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Five categories are-1.Control environment2.Risk assessment3.Control activities4.Information and communication5.Monitoring8
Performance of the tests of controls and substantive tests of transaction occurs during thisphase. The objectives of phase II are to1.Obtain evidence in support of the specific controls that contribute to auditor’sassessed control risk,2.Obtain evidence in support of the monitory correctness of transactions The former objective is met by performing tests of control, and the latter by performingsubstantive test of transaction. Many of both types of test are conducted simultaneously onthe same transaction. When control are not considered effective, or when control deviationare discovered, substantive tests can be expanded in this phase or in phase III.Since the results of tests of controls and substantive tests of transactions are majordeterminant of extent of tests of detail balances,they are often performed two or three monthsbefore balance sheet date. This helps the auditor plan for contingencies, revise the auditprogram for unexpected results, and complete the audit as soon as possible after the balancesheet date.9
The objective of phase III is to obtain additional evidence to determine whether the endingbalance and footnotes in financial statement are fairly stated. There are two general categoriesof phase III procedures: analytical procedures and test of detail balance sheet. Whenperforming analytical procedures, the auditors examine both financial data and nonfinancialdata, such as the number of employees.When performing analytical procedures, the auditors examine both financial data andnonfinancial data, such as the number of employees. Before starting their analyticalprocedures, auditors estimate the expected value (of the ratio/ trend/ account balance/transaction, etc.) before calculating the actual value so as to avoid the actual value beingbiased for the auditor’s estimate of the expected value. The expected results are estimatedbased on preliminary discussions with the clients.10
After the first three phases are completed, it is necessary to accumulate some additionalevidences for the financial statements, summarize the results, issue the audit report, andperform other forms of communication. The phase has several parts-Review of contingent liabilities:Contigent liabilities are potential liabilities that must be disclosed in the client’s footnotes.Auditors must make sure that the disclosure id adequate. Review for subsequent events:The auditor must review transactions and events that occurred after the balance sheet date todetermine whether any of these transactions or events affect the fair presentation or disclosureof the current period statements. The auditing procedures required by auditing standards toverify these transactions and events are commonly called the review for subsequent events orpost-balance-sheet review.