AUDIT PLAN & AUDIT PROGRAM

C H A P T E R 1 3

L E C T U R E R : Y E N P H A M ADAPTED FROM 2014 PEARSON EDUCATION

LEARNING
OBJECTIVES
• Types of test
• Selecting types of tests
• Design audit program
• Summary of audit process
 1.
AUDIT TESTS
 TYPES OF TESTS

RISK ASSESSMENT PROCEDURES

TESTS OF CONTROLS

SUBSTANTIVE TESTS OF TRANSACTIONS

TESTS OF DETAILS OF BALANCES

FURTHER AUDIT PROCEDURES
& THE AUDIT RISK MODEL

Audit risk AAR

model = PDR
IR × CR

Substantive Tests of Sufficient

Tests of Analytical
controls + tests of + procedures + details of = appropriate
transactions balances evidence

Further audit procedures

RISK ASSESSMENT PROCEDURES

A major part of these procedures are done to obtain an

understanding of internal control.
ROLE OF ALL AUDIT TESTS IN THE
SALE AND COLLECTION CYCLE

FIGURE 13-2 Role of Audit Tests in the Audit of the Sales and Collection Cycle

Sales Accounts Receivable Cash in Bank

Sales transactions Cash receipts transactions

Audited by Audited by
TOC TOC

Audited by Audited by
STOT STOT
Ending Ending
balance Audited by balance Audited by
SAP SAP
Audited by Audited by
SAP SAP

Audited by Audited by
TDB TDB

Tests of controls
Substantive Substantive Tests of
(including procedures to Sufficient
tests of analytical details of
obtain an understanding appropriate
transactions procedures balances
of internal control) evidence
(STOT) (SAP) (TDB)
(TOC)
TEST OF CONTROLS

To test the operating effectiveness of controls

• Make inquiries of client personnel
• Examine documents, records & reports
• Observe control-related activities
• Reperform client procedures
S U B S TA N T I V E T E S T S

Substantive
Monetary tests of
misstatements transactions
(STOT)

Substantive Tests of
analytical details of
procedures balances
(AP) (TDB)

1-9
 Inquiries of the client are made for every type of test.

TABLE 13-2 Relationship Between Further Audit Procedures and Evidence

Type of Evidence

Inquiries of the Client

Analytical Procedures
Physical Examination

Reperformance
Confirmation

Recalculation
Observation
Inspection
Further Audit Procedures
Tests of controls (including procedures to obtain an understanding √ √ √ √
of internal control)
Substantive tests of transactions √ √ √ √
Substantive analytical procedures √ √
Tests of details of balances √ √ √ √ √ √

414 Part 2 / THE AUDIT PROCESS

 Audit Assurance from Substantive Tests and Tests of
FIGURE 13-3
Controls at Different Levels of Internal Control Effectiveness

Acceptable C3
assurance
Audit assurance
C2 from control risk

AUDIT ASSURANCE
assessment and
tests of controls
C1
Audit assurance
from substantive
tests

No
assurance A C B
INTERNAL CONTROL EFFECTIVENESS
Ineffective control Effective control

C3 No reliance on controls.
C2 Some reliance on controls.
C1 Maximum reliance on controls.
 2.
DESIGN AUDIT PROGRAM
N AT U R E O F A U D I T

Part 1:
Tests of controls and
Substantive tests of transactions

Part 2:
Analytical procedures

Part 3:
Tests of details and balances
 tested, such as sales.

Methodology for Designing Tests of Controls and

FIGURE 13-4
Substantive Tests of Transactions

Understand
internal control

Assess planned
control risk

Determine
extent of
tests of controls*

Design tests of Audit procedures

controls and
substantive tests Sample size
of transactions
to meet Items to select
transaction-related
audit objectives Timing

*Extent of tests of controls is determined by planned reliance on controls. For public companies
required to have an audit of internal control, testing must be sufficient to issue an opinion on
internal control over financial reporting.
 Four-Step Approach to Designing Tests of Controls and
FIGURE 13-5
Substantive Tests of Transactions

Apply transaction-
related audit objectives
to a class of transactions
(step 1)

Identify key controls

Design tests
and make a preliminary
of controls
assessment of control
(step 3)
risk (step 2)
Audit procedures
Sample size
Items to select
Timing

Design substantive
tests of transactions
(step 4)
Audit procedures
Sample size
Items to select
Timing
 Methodology for Designing Tests of Details
FIGURE 13-6
of Balances —Accounts Receivable

Identify significant risks and assess

risk of material misstatement
for accounts receivable

Set performance materiality

for accounts receivable

Assess control risk for sales

and collection cycle

Design and perform tests of

controls and substantive tests
of transactions for
sales and collection cycle

Design and perform substantive

analytical procedures for
accounts receivable balance

Audit procedures
Design tests of details of
accounts receivable balance Sample size
to satisfy balance-related Items to select
audit objectives
Timing
FIGURE 13-7 V
Approach to Designing Tests of Details of Balances

Apply transaction-
related audit objectives Apply balance- Decide
to a class of transactions Make preliminary
related audit performance
judgment about
objectives to an materiality
materiality
account balance
Identify key controls Design tests
and make a Design substantive
of controls analytical
preliminary assessment
of control risk procedures
Audit procedures

Sample size Design tests Identify Decide

of details significant acceptable
Items to select of balances risks audit risk

Timing Audit procedures

Assess
Sample size
inherent risk
Items to select

Timing
Design substantive
tests of transactions

Audit procedures

Sample size

Items to select

Timing
R E L AT I O N S H I P A M O N G 5 K E Y
E V I D E N C E R E L AT E D T E R M S

Ø Phases of the audit process

Ø Audit objectives

Ø Types of tests

Ø Evidence decisions

Ø Types of evidence
 TABLE 13-6 Relationship Among Five Key Evidence-Related Terms

Phases of
the Audit Process Audit Objectives Types of Tests Evidence Decisions Types of Evidence
Plan and Design an Audit Risk assessment procedures Audit procedures Inspection
Approach (Phase I) Procedures to understand Timing Inquiries of client
client’s business and Analytical procedures
industry
Procedures to understand
internal control
Planning analytical
procedures
Perform Tests of Controls Transaction-related audit Procedures to obtain an Audit procedures Inspection
and Substantive Tests objectives understanding and tests of Sample size Observation
of Transactions Occurrence controls Items to select Inquiries of client
(Phase II) Completeness Timing Reperformance
Accuracy Recalculation
Posting and summarization Substantive tests of Audit procedures
Classification transactions Sample size
Timing Items to select
Timing
Perform Substantive Balance-related audit objectives Substantive analytical Audit procedures Physical examination
Analytical Procedures Existence procedures Timing Confirmation
and Tests of Details of Completeness Inspection
Balances (Phase III) Accuracy Tests of details of balances Audit procedures Inquiries of client
Classification Sample size Reperformance
Cutoff Items to select Analytical procedures
Detail tie-in Timing Recalculation
Realizable value
Rights and obligations
Complete the Audit and Presentation and disclosure- Analytical procedures Audit procedures Analytical procedures
Issue an Audit Report related audit objectives Timing Inspection
(Phase IV) Occurrence and rights and Inquiries of client
obligations Tests of details of balances Audit procedures
Completeness Sample size
Accuracy and valuation Items to select
Classification and Timing
understandability
 3.
S U M M A RY A U D I T P R O G R A M
S U M M A RY O F T H E A U D I T P R O G R A M

Perform analytical
Plan and design procedures and
Phase I an audit approach Phase III tests of details
of balances

Perform tests of
Complete the
controls and
Phase II substantive tests Phase IV audit and issue
an audit report
of transactions
 PHASE I

Accept client and perform initial planning

Understand the client’s business and industry

Assess client’s business risk

Perform preliminary analytical procedures

 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 strategy and audit program

 PHASE II

Plan to reduce assessed

level of control risk?

Yes No
Perform tests of controls

Perform substantive tests of transactions

Assess likelihood of misstatements in FS

 PHASE III

High or
Low Low Medium
unknown
Perform analytical procedures

Perform tests of key items

Perform additional tests of details of balances

 PHASE IV

Perform additional tests for presentation and disclosure

Accumulate final evidence

Evaluate results

Issue audit report

Communicate with audit committee and management