Week 10 Flashcards
The audit program consist of 3 parts:
Test of Controls
Analytical Procedures
Test of Details
Test of Controls
Purpose:
Verify IC are working
Examples:
Observe Inventory Count
Inspect approvals
Reperform bank reconciliations
Analytical Procedures
Purpose:
Assess reasonableness of a balance
Examples:
Mtc expense year over year
Sales commission ratio to commission plan
Test of Details
Purpose:
Verify monetary correctness
Examples:
Confirm cash balance with Bank
Inspect sales to shipping documents
Recalculate client AFDA using their method
Control Testing vs. Substantive Testing
Control Testing
Gather evidence that control is effective
Testing attributes – does it exist
More testing or change audit plan
Ex. Authorizations, Bank Reconciliation, SOD
Control Testing vs. Substantive Testing
Substantive Testing
Gather evidence that there is no material misstatement
Testing dollars – is it correct
Extrapolate error; might change audit opinion
Ex. Year-end accrual calculated correctly, Revenue not recognized early
Techniques for Testing Controls
Stronger Evidence
Re-performance
Inspection
Weaker Evidence
Observation
Enquiry
Test of Control vs. Detail
Independent Clerk verifies quantity, price, and extension of each supplier’s invoice, after which the clerk must initial to indicate performance.
Control
Inspect supplier’s invoice for initials
(Not enough)
Perform dual-purpose test: look for initial and reperform the control which in essence is the test of details. Otherwise don’t know if control is being performed well.
Test of Details
Verify accuracy of supplier’s invoice by
recalculating extensions and totals
Validating prices with a source document such as purchase order
2 questions for selecting & designing tests of controls
Which controls to test?
- Those with the most efficient and effective audit evidence
- Influenced by type, frequency & level of assurance required
- If possible, one that addresses several WCGWs
How much testing to do? (Sample Size & Timing)
- Influenced by type, frequency & level of assurance required
- Persuasiveness of evidence produced by the control
- Other controls that are being tested
- Relative importance of the WCGW
Timing of Tests
Between Q1 and Q2
Sub. Testing
Complete Substantive Testing
Complete audit
Q2 Control Testing Understanding of IC Walkthroughs Entity-level controls
Between Q3 and Q4
Control Testing
Transactional Control Testing
Some Substantive Testing
Evaluate Results of Sampling
A+
No exceptions
Evidence supports control risk rating of low
B+
Some exceptions
Examine causal – contained?
If systemic – another control? – test the alternative control
F
Need to change audit plan