Arens Aud16 Inppt13

OVERALL AUDIT
STRATEGY AND
AUDIT PROGRAM
CHAPTER 13
Copyright © 2017 Pearson Education, Ltd. 13-1

CHAPTER 13 LEARNING OBJECTIVES
13-1 Use the five types of audit tests to determine whether the financial statements
are fairly stated.
13-2 Select the appropriate types of audit tests.
13-3 Understand the concept of evidence mix and how it should be varied in
different circumstances.
13-4 Design an audit program.
13-5 Compare and contrast transaction-related audit objectives with balance-
related audit objectives and presentation and disclosure-related objectives.
13-6 Understand key evidence-related terms.
13-7 Integrate the four phases of the audit process.

OBJECTIVE 13-1
Use the five types of audit tests to
determine whether financial
statements are fairly stated.

TYPES OF TESTS
Risk Assessment Procedures – Auditors use the results of risk
assessment procedures to determine the type and amount of further
audit procedures necessary to form an opinion on the fairness of the
financial statements.
Further audit procedures include:
• Tests of controls
• Substantive tests of transactions
• Substantive analytical procedures
• Tests of details of balances
Further Audit Procedures and the Audit Risk Model are shown in
Figure 13-1.

TYPES OF TESTS (CONT.)
Tests of Controls – To obtain sufficient appropriate evidence to support a reduced
assessment of control risk, the auditor:
• Make inquiries of appropriate client personnel
• Examine documents, records, and reports
• Observe control-related activities
• Reperform client procedures
The amount of evidence needed for tests of controls depends on two things:
1. The extent of evidence obtained in gaining the understanding of internal control
2. The planned reduction in control risk
The role of tests of controls is shown in Figure 13-2.

Table 13-1 identifies a test of control that might be performed to test its effectiveness.

TYPES OF TESTS (CONT.)
Substantive Tests of Transactions – Used to determine whether all six
transaction-related audit objectives have been satisfied for each class of
transactions.
Substantive Analytical Procedures - Although not required, substantive
analytical procedures may be used to audit an account balance. The two most
important purposes of substantive analytical procedures are:
1. Indicate possible misstatements in the financial statements
2. Provide substantive evidence
Tests of Details of Balances – The primary emphasis of tests of balances is
on the balance sheet.
Summary of Types of Tests - Figure 13-2 summarizes the types of tests the
auditor may use.

OBJECTIVE 13-2
Select the appropriate types
of audit tests.

SELECTING WHICH TYPES OF TESTS TO PERFORM
Availability of Types of Evidence for Further Audit Procedures –Each
of the four types of further audit procedures involves only certain types of
evidence.
The relationship between further audit procedures and the types of evidence are
summarized in Table 13-2.
Relative Costs – The auditor must decide which type of test to select for
obtaining sufficient appropriate evidence and the cost of the evidence is an
important consideration. Types of tests in order of increasing cost:
• Risk assessment procedures
• Tests of controls
• Substantive tests of transactions
• Tests of details of balances.

SELECTING WHICH TYPES OF TESTS TO PERFORM
(CONT.)
Relationship Between Tests of Controls and Substantive Tests –

When test of controls show deviations that lead the auditor to believe that
there may be material misstatements, the auditors then perform substantive
tests to determine whether a material misstatement actually occurred.
Relationship Between Substantive Analytical Procedures and Other
Substantive Tests - Analytical procedures only indicate the likelihood of
misstatement. Unusual fluctuations indicate an increase in the likelihood.
Trade-Off Between Tests of Controls and Substantive Tests – During
planning, auditors decide whether to assess control risk below the maximum.
If they do, they must test the controls. This is shown in Figure 13-3.

OBJECTIVE 13-3
Understand the concept of evidence
mix and how it should be varied in
different circumstances.

EVIDENCE MIX
The types of evidence chosen and the extent of use by the

auditor varies widely from audit to audit, based on levels of
internal control effectiveness and inherent risks.
The combination of the types and amounts of evidence needed in an
audit is referred to as the evidence mix.
Four different audit scenarios are shown on page 418, giving
information about the internal control effectiveness, size of the company
and other factors. The evidence mix for each of these scenarios are
shown in Table 13-3.

OBJECTIVE 13-4
Design an audit program.

DESIGN OF THE AUDIT PROGRAM
The auditor uses risk assessment procedures to determine the

appropriate emphasis on each of the other four types of tests, and
design the specific audit procedures for each type of test. These audit
procedures are combined to form the audit program.
The audit program will include procedures to satisfy all audit objectives,
but here we focus on designing audit programs to satisfy transaction-
related and balance-related audit objectives.
Besides the risk assessment procedures, the audit program is designed
in three additional parts:
• Tests of controls and substantive tests of transactions
• Tests of details of balances
The design process is shown in Figure 13-4.

DESIGN OF THE AUDIT PROGRAM(CONT.)
Tests of Controls and Substantive Tests of Transactions – When
designing these tests, auditors emphasize satisfying the transaction-related
audit objectives.
Auditors follow a four-step approach to reduce assessed control risk:
1. Apply the transaction-related audit objectives to the class of transactions being tested,
such as sales.
2. Identify key controls that should reduce control risk for each transaction-related audit
objective.
3. Develop appropriate tests of controls for all internal controls that are used to reduce
the preliminary assessment of control risk below maximum (key controls).
4. For potential types of misstatements related to each transaction-related audit objective,
design appropriate substantive tests of transactions, considering deficiencies in
internal control and expected results of the tests of controls in step 3.
This process is shown in Figure 13-5.

Substantive Analytical Procedures – Because substantive analytical
procedures are relatively inexpensive, many auditors perform them on all audits.
Tests of Details of Balances – The key decisions involved in designing tests of
details of balances:
• Identify Significant Risks and Assess Risk of Material Misstatement
• Set Performance Materiality
• Assess Control Risk for the Sales and Collection Cycle
• Design and Perform Tests of Controls and Substantive Tests of Transactions
• Design and Perform Substantive Analytical Procedures
• Design Tests of Details of Accounts to Satisfy Balance-Related Audit Objectives
This methodology is shown in Figure 13-6. Overall design approach is shown in
Figure 13-7.
Level of Disaggregation of Planning Activities– The levels range

from overall audit to balance-related audit objectives.
An example of the Disaggregation Level to Which Planning Activities Are
Applied is illustrated in Figure 13-8 on page 425.
Illustrative Audit Program - Auditing standards require the auditor
to use a written audit program.
An audit program for Tests of Details of Balances for Accounts
Receivable is shown in Table 13-4 on page 427.

OBJECTIVE 13-5
Compare and contrast transaction-
related audit objectives with
balance-related audit objectives.

RELATIONSHIP OF TRANSACTION-RELATED AUDIT
OBJECTIVES TO BALANCE-RELATED AND PRESENTATION
AND DISCLOSURE-RELATED AUDIT OBJECTIVES
Tests of details of balances are the primary test to reduce

detection risk to an acceptable level.
Even when all transaction-related audit objectives are met,
the auditor will still rely primarily on substantive tests of
balances to meet the following balance-related audit
objectives:
• Realizable value
• Rights and obligations
These relationships are illustrated in Table 13-5.

OBJECTIVE 13-6
Understand key evidence-related
terms.

SUMMARY OF KEY EVIDENCE-RELATED TERMS
Phases of the Audit Process – The four phases are shown in the
first column of Table 13-6.
Audit Objectives – The objectives that must be met before the
auditor can conclude that any given class of transactions or account
balance is fairly stated, shown in the second column of Table 13-6.
Types of Tests – The five types of audit tests are shown in the third
column of Table 13-6.
Evidence Decisions – The four subcategories of decisions are
shown in the fourth column of Table 13-6.
Types of Evidence – The eight broad categories of evidence are
shown in the last column of Table 13-6.

OBJECTIVE 13-7
Integrate the four phases of
the audit process.

SUMMARY OF THE AUDIT PROCESS
Phase I: Plan and Design an Audit Approach
Phase II: Perform Tests of Controls and Substantive Tests of
Transactions
Phase III: Perform Substantive Analytical Procedures and Tests of
Details of Balances – Timing of Tests is shown in Table 13-7
Phase IV: Complete the Audit and Issue an Audit Report:
• Perform Additional Tests for Presentation and Disclosure
• Accumulate Final Evidence
• Issue Audit Report
• Communicate with Audit Committee and Management
The Summary of the Audit Process is illustrated in Figure 13-9 on page 430.


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OVERALL AUDIT

Copyright © 2017 Pearson Education, Ltd. 13-1

Copyright © 2017 Pearson Education, Ltd. 13-2

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The role of tests of controls is shown in Figure 13-2.

Copyright © 2017 Pearson Education, Ltd. 13-6

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Relationship Between Tests of Controls and Substantive Tests –

Copyright © 2017 Pearson Education, Ltd. 13-13

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The types of evidence chosen and the extent of use by the

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The auditor uses risk assessment procedures to determine the

Copyright © 2017 Pearson Education, Ltd. 13-19

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Level of Disaggregation of Planning Activities– The levels range

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Tests of details of balances are the primary test to reduce

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Copyright © 2017 Pearson Education, Ltd. 13-30

Copyright © 2017 Pearson Education, Ltd. 13-31

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Copyright © 2017 Pearson Education, Ltd. 13-34

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