
• Observation (contrary to book)
• Documentation

13
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

14
Which Types of Tests?

• Remember audit risk model
• AR IR x CR x DR
• If CR lt 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

15
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)

16
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

17
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

18
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.

19
Examples

• Cash Disbursements Program