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sol13 - Chapter 13 Overall Audit Plan and Audit Program...

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13-1 Chapter 13 Overall Audit Plan and Audit Program UIstop Review Questions 13-1 The five types of tests auditors use to determine whether financial statements are fairly stated include the following: UIstop Procedures to gain an understanding of internal control UIstop Tests of controls UIstop Substantive tests of transactions UIstop Analytical procedures UIstop Tests of details of balances While procedures to gain an understanding of internal control help the financial statement auditor obtain information to make an initial assessment of control risk, tests of controls must be performed as support of an assessment of control risk that is below maximum. The purpose of tests of controls is to obtain evidence regarding the effectiveness of controls, which may allow the auditor to assess control risk below maximum. If controls are found to be effective and functioning, the substantive evidence may be reduced. Substantive evidence is obtained to reduce detection risk. Substantive evidence includes evidence from substantive tests of transactions, analytical procedures, and tests of details of balances. For audits of internal control over financial reporting, the auditor only performs the first two types of audit tests: procedures to obtain an understanding of internal control and tests of controls. Because a public company auditor must issue a report on internal control over financial reporting, the extent of the auditor’s tests of controls must be sufficient to issue an opinion about the operating effectiveness of those controls. That generally requires a significant amount of testing of controls over financial reporting. 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. Tests of controls provide the primary basis for a public company auditor’s report on internal controls over financial reporting. Specific accounts affected by performing tests of controls for the acquisition and payment cycle include the following: cash, accounts payable, purchases, purchase returns and allowances, purchase discounts, manufacturing expenses, selling expenses, prepaid insurance, leasehold improvements, and various administrative expenses.
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13-2 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 been clerically tested, compared to a receiving report and purchase order, and approved for payment. 2. Examination of employee time cards for approval of overtime hours worked. 3. Examination of journal entries for proper approval.
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