AUDIT PLANNING & FIELDWORK 3a

AUDIT PROCEDURES

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Audit procedure is the detailed instruction that explains the audit evidence to be obtained during the audit.

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Further Audit Procedures

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Test of Controls (TOC)

• The auditor’s understanding of IC is used to assess control risk for each transaction-related audit objective
• To obtain sufficient appropriate evidence to support that assessment, the auditor performs test of control

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TOC (Cont)

• May include the following types of evidence (left side image)
• TOC are also used to determine whether these controls are effective and usually involve testing a sample of transactions

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Make inquiries of appropriate client personnel

Examine documents, records, and reports

Observe control-related activities

Reperform client procedures

Substantive Tests

• Procedures designed to test for dollar misstatements (monetary misstatements) that directly affect the correctness of FS balances.
• There are 3 types (left image)

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ST of transactions

Substantive analytical procedures

Tests of details of balances

ANALYTICAL PROCEDURES

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• ISA 520: evaluations of financial information made by a study of plausible relationships among financial and non-financial data

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• Example: compare current-year recorded commission expense to an expectation of commission expense based on total recorded sales multiplied by the average commission rate as a test of the overall reasonableness of recorded commissions

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Performed at any of three times �during an engagement

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Planning phase: to assist in determining the nature, extent & timing of audit procedures. Helps the auditor identify significant matters requiring special considerations later in the engagement

During testing phase: as a substantive test in support of account balances. These tests often done in conjunction with other audit procedures

During the completion: serve as a final review for material misstatements. The final ‘objective look’, normally done by a senior partner

Five Types of �Analytical Procedures

• Compare client data with:

1. Industry data

2. Similar prior-period data

3. Client-determined expected results

4. Auditor-determined expected results

5. Expected results using nonfinancial data.

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Compare Client and Industry Data

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Common Financial Ratios

• Short-term debt-paying ability
• Liquidity activity ratios
• Ability to meet long-term debt obligations
• Profitability ratios

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Summary of Analytical Procedures

• They involve the computation of ratios and other comparisons of recorded amounts to auditor expectations.
• They are used in planning to understand the client’s business and industry.
• They are used throughout the audit to identify possible misstatements, reduce detailed tests, and to assess going-concern issues.

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TEST OF DETAILS OF BALANCES

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• Focus on the ending general ledger balances for both balance sheet and income statement accounts. The primary emphasis is on the balance sheet.
• Test the ending balances are essential because the evidence is usually obtained from a source independent of the client (highly reliable)

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AUDIT PROGRAM

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A list of procedures for an audit area or an entire audit which usually includes sample sizes, items to select, and the timing of the tests.

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It is a set of procedures (i.e. evidence-gathering steps) that necessary to perform in order to obtain reasonable assurance that the FS are not affected by material misstatements and subsequently form opinion on the truth and fairness of the client’s FS

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Purposes

1. Aid in guiding the audit staff in the audit work to be done
2. Provide evidence of proper planning and a record of the work done that conformed to the auditing standards
3. Provide a basis for coordinating and supervising the audit work and controlling the time spent on the audit

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Types of Audit Program

• Standard: include procedures to address all significant assertions and major audit objectives
• Tailored: specifically prepared to individual engagements, which help to ensure proper attention to details because it enables the auditor to obtain thorough understanding of the client’s accounting system and the risks affecting to it. However, it requires too much time (time consuming to prepare)

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Main components:

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• Objectives
• Procedures, and
• Conclusion

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Thanks!

Any questions?

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