Overall Audit Strategy

1
chapter 13

• Overall Audit Strategy
• and Audit Program

2

• Partner Terry Auditors must understand internal
  control in every audit. For all public
  companies and for nonpublic companies where
  control risk is assessed below maximum, the
  auditor must perform tests of controls. But,
  dont forget that auditing standards also require
  that substantive tests be performed in all
  audits.

3
Yu

• what is the objective of AU-C section 315?

4
AU-C 315 Understanding the Entity Its
Environment Assessing RoMM

• .03 The objective of the auditor is to identify
  and assess the risks of material misstatement,
  whether due to fraud or error, at the financial
  statement and relevant assertion levels through
  understanding the entity and its environment,
  including the entity's internal control, thereby
  providing a basis for designing and implementing
  responses to the assessed risks of material
  misstatement.

5
December 2006
Statement on Auditing Standards
109
AICPA
Understanding the Entity and its Environment
and Assessing the Risks of Material Misstatement
6
Page 160/169 (what is a sufficient understanding?)

• For all significant classes of transactions,
  accounts and disclosures
• Evaluate
• Risks related to all relevant assertions
• Identify points in the transactions where
  material misstatements could occur
• How each significant class of transactions
• Initiated Authorized
• Recorded
• Documents records
• Processed through the accounting system into the
  GL
• Reporting process including disclosures
  estimates

7
Understanding Internal Controls

• Risk assessment procedures
• Evaluate design of internal controls
• Document understanding
• Assess Control Risk (preliminary)
• Test Operating Effectiveness of controls
• Assess Control Risk (after ToCs)
• Substantive Tests of Transactions
• Substantive Analytical Procedures
• Tests of Details of Balances

8
Lauren

• what is the definition of control risk?

9
Control Risk

• The risk that a misstatement that could occur in
  an assertion about a class of transaction,
  account balance, or disclosure and that could be
  material, either individually or when aggregated
  with other misstatements, will not be prevented,
  or detected and corrected, on a timely basis by
  the entity's internal control.

10
Tests of Controls

• if a control is properly designed
• test if control is operating effectively

11
Assess control risk

• Identify
• Significant classes of transactions
• Use managements assertions to determine
• points where errors or fraud could occur
• Controls that would prevent or detect these
  errors
• Link specific controls to related assertions
• Evaluate the design of the control
• Test the operating effectiveness of the control

12
Page 59
13

• Final Assessment
• CR lt Max

14
Giselle

• What is the objective of AU-C section 500?

15
AU-C 500Audit Evidence

• .04 The objective of the auditor is to design and
  perform audit procedures that enable the auditor
  to obtain sufficient appropriate audit evidence
  to be able to draw reasonable conclusions on
  which to base the auditor's opinion.

16
types of Tests of Controls p. 205

• Make inquiries of client personnel
• Examine documents for evidence the control was
  implemented
• Observe control activities
• Reperform control activities

17
Table 1 p. 207 ties to CR Matrix p. 176

• 1 Credit is approved for each sale
• 2 Recorded sales are supported by an authorized
  shipping document
• 2 And an approved sales order
• 3
• 4 Shipping documents are forwarded to billing
  daily and a billing invoice is created
• 5 Shipping documents are prenumbered and
  accounted for weekly
• 6
• 7 Unit selling prices are obtained from the
  master price list

18
Table 1 page 207

• 1 Credit is approved for each sale
• 2 Recorded sales are supported by an authorized
  shipping document
• 2 And an approved sales order
• 4 Shipping documents are forwarded to billing
  daily and a billing invoice is created
• 5 Shipping documents are prenumbered and
  accounted for weekly
• 7 Unit selling prices are obtained from the
  master price list

Occur (accuracy) Occurrence Occurrence Occurrence
cutoff Completeness accuracy
19

• Vouch Trace Project
• Table 1 on page 207
• 45 transactions
• discuss how VT could be used
• to test controls in Table 1

20
(No Transcript)
21
(No Transcript)
22
ubstantive Tests

• Provide substantive evidence
• help establish the monetary correctness

23
page 218 Accounts Receivable

• Set Performance Materiality (tolerable
  misstatement)
• Assess control risk for
• credit sales transactions preliminary
• cash receipts transactions (collection) prelimina
  ry
• Design and perform Tests of Controls
• Assess control risk
• credit sales transactions final
• cash receipts transactions (collection) final
• Design and perform Subst Tests of Transactions
• Subst Analytical Procedures
• Subst Test of Details of Acc Rec Balance
• Conclude on Accounts Receivable

24
Substantive tests

• Substantive tests of transactions
• Substantive analytical procedures
• Tests of details of account balances

25
Page 59
26
Substantive analytical procedures

• Indicate possible misstatements
• Provide substantive evidence
• help establish the monetary correctness
• (only indicate the likelihood of misstatement)

27
(No Transcript)
28
Substantive analytical procedures

• Supplies
• Prepaid rent
• Depreciation expense

29
Substantive Tests of Details of Balances

• Provide substantive evidence
• help establish the monetary correctness
• Bank reconciliations
• Confirmation of accounts receivables
• Inventory observation

30
Audit Approaches
31
for private companiesnon-SEC companiesnot
covered by Sarbanes-Oxley
32
(No Transcript)
33
Private Company non SEC

• When you reflect on similar audit clients
• You believe it would cost less to perform
• Tests of Contols than ubstantive Test

34
Ryan H

• After evaluating the design of the controls you
  DO NOT believe the clients controls would
  effectively prevent or detect and correct
  misstatements even if they are implemented
• You preliminarily assess CR
• Which audit approach will you take?

35
Nico

• Which types of audit tests will you perform
• evaluate design of controls
• Tests of Controls
• test operating effectiveness none some
  extensive
• Substantive Tests
• analytical procedures
• test of details of account balances none limited
  extensive

36
Private Company non SEC

• When you reflect on similar audit clients
• You believe it would cost less to perform
• ubstantive Test than Tests of Contols

37
Elizabeth W

• After evaluating the design of the controls you
  believe the controls would prevent, or detect and
  correct misstatements if they are properly
  implemented
• You will preliminarily assess CR
• Which audit approach will you take?

38
Jennifer

• Which types of audit tests will you perform
• evaluate design of controls
• Tests of Controls
• test operating effectiveness none some
  extensive
• Substantive Tests
• analytical procedures
• test of details of account balances none limited
  extensive

39
Iterative Process analysis of audit 4

• page 214
• Analysis of Audit 4
• Demonstrates the iterative nature of the audit
  process
• Planned CR med ToC medium
• Anal Proc extensive
• PDR med Subst medium

40
Iterative Process analysis of audit 4

• Auditor found significant misstatements while
  performing substantive tests.
• The auditor must conclude that controls are
  ineffective and that control risk is MAX,
  regardless the results of their previous tests of
  controls and control risk assessment.
• The auditor must perform extensive Substantive
  Tests

41
Private Company non SEC

• When you reflect on similar audit clients
• You believe it would cost less to perform
• Tests of Contols than ubstantive Test

42
Ryan M

• After evaluating the design of the controls you
  believe the controls would prevent, or detect and
  correct misstatements if they are properly
  implemented
• You will preliminarily assess CR
• Which audit approach will you take?

43
Eric

• Which types of audit tests will you perform
• evaluate design of controls
• Tests of Controls
• test operating effectiveness none some
  extensive
• Substantive Tests
• analytical procedures
• test of details of account balances none limited
  extensive

Go To Next Slide
44
Ellen

• While you are performing tests of controls you
  encounter control deficiencies. Do you need to
  change you audit approach?
• You will assess CR
• Which audit approach will you take?

45
Steve

• Which types of audit tests will you perform
• evaluate design of controls
• Tests of Controls
• test operating effectiveness none some
  extensive
• Substantive Tests
• analytical procedures
• test of details of account balances none limited
  extensive

46
preliminarily assess Subst Tests Less costly than ToC ToC Less costly than Subst Tests
controls effective (CR Low) extensive Subst Tests ToC limit subst tests gt analytical procedures
controls ineffective (CR MAX) Must do extensive Subst Tests Must do extensive Subst Tests
47

• Understand internal controls
• Document understanding
• Evaluate the design of the controls
• Preliminarily assess control risk
• Document prelim CR assessment
• If CR lt Max ToC lt Subt Tests
• Design and perform ToC
• Document results of ToC and CR assessment
• Design and perform limited Subst Tests
• Document results of Subst Tests
• If CR Max or Subt lt ToC
• Design and perform extensive Subst Tests
• Document results of Subst Tests

48
for public companiesSEC companiescovered by
Sarbanes-Oxley
49
(No Transcript)
50
Public Company

• When you reflect on similar audit clients
• You believe it would cost less to perform
• Tests of Contols than ubstantive Test

51
Dev

• After evaluating the design of the controls you
  DO NOT believe the clients controls would
  effectively prevent, or detect and correct
  misstatements even if they are implemented
• You preliminarily assess CR
• Which audit approach will you take?

52
Brenda

• Which types of audit tests will you perform
• evaluate design of controls
• Tests of Controls
• test operating effectiveness none some
  extensive
• Substantive Tests
• analytical procedures
• test of details of account balances none limited
  extensive

53
Public Company

• When you reflect on similar audit clients
• You believe it would cost less to perform
• ubstantive Test than Tests of Contols

54
Elizabeth T

• After evaluating the design of the controls you
  believe the controls would prevent, or detect and
  correct misstatements if they are properly
  implemented
• You will preliminarily assess CR
• Which audit approach will you take?

55
Suiting

• Which types of audit tests will you perform
• evaluate design of controls
• Tests of Controls
• test operating effectiveness none some
  extensive
• Substantive Tests
• analytical procedures
• test of details of account balances none limited
  extensive

56
Public Company

• When you reflect on similar audit clients
• You believe it would cost less to perform
• Tests of Contols than ubstantive Test

57
Elaine

• After evaluating the design of the controls you
  believe the controls would prevent, or detect and
  correct misstatements if they are properly
  implemented
• You will preliminarily assess CR
• Which audit approach will you take?

58
Catherine

• Which types of audit tests will you perform
• evaluate design of controls
• Tests of Controls
• test operating effectiveness none some
  extensive
• Substantive Tests
• analytical procedures
• test of details of account balances none limited
  extensive

59
Karli

• While you are performing tests of details of
  account balances you encounter material
  misstatements. Do you need to change you audit
  approach?
• You will assess CR
• Which audit approach will you take?

60
Michael

• Which types of audit tests will you perform
• evaluate design of controls
• Tests of Controls
• test operating effectiveness none some
  extensive
• Substantive Tests
• analytical procedures
• test of details of account balances none limited
  extensive

61
preliminarily assess Subst Tests Less costly than ToC ToC Less costly than Subst Tests
controls effective (CR lt Low) ToC can limit subst tests analytical procedures ToC can limit subst tests analytical procedures
controls ineffective (CR MAX) must do some ToC Extensive Subst Tests Tests of Details must do some ToC Extensive Subst Tests Tests of Details
62

• Understand internal control structure
• Document understanding
• Evaluate the Design Effectiveness of ICS
• Design and perform ToC to assess CR
• Document results of ToC and CR assessment
• If CR gt Low
• Design and perform extensive Subst Tests
• Document results of Subst Tests

63
Audit DocumentationWorkpapers

• Must document
• Record of compliance with GAAS

64
Summary of Understanding Internal Controland
Assessing Control Risk

• Figure 11 page 188
• is good

65
(No Transcript)
66
(No Transcript)
67
(No Transcript)
68
(No Transcript)
69
(No Transcript)