Exam 3 - Chapter 13 - Audit Strategy and Program

Question 1

Auditors use five types of tests to determine whether financial statements are fairly stated.

What are these tests?

Answer 1

• Risk assessment procedures (phase 1)
• Test of controls (phase 2)

substantive tests

• Tests of transactions (phase 2)
• Test of balances (phase 3)
• Analytical procedures (phase 3)

Question 2

How do the five audit tests affect planned detection risk?

Answer 2

Risk assessment provides basis for determinging risk and other 4 tests aim to reduce risk

Assurance gathered from these tests must reduce PDR to desired level

Question 3

What are the four phases of an audit?

Answer 3

Phase 1 - Plan/design an audit approach

Phase 2 - Perform tests of controls and substantive tests of tansactions

Phase 3 - Perform analytical procedures and tests of details of balances

Phase 4 - Complete the audit and issue an audit report

Question 4

Use this flashcard to view the steps/events of phase 2.

Answer 4

Question 5

What is the purpose of performing the test of controls?

Answer 5

To provide a greater understanding of internal controls and reduce assessed control risk;

Greater understanding helps assess:

Control risk for each transaction-related audit objective

Question 6

What types of evidence can be gathered as a test of controls?

Answer 6

• Make inquiries of client personnel
• Examine documents, records, and reports
• Observe control-related activities
• Reperform client procedures (also serves as test of transaction)

Question 7

What are substantive tests?

Answer 7

Procedures designed to test for dollar misstatements (directly affect correctness of financial statements)

Question 8

What is the purpose of substantive tests of transactions?

Answer 8

Determine whether all six transaction related audit objectives have been satisfied

• Substantiates the general ledger totals as correct

Question 9

What is the purpose of tests of details of balances?

• Give some examples of these tests.

Answer 9

Gather evidence to satisfy all balance-related audit objectives and substantiate ending general ledger balances

Examples:

• Confirmation of customer bal for A/R
• Physical examination of inventory
• Examination of vendors’ statements for accounts payable

Question 10

What factors determine what types of tests to perform during the audit procedure?

Answer 10

• Availability of the 8 types of evidence
• Relative cost of each type of test
• effectiveness of internal controls
• inherent risks

Question 11

What types of evidence may be gathered for tests of transactions?

Answer 11

• Inspection of documents and records
• Inquiries with the clients
• Reperformance of procedures (ensures correct transaction types and amounts)
• Recalculation

Question 12

What types of evidence may be gathered for tests of details of balances?

Answer 12

• Physical examination
• Confirmation
• Inspection of documents, records
• Inquiries with client
• Reperformance
• Recalculation

Question 13

Relative costs of audit tests:

• List in ascending order of cost

Answer 13

• Analytical procedures (easy to perform)
• Risk assessment procedures
• Test of controls
• Substantive tests of transactions (involve recalculations/tracing)
• Test of details of balances (cost of confirmations/examinations)

Question 14

What is the relationship between tests of controls, analytical procedures, substantive tests of transaction, and tests of balances

Answer 14

Test of controls and analytical procedures

indicate likelihood of misstatements

Tests of transactions and balances

These tests determine if misstatements have actually occured

Inverse relationship: If auditor finds controls to be lacking or unusual fluctuations from analytical procedures; more need for tests of trans. and balances

Question 15

What is the relationship of PDR and test of controls/substantive tests

Answer 15

PDR: % risk that auditor will fail to detect material misstatement

If tests of controls support control risk assessment, PDR is increased, and less substantive testing is required

Question 16

What is the evidence mix?

How can the evidence mix vary between companies?

Answer 16

The combination of the four audit tests that best collects sufficient evidence for assurance based on risk assessment.

Question 17

How can evidence mix vary from company to company?

Answer 17

• If auditor determines company has strong internal controls, test of controls and analytical procedures may be majority of evidence.
• If auditor determines ineffective controls and high inherent risk, substantive tests of transactions and balances may be majority of evidence

Question 18

When auditors design tests of controls and substantive tests of transactions, auditors emphasize _______.

Answer 18

Auditors emphasize satisfying the transaction related audit objectives

Question 19

When designing a test of controls/test of transactions, auditors follow a four step process to reduce control risk:

Answer 19

1. Apply trans. related audit objectives to class of transactions being tested
2. Identify key controls that should reduce control risk
3. Develop appropriate test of controls to reduce control risk below maximum
4. Design appropriate substantive tests, considering control risk at this point

Question 20

When designing a tests of details of balances, auditors should satisfy ________

Answer 20

Auditors should satisfy balance-related audit objectives

Question 21

When designing a tests of details of balances, auditors follow a six-step process:

Answer 21

1. Identify business risks related to account
2. Set performance materiality and assess inherent risk
3. Assess control risk
4. Design/perform tests of controls/tests of transactions
5. Design/perform analytical procedures
6. Design tests of details of account balance

Question 22

What is the relationship between transaction-related audit objectives and balance-related audit objectives?

Answer 22

Transaction related audit objectives often have a direct relationship to balance-related audit objectives.

• Effective tests of transactions help reduce tests of balances.