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Flashcards in Week 10 Deck (11):
1

The audit program consist of 3 parts:

Test of Controls
Analytical Procedures
Test of Details

2

Test of Controls

Purpose:
Verify IC are working

Examples:
Observe Inventory Count
Inspect approvals
Reperform bank reconciliations

3

Analytical Procedures

Purpose:
Assess reasonableness of a balance

Examples:
Mtc expense year over year
Sales commission ratio to commission plan

4

Test of Details

Purpose:
Verify monetary correctness

Examples:
Confirm cash balance with Bank
Inspect sales to shipping documents
Recalculate client AFDA using their method

5

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

6

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

7

Techniques for Testing Controls

Stronger Evidence
Re-performance
Inspection

Weaker Evidence
Observation
Enquiry

8

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

9

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

10

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

11

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