Overall Audit Plan

and Audit Program

Chapter 12

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 1
 Learning Objective 1

Use the five types of audit tests

to determine whether financial
statements are fairly stated.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 2
 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

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 3
 Types of Audit Tests and
the Audit Risk Model
Audit AAR
Risk = PDR
IR × CR
Model

Procedures Substantive
Types Tests of
to obtain an tests of
of Audit + controls +
understanding of transactions
Tests (TOC)
internal control (STOT)
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 4
 Types of Audit Tests and
the Audit Risk Model
Audit AAR
Risk = PDR
IR × CR
Model

Tests of Sufficient
Types Analytical
details of competent
of Audit procedures + =
balances evidence
Tests (AP)
(TDP) per GASS
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 5
 Role of all Audit Tests in the
Sales and Collection Cycle
Accounts Cash in
Sales Receivable Bank
Sales Cash receipts
transactions transactions
Audited by Audited by
TOC, STOT, and AP TOC, STOT, and AP
Ending Ending
balance balance
Audited by AP and TDB

TOC + STOT + AP + TDB

= Sufficient competent evidence per GAAS
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 6
 Learning Objective 2

Select the appropriate

types of audit tests.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 7
 Relationship Between
Types of Tests and Evidence
Type of Evidence

Documentation
Confirmation
Examination

Observation
Physical
Type of Test
Procedures for internal control √ √
Tests of controls √ √
Substantive tests of transactions √
Analytical procedures
Tests of details of balances √ √ √
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 8
 Hubungan antara Jenis – Jenis
Pengujian dan Bukti
Type of Evidence

Reperformance

performance
Inquiries of
the client

Analytic
Type of Test
Procedures for internal control √ √
Tests of controls √ √
Substantive tests of transactions √ √
Analytical procedures √ √
Tests of details of balances √ √
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 9
 Audit Assurance at Different Levels
of Internal Control Effectiveness
Acceptable C3
assurance AUDIT ASSURANCE
Audit assurance
C2 from control risk
Audit assessment and
assurance tests of control
C1
from
substantive
No tests
assurance
A C B
INTERNAL CONTROL EFFECTIVENESS
Weak control Strong control
Reliance on controls: C3 – None, C2 – Some, C1 – Maximum
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 10
 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 12
 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 Access

controls controls
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 13
 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 Tests
an Understanding of
of Internal Control Controls
Audit 1 E E
Audit 2 M M
Audit 3 M N
Audit 4 M M
Amount of testing: Extensive, Medium, Small, None
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 15
 Variations in Evidence Mix
Substantive Tests of
Tests of Analytical Details of
Transactions Procedures 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
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 16
 Learning Objective 5

Design an audit program.

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 Program Audit

Part 1:
Tests of controls and substantive
tests of transactions
Part 2:
Analytical procedures
Part 3:
Tests of details and balances

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 18
 Audit Procedures

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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 19
 Methodology for Designing
Controls and Substantive Tests
Design tests of controls
Perform procedures
and substantive tests
to understand
of transactions to meet
internal control.
transaction-related
audit objectives.
Assess control risk. Audit procedures
Sample size
Evaluate cost-benefit Items to select
of testing controls. Timing
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 20
 Four-Step Approach to
Designing Control and
Substantive Tests
Apply transaction- Identify key controls
related audit objectives and make an assessment
to a class of transactions of control risk
(Step 1). (Step 2).

Design substantive tests Design tests of

of transactions (Step 4). controls (Step 3).

Audit procedures Sample size Items to select Timing

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 21
 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.

Assess control risk for sales

and collection cycle.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 22
 Methodology for Designing Tests
of
Balances – Accounts Receivable
Design and perform tests of
controls and substantive tests
of transactions for sales and
collection cycle.

Design and perform analytical

procedures for accounts
receivable balance.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 23
 Methodology for Designing Tests
of
Balances – Accounts Receivable

Design tests of details of Audit procedures

accounts receivable balance Sample size
to satisfy balance-related Items to select
audit objectives. Timing

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 24
 Approach to Designing Tests
of Details of Balances
Apply transaction- Identify key controls
related audit and make a preliminary
objectives to a class assessment
of transactions. of control risk.

Design substantive tests Design tests of

of transactions. controls.

Audit procedures Sample size Items to select Timing

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 25
 Approach to Designing Tests
of Details of Balances
Design tests Apply balance-related audit
of controls. objectives to an account balance.

Design Design tests of details of balances.

substantive Audit procedures
tests of Sample size
transactions.
Items to select
Timing
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 26
 Approach to Designing Tests
of Details of Balances
Apply balance- Make preliminary
Decide tolerable
related audit judgment about
misstatement.
objectives to an materiality.
account balance.

Design analytical
procedures.
Assess inherent risk.
Decide acceptable
Design tests audit risk.
of details of Assess client
balances. business risk.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 27
 Learning Objective 6

Compare and contrast

transaction-related audit
objectives and balance-
related audit objectives.

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 Relationship of Transaction- to
Balance-Related Audit Objectives
Transaction-Related Balance-Related Nature of
Audit Objective Audit Objective Relationship
Existence Existence or Direct
completeness
Completeness Completeness or Direct
existence
Accuracy Accuracy Direct

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 29
 Relationship of Transaction- to
Balance-Related Audit Objectives
Transaction-Related Balance-Related Nature of
Audit Objective Audit Objective Relationship
Classification Classification Direct
Timing Cutoff Direct
Posting and Detail tie-in Direct
summarization

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 30
 Relationship of Transaction- to
Balance-Related Audit Objectives
Transaction-Related Balance-Related Nature of
Audit Objective Audit Objective Relationship
Realizable value None
Rights and None
obligations
Presentation and None
disclosure

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 31
 Learning Objective 7

Integrate the four phases

of the audit process.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 32
 Summary of the
Audit Process

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

Perform tests of
Complete the
controls and
Phase II Phase IV audit and issue
substantive tests
an audit report.
of transactions.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 33
 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.
Set materiality and assess acceptable audit risk
and inherent risk.
Understand internal control and assess control risk.
Develop overall audit plan and audit program.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 34
 Summary of the Audit Process
Phase II

Plan to reduce assessed No

level of control risk?

Yes
Perform tests of controls.
Perform substantive tests of transactions.
Assess likelihood of misstatements in
financial statements.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 35
 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 36
 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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 37
 End of Chapter 12

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 12 - 38