13-1
Chapter 13
Overall Audit Strategy and Audit Program
Concept Checks
P. 419
1. The five types of tests auditors use to determine whether financial
statements are fairly stated include the following:
Risk assessment procedures
Tests of controls
Substantive tests of transactions
Substantive analytical procedures
Tests of details of balances
support an assessment of control risk that is below maximum.
Because substantive tests of transactions provide evidence about
substantive analytical procedures, and tests of details of balances.
2. C represents the auditor’s assessment of the effectiveness of internal
control. Tests of controls at the C1 level would support a minimum level
of control risk. This would require more testing of the controls than would
be required at either C2 or C3. Testing controls at the C1 level allows the
C3 represents the idea that it is not cost–effective to test internal
controls and all assurance must come from substantive testing. This
At point C2, the auditor performs some tests of controls and is able
to reduce control risk below maximum. Point C2 would be appropriate if it
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P. 428
tests of transactions is as follows:
transactions being tested.
control risk for each transaction–related audit objective.
3. Develop appropriate tests of controls for each key control.
2. If performance materiality is low, and inherent risk and control risk are
tests of details of balances.
Review Questions
13–1 Risk assessment procedures are performed to assess the risk of
appropriate evidence.
13–2 Tests of controls are audit procedures to test the operating effectiveness
of control policies and procedures in support of a reduced assessed control
risk, and provide the primary basis for the auditor’s report on internal controls
leasehold improvements, and various administrative expenses.
13–3 Tests of controls are audit procedures to test the operating effectiveness
of control policies and procedures in support of a reduced assessed control
risk. Examples include:
1. The examination of vendor invoices for indication that they have
order, and approved for payment.
hours worked.
3. Examination of journal entries for proper approval.
4. Examination of approvals for the write–off of bad debts.
13-3
13–3 (continued)
Substantive tests of transactions are audit procedures testing for
1. Recalculation of amounts (quantity times unit selling price) on
selected sales invoices and tracing of amounts to the sales journal.
2. Examination of vendor invoices in support of amounts recorded in
13–4 A test of control audit procedure to test that approved wage rates are
A substantive test of transactions audit procedure would be to compare
13–5 The auditor resolves the problem by making assumptions about the
results of the tests of controls and performing both the tests of controls and
substantive tests of transactions on the basis of these assumptions. Ordinarily
the auditor assumes an effective system of internal control with few or no
exceptions planned. If the results of the tests of controls are as good as or
13–6 Substantive tests of transactions are performed to verify the accuracy
of a client’s accounting system. This is accomplished by determining whether
individual transactions are correctly recorded and summarized in the journals,
master files, and general ledger. Substantive tests of transactions are also
concerned with classes of transactions, such as payroll, acquisitions, or cash
13-4
13–7 When the results of substantive analytical procedures are different from
the auditor’s expectations and thereby indicate that there may be a
misstatement in the balance in accounts receivable or sales, the auditor should
extend the tests to determine why the ratios are different from expectations.
13–8 The primary purpose of testing sales and cash receipts transactions is to
evaluate the internal controls so that the scope of the substantive tests of the
account balances may be set. If the auditor performs the tests of details of
13–9 1. Control #1 – Computer verification of the customer’s credit limit.
The presence of effective general controls over software programs
and master file changes can significantly reduce the auditor’s testing
authorized and tested prior to implementation. These are all tests
of general controls over software programs and master file changes.
2. Control #2 – The accounts receivable clerk matches bills of lading,
or she would most likely examine a sample of the underlying
documents for the accounts receivable clerk’s initials and reperform
the comparisons.
13-5
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13–10 The following shows which types of evidence are applicable for the five
types of tests (see Table 13–2 on p. 414).
TYPE OF EVIDENCE
TYPES OF TESTS
Physical examination
Tests of details of balances
Confirmation
Tests of details of balances
Inspection
All except substantive analytical procedures
Observation
Risk assessment procedures and tests of controls
Inquiries of the client
All five types
Reperformance
Tests of controls, substantive tests of transactions,
and tests of details of balances
Analytical procedures
Substantive analytical procedures
Recalculation
Substantive tests of transactions and tests of
details of balances
Tests of details of balances
Substantive tests of transactions
Tests of controls
Risk assessment procedures
Substantive analytical procedures
expanded to include a larger sample of the additions for the year. In addition,
inquiry as to what additions were made during the year may be made by the
13–13 By identifying the best mix of tests, the auditor can accumulate
sufficient appropriate evidence at minimum cost. The auditor can thereby
meet the standards of the profession and still be cost effective and competitive.
13-6
13–14 The approach to designing tests of controls and substantive tests of
transactions (Figure 13–4) emphasizes satisfying the transaction–related audit
objectives developed in Chapters 6 and 12. Recall that these objectives focus
on the proper functioning of the accounting system.
The methodology of designing tests of details of balances (Figure 13–6)
emphasizes satisfying the balance–related audit objectives developed in
Chapter 6. The primary focus of these objectives is on the fair presentation of
account balances in the financial statements. The extent of testing depends, in
part, on the results of the tests of controls and substantive tests of transactions.
problems in tests of controls and substantive tests of transactions unless there
is reason to believe otherwise. If the auditor determines that the tests of
controls and substantive tests of transactions results are different from those
expected, the amount of testing of details of balances must be altered.
as follows:
GENERAL
BALANCE–
RELATED AUDIT
OBJECTIVE
SPECIFIC OBJECTIVE
AUDIT PROCEDURE
Detail tie–in
Inventory on the inventory
summary agrees with the
physical count, the
extensions are correct,
and the total is correctly
added and agrees with the
general ledger.
Check extensions of price
times quantity on a sample
basis, foot the detailed
inventory summary, and
trace the balance to the
general ledger and financial
statements.
Existence
Inventory as stated in
financial statements
actually exists.
Trace inventory from final
inventory summary to actual
inventory and physically
count selected items.
Completeness
Existing inventory items
have been counted and
included in the financial
statements.
Select items from the physical
inventory and trace to the
client’s final summary to
make sure that all items are
included.
13–16 (continued)
GENERAL
BALANCE–
RELATED AUDIT
OBJECTIVE
SPECIFIC OBJECTIVE
AUDIT PROCEDURE
Accuracy
Inventory items included in
the financial statements
are stated at the correct
amounts.
Perform price tests of
inventory by examining
supporting vendors’ invoices
for selected inventory items
and reverify price times
quantity.
Classification
Inventory as included in the
financial statements is
properly classified.
Compare the classification of
inventory into raw materials,
work in process, and finished
goods by comparing
description on physical
inventory count tags with the
client’s final inventory listing.
Cutoff
Inventory cutoff is properly
recorded at the balance
sheet date.
Trace selected receiving
reports several days before
and after the balance sheet
date to determine whether
inventory purchases are
recorded in the proper period
and related physical
inventory counts are included
or excluded from inventory.
Realizable value
Inventory on the financial
statements excludes
unusable items.
Inquire of factory employees
and management regarding
obsolescence of inventory,
and examine storeroom for
evidence of damaged or
obsolete inventory.
Rights and
obligations
Inventory items in the
financial statements are
owned by the client.
Review contracts with
suppliers and customers for
the possibility of the inclusion
of consigned or other non–
owned inventory.
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13–17 There is a direct relationship of the occurrence transaction–related audit
objective to the existence balance–related audit objective if a class of
transactions increases the related account balance (e.g., sales transactions
increase accounts receivable).
There is a direct relationship of the occurrence transaction–related audit
objective to the completeness balance–related audit objective if a class of
Phase I Plan and design and 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
As indicated above, auditors perform tests of controls in Phase II.
13–19 Auditors frequently consider it desirable to perform audit tests throughout
the year rather than waiting until year–end because of the CPA firm’s difficulty of
begin their testing of controls earlier in the year to ensure they are able to test a
sufficient sample of controls for operating effectiveness. Some controls may
1. Update fixed asset schedules.
2. Examine new loan agreements and other legal records.
3. Vouch certain transactions.
may be performed with minor review and updating at year–end:
(a) Observation of physical inventories;
(b) Confirmation of accounts receivable balances;
13-9
Multiple Choice Questions From CPA Examinations
13–20 a. (2) b. (1) c. (4)
13–21 a. (3) b. (1) c. (3)
13–22 a. (3) b. (1) c. (2)
Discussion Questions and Problems
13–23
a.
b.
a.
b.
1. T of C
2. TD of B
3. T of C
4. TD of B
5. TD of B
6. T of C
Inquiry and observation
Inspection
Inquiry
Recalculation
Confirmation
Inspection
7. TD of B
8. SAP
9. T of C
10. ST of T
11. SAP
Inspection
Analytical procedures
Inspection
Inspection
Analytical procedures
13–24
a.
b.
1. ST of T
2. T of C
3. T of C
4. ST of T
5. ST of T
6. T of C
7. ST of T
8. ST of T
Completeness
Occurrence
Accuracy
Accuracy
Posting and summarization
Classification
Accuracy
Posting and summarization
13–25
a.
b.
c.
d.
e.
f.
1. Sales and
Collection
Inspection
Test of control
N/A
Accuracy
N/A
2. Inventory and
Warehousing
Physical Examination
Substantive
T D of B
N/A
Existence
3. Acquisition and
Payment
Recalculation
Substantive
S T of T
Posting and
summarization
N/A
4. Acquisition and
Payment
Inspection
Test of control
or Substantive
S T of T
Occurrence
N/A
5. Acquisition and
Payment
Inspection
Substantive
T D of B
N/A
Cutoff
6. Sales and
Collection
Inquiry
Substantive
T D of B
N/A
Realizable
value
7. Inventory and
Warehousing
Analytical
procedure
Substantive
SA P
N/A
Realizable
value
8. Capital Acquisition
and Repayment
Confirmation
Substantive
T D of B
N/A
Existence
Accuracy
9. Sales and
Collection
Recalculation
Substantive
T D of B
N/A
Detail tie–in
13–10
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