Chapter 10 Flashcards
5 requirements by CAS 300 to develop overall audit strategy
- characteristics of engagement that define its scope
- reporting requirements
- significant factors in directing audit team’s efforts
- results of preliminary engagement activities
- nature, timing and extent of resources necessary for engagement
overall audit strategy is also called
general overview of audit
overall audit strategy provides basis for
audit plan
audit plan includes (2)
- nature, timing and extent of risk assessment procedures
2. nature, timing and extent of further audit procedures at assertion level
all audits require procedures related to
1) financial statement closing process and
2) assess fraud risks (management override i.e.)
examples of financial closing processes
- enter transactions totals in ledger
- select and apply accounting policies
- initiate, authorize and record journal entries
5 types of audit tests to determine if financial statements are fairly stated
- risk assessment procedures
- test of controls
- substantive tests of transactions
- substantive analytical procedures
- substantive tests of balances
def: risk assessment procedures
assess the likelihood of material misstatement in financial statements
likelihood of material misstatements formula
inherent risk x control risk
what is the major subset of risk assessment procedures
procedures to obtain an understanding of internal control
def: test of controls
verify whether the client’s controls match the auditor’s understanding of them
tests of controls are designed to obtain evidence regarding
the effectiveness of controls
if controls are effective
substantive evidence may be reduced
test of controls can be done _____ from others
separately, but more efficient to do them with substantive tests of transactions
def: dual-purpose tests
provide evidence of whether or not the controls being tested were effective (from test of controls) AND whether there are misstatements in data produced by the accounting system (subs)
def: Substantive analytical procedures
comparisons of recorded amounts to expectations developed by auditor
auditor standards require that substantive analytical procedures be done during
the planning and completion of audit
if analytical procedures indicate a reasonable possibility of misstatement
additional procedures or substantive tests of details may be done
def: substantive tests of balances
detect material misstatements at the assertion level
which substantive tests are used to test transaction related assertions
substantive tests of balances
substantive tests of transactions and balances are often referred to as
test of details
per CAS 330, substantive procedures must be performed for
each material class of transactions, account balances and disclosure + each significant risk at assertion level
if the auditor is not relying on controls he will perform
substantive tests of transaction only
purpose of substantive analytical procedures in audit of account balances
- possible misstatements
2. provide substantive evidence
the primary emphasis of most substantive tests of balances is
the ending balances on the balance sheet
if controls are working as designed then auditor will conduct
more tests of controls and fewer substantive tests
if controls are not functioning or are too expensive to test, the auditor will
conduct more tests of details
more types of evidence are used for
tests of balances than any other type of test
which test involves physical examination and confirmation?
substantive tests of balances
inquiries of the client are made for
every type of tests
inspection, reperformance and recalculation are used for every test but
analytical procedures
types of tests according to cost (least to most costly)
- analytical procedures
- risk assessment
- test of controls
- substantive tests of transactions
- substantive tests of balances
auditors use ____ to determine the mix of audit tests
professional judgement
exception in a test of controls indicates
the likelihood of significant misstatements
exception in a substantive test of transaction or balance is
a financial statement misstatement
if analytical procedures identify unusual fluctuations
auditors should perform substantive tests trans/bal to determine if dollar misstatements occurred
if control risk is assessed as high the auditor would
follow a substantive approach
if control risk is assessed low the auditor would
follow a combined approach
an audit program is normally split into three parts
- tests of controls and substantive tests of transactions
- substantive analytical procedures
- substantive tests of balances
in part one of the audit program if there is no reliance on controls then
only substantive tests of transactions
how to decide what to include in first section?
based on descriptive section documenting understanding obtained about internal control
if cost beneficial tests of controls would be conducted for
key controls on which the auditor intends to rely
audit program is normally listed in which format?
performance format (i.e. in order in which tests will be conducted)
substantive analytical procedures are conducted at
each phase of the audit (planning stage, during, near the end)
substantive analytical procedures in planning stage
help auditor decide other evidence needed to satisfy audit risk
substantive analytical procedures during audit is done
in conjunction with tests of details of balances as part of substantive procedures
substantive analytical procedures at the end of audit is done
as a final test of reasonableness
the planned substantive tests of balances include
audit procedures, sample size, items to select and timing
procedures must be selected and designed for
EACH account and each balance related audit objective within each account
time frame of audit tests
throughout the year or if small –> concentrated period of time
audit program is developed based on assumptions about
inherent risk, control risk and results of tests of controls and analytical procedures
if assumptions change
the planned audit program will also require revision
Def: roll forward
substantive work on journal entries and transactions from a date prior to the balance sheet date to the year end
when is a roll forward done?
when clients want to issue statements soon after the balance sheet date so that work can be done during the interim period
