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Unformatted text preview: 1 Chapter 13 Overall Audit Plan and Audit Program Review Questions 13-1 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 Analytical procedures Tests of details of balances While risk assessment procedures (procedures to gain an understanding of the entity and its environment, including 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 Risk assessment procedures are performed to assess the risk of material misstatement in the financial statements. Risk assessment procedures include procedures performed to obtain an understanding of the entity and its environment, including internal controls. Auditors use the results of the risk assessment procedures to design and perform further audit procedures. Further audit procedures (not risk assessment procedures) provide the auditor sufficient appropriate evidence, required by the third GAAS fieldwork standard. 13-1 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. 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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This note was uploaded on 08/27/2011 for the course AC555 AC555 taught by Professor Tarbet during the Spring '10 term at Keller Graduate School of Management.
- Spring '10