Chapter 13
Overall Audit Plan and Audit Program
Much of the material in Chapter 13 is review and integration. Chapter 13 was
substantially rewritten in the previous edition to reflect the to reflect the Risk
Assessment SASs (SAS Nos. 104-111). The chapter helps students see the
connection between risk assessment procedures and further audit procedures
and the audit risk model introduced in Chapter 9. The integration portion of the
material is especially important. The types of tests are also critical. This chapter is
a major one to help students tie the audit process together.
The following are the areas we cover in the chapter:
Chapter opening vignette
Types of tests
Impact of information technology on audit testing
Evidence mix
Design of the audit program
Summary of key evidence-related terms
Summary of the audit process
To provide a frame of reference for discussing the chapter, we first refer students to
Figure 8-1 (page 211), with emphasis on the bottom rectangle and its relationship to
the rest of the items in the figure.
(See Figure 8-1)
Chapter Opening Vignette – “How Much and What Kind of Testing
Will Get the Job Done?”
This vignette presents a debate over the conflict between efficiency and
effectiveness in doing audits. The auditor has an obligation to find material
misstatements, but also to conduct the audit at the lowest possible cost. Clients want
all misstatements, especially fraud, found, but they also want the audit fee to be low.
They can't have it both ways. Additionally, integrated audits of internal control over
financial reporting and the financial statements required by PCAOB Standard 5 for
public companies has significantly affected the mix of audit procedures that must be
performed in audits of public companies. This vignette demonstrates that while tests
of controls will be extensively performed in audits of public companies, substantive
tests will continue to be performed in all audits of financial statements.
Students can engage in this debate, and you can ask them how an auditor
decides which procedures to do and which to forego. You can also discuss the tools
auditors have to obtain both efficiency and effectiveness: e.g., audit risk model,
statistical methods, computer processing, and computer models for assessing risk,
developing programs, and accomplishing administrative tasks.
13-1
Types of Tests (page 402)
First we define the five types of tests and help students understand that only
four of those five represent further audit procedures as defined by auditing
standards. We remind students that risk assessment procedures are represented by
the procedures auditors perform to assess inherent risk and control risk as described
in Chapters 8 and 9. Auditors perform further audit procedures in response to the
risks identified by the risk assessment procedures. We use Figure 13-1 (page 403)
to help students see the connection between the four types of procedures that
constitute further audit procedures to the components of the audit risk model. Notice
that Problem 13-24 is a good test of students' understanding of the definitions and
their relationship to material in earlier chapters.
(See Figure 13-1)
There are several other questions you might ask in this section.
1. What is the difference between a test of control and a substantive test of
transactions? Review Question 13-4 is helpful.
2. What is the difference between a substantive test of transactions and a test
of details of balances? (Review Question 13-9).
3. Review Question 13-6 – Performing substantive tests of transactions
simultaneously with tests of controls.
4. What is the relationship between tests of controls and substantive tests?
Figure 13-3 (page 410) is useful to discuss this.
(See Figure 13-3)
5. What are the relationships among tests of controls, substantive tests of
transactions, analytical procedures, and tests of details of balances? We
summarize this with T-13-1.
(See T-13-1)
6. What types of tests are required in a public company’s audit of internal
control over financial reporting? Review Question 13-1 is helpful for this
emphasis.
For definitional purposes, several problems are excellent. These include 13-25,
13-26, 13-27, and 13-28. Each of these problems interrelate material from Chapters
6 through 13. Often we assign only two or three of the requirements for any given
problem. To provide memory joggers, put T-13-2 on the overhead while discussing
these problems. Also show Table 13-2 (page 407) to relate types of evidence to
types of tests.
(See T-13-2)
(See Table 13-2)
13-2
Impact of Information Technology on Audit Testing (page 410)
Use T-13-1 as a framework to discuss how the client’s and the auditor’s use of
information technology has changed the emphasis placed on each type of test. The
existence of automated controls allows the auditor to rely on controls with a reduced
level of testing. Audit software allows auditors to perform analytical procedures more
effectively. As a result, auditors may be more likely to increase reliance on controls,
and obtain greater assurance from analytical procedures. Auditor software, such as
ACL as illustrated in this book, also allows many tests of details of balances to be
completed more efficiently.
(See T-13-1)
Problem 13-29 can be used to illustrate the existence of automated controls,
and to discuss the effect of automated controls on audit testing.
Evidence Mix (page 411)
Keep T-13-1 on the overhead and ask students to explain the difference
between the three audits.
(See T-13-1)
Audits A and C were approached essentially the same except that a lower audit
risk was acceptable for C. Refer to Chapter 9. Audits A and B achieved the same
audit risk, but each audit was approached in a completely different manner. Audit A
apparently had effective internal controls and analytical procedures results were
good. In Audit B, the controls were apparently deficient and the results of analytical
procedures must have indicated problem areas. Emphasize that Audit B could not
represent an audit strategy for an integrated audit of a public company’s financial
statements and internal control over financial reporting given that tests of controls
must be performed in an integrated audit.
Another transparency we use to show the relationships among analytical
procedures, tests of controls, substantive tests of transactions, and tests of details
of balances is
T-13-3.
(See T-13-3)
Next, we discuss the effect of a reduced assessed control risk and performing
tests of controls and substantive tests of transactions on tests of details of balances.
A return to Figure 10-11 (page 320) is useful to illustrate that concept and to
integrate Chapters 10-13. We discuss the five types of tests and where they fit into
Figure 10-11.
(See Figure 10-11)
13-3
Finally, we like to discuss the appropriate emphasis on different types of tests
under differing circumstances. This is a discussion of the material in Table 13-3
(page 412).
T-13-3 shows a summary of the logic sequence that is appropriate to make the
decision in the audit of the financial statements. Problems 13-31 and 13-32 are
useful to illustrate this concept. Case 13-36 can also be used at this point. Be sure to
point out that in the audit of internal controls over financial reporting the auditor’s
basis for reporting comes from tests of controls and not substantive testing.
(See Table 13-3)
(See T-13-3)
Design of the Audit Program (page 412)
This material may be too conceptual for some students at this stage of the
course, but an understanding of the audit process requires them to understand this
material before the course is complete. We introduce the material in this part of the
chapter, and return to it again in Chapter 16. There are several important things we
like to accomplish in this section.
1. Compare the methodology for designing tests of controls, substantive tests
of transactions, and tests of details of balances. Figure 13-4 (page 413)
and Figure 13-6 (page 416) are useful to make that comparison.
(See Figures 13-4 and 13-6)
2. Show the factors that determine tests of details of balances. Figure 13-2
(page 404) and Figure 13-7 (page 417) show the progression from
financial statements through tests of details of balances. If students
understand Figure 13-2, they will likely understand the audit process.
(See Figures 13-2 and 13-7)
3. Show an output of the design of tests of balances, such as the audit
program in Table 13-4 (page 420).
(See Table 13-4)
Summary of Key Evidence-Related Terms (page 421)
At this point, students have been exposed to many terms related to the phases
of the audit process, audit objectives, types of tests, evidence decisions, and types
of evidence. Use Table 13-6 (page 422) to summarize the relationship among these
five key evidence-related terms.
(See Table 13-6)
13-4
Summary of the Audit Process (page 423)
At this point, we spend a few minutes going over Figure 13-9 (page 424). We
like to use the transparency for this figure so that it can be discussed more
effectively. This figure summarizes much of the material discussed in Chapters 6
through 13. We also refer back to Figure 13-9 in almost every other chapter in the
course.
(See Figure 13-9)
If we have time, we like to list the major decisions made during Phase I (see T-13-
4), and ask students to explain the primary basis on which the decisions are made. It
is also useful to ask what can happen at a later date to change each decision.
(See T-13-4)
13-5
CHAPTER 13
CROSS-REFERENCE OF LEARNING OBJECTIVES AND PROBLEM MATERIAL
Multiple Discussion
Review Choice Questions
Learning Objectives Questions Questions and Problems Cases
13-1 Use the five types of audit tests to determine 13-1, 13-2, 13-22, 13-23 13-24, 13-25,
whether financial statements are fairly stated. 13-3, 13-4, 13-26, 13-27,
13-5, 13-6, 13-28
13-8, 13-9
13-2 Select the appropriate types of audit tests. 13-7, 13-8, 13-24, 13-25
13-12, 13-13,
13-14
13-6
13-3 Understand how information technology affects 13-10 13-25, 13-29
audit testing.
13-4 Understand the concept of evidence mix and how 13-5, 13-7, 13-31, 13-32, 13-35, 13-36
it should be varied in different circumstances. 13-11,13-15 13-33
13-5 Design an audit program. 13-16, 13-17, 13-22 13-27, 13-28, 13-35, 13-36
13-18, 13-19, 13-30, 13-31,
13-20 13-34
13-6 Compare and contrast transaction-related audit 13-25, 13-27,
objectives with balance-related and presentation 13-28
and disclosure-related audit objectives.
13-7 Integrate the four phases of the audit process. 13-21 13-22 13-30, 13-34
LEVEL OF ASSURANCE
OBTAINED IN DIFFERENT WAYS
(1 - AUDIT RISK)
Achieved Level of Assurance
Audit Audit Audit
A B C
Assessed Control
Risk Including
Tests of Controls 30% -- 30%
Substantive Tests
of Transactions 15% 25% 16%
Analytical
Procedures 30% 10% 30%
Tests of Details
of Balances 22% 62% 23%
Total 97% 97% 99%
Achieved Audit
Risk 3% 3% 1%
Required:
1. Explain the differences between Audit A and C.
2. Explain the differences between Audit A and B.
T-13-1
TYPES OF EVIDENCE
Physical Examination
Confirmation
Documentation
Observation
Inquiries of the Client
Reperformance
Analytical Procedures
Recalculation
TRANSACTION-RELATED BALANCE-RELATED
AUDIT OBJECTIVES AUDIT OBJECTIVES
Occurrence Existence
Completeness Completeness
Accuracy Accuracy
Posting & summarization Detail tie-in
Classification Classification
Timing Cutoff
Realizable value
Rights & obligations
Note: The auditor also uses a combination of the types of evidence to
satisfy presentation and disclosure objectives
T-13-2
RELATIONSHIPS AMONG ANALYTICAL
PROCEDURES, TESTS OF CONTROLS,
SUBSTANTIVE TESTS OF TRANSACTIONS,
AND TESTS OF DETAILS OF BALANCES
Analytical Procedures • Almost always heavy
T of C, S T of T, and • Independent of analytical procedures
Observations • Extent of testing depends primarily
upon intended reduction of
assessed control risk
• Some substantive tests of transactions
are normally performed
Tests of Details • Dependent on analytical
of Balances procedures, tests of controls, and
substantive tests of transactions
• Some tests of details are normally
always required
Assessed Control
Risk, T of C, and
S T of T
Bad Results or Few
Good Results
Tests Performed
Analytical Analytical
Procedures Procedures
Good Bad Results or Good Bad Results or
Results Few Performed Results Few Performed
Minimal Medium Medium Extensive
Tests of Tests of Tests of Tests of
Details Details Details Details
T-13-3
DECISIONS MADE IN PHASE I
OF THE AUDIT
1. Accept or continue with client.
2. Understand client’s business and industry and
assess client business risk.
3. Materiality, acceptable audit risk, inherent risk,
and fraud risk.
4. Understand internal control and determine
planned assessed control risk.
5. Planned extent of substantive tests in Phase II
and III.
6. Timing of all audit procedures and intended
completion date.
7. Size of audit team and allocation of work.
8. Extent of need for industry, statistical
sampling, or IT specialists.
9. Degree of additional management and tax
services to provide.
T-13-4
