Why is an audit plan needed?
• “Planning” means:
– Development of the audit strategy and
– Development of the audit program
• The audit plan helps to ensure that the audit process may be conducted in a targeted, effective, and timely manner
• The scope of the audit plan depends on the size of the company, the complexity of the audit, and on the previous experience of the auditor with the audited company and his knowledge about the company’s business and
environment
• An important component of the audit plan is the acquisition of knowledge about the business and the environment of the organization. This knowledge
serves the external auditor to identify events,transactions or practices that may have a significant influence on the financial statements
• It may be useful to discuss parts of the audit strategy or certain procedures with the management, the supervisory board, the internal audit or other employees of the organization in order to:
Increase the effectiveness and efficiency of the audit
Coordinate audit procedures within the organization
What is an audit strategy?
- The external auditor has to develop and document an audit strategy which focuses on the expected scope and the expected procedures of the audit
- The audit strategy has to be documented in a sufficient manner so that the auditor may develop the audit program based on this documentation
Which aspects should be considered in the development of an audit strategy?
Knowledge of the business and the environment of the organization
Understanding of the organization’s accounting and its internal control system
Risk and probability
Type, time and scope of procedures
Coordination, guidance, supervision and control
Further related aspects (e.g., going concern criterion)
What is an audit program?
- The auditor has to develop and document an audit program which comprises the type, time and scope of audit procedures required by the audit strategy
- The audit program serves as a guidance for involved auditors and as a means of control and documentation of adequate and necessary auditing procedures
- When developing the audit program, the external auditor regards the respective evaluation of inherent risk and control risk as well as the degree of persuasiveness of evidence
• Furthermore, the external auditor takes account of the point of time on which tests of controls and substantive tests of transactions are conducted, the availability of employees involved in the audit, the coordination with the audited client, and the possible involvement of
experts or other auditors
Procedures to understand the internal control
– Update and evaluate results from previous years – Interview personnel / management – Review of guidelines, manuals etc. – Review of client’s documentation – Observations
What are tests of controls
• Tests of Controls are used to audit the appropriateness and effectiveness of the internal control system
• Influencing factors: – Quality of information systems – Size of auditee – Experience from previous years – Knowledge of audit teams – Efficiency / economic aspects – Agreement / Contract with client – Agreement with stakeholders / Certification / Confirmation
What are the substantive tests of transactions
- Substantive Tests of Transactions are used to test for monetary misstatements that directly affect the correctness of financial reporting
- The objective of Substantive Tests of Transactions is the audit of management’s assertions and transaction-related audit objectives for each class of transaction (i.e., occurrence, completeness, accuracy, posting and summarization, classification, timing)
- Substantive Tests of Transactions influence CR as well as PDR
What are the analytical procedures?
• Analytical procedures include comparisons of recorded amounts to the auditor’s expectations
• Objectives: – Better understanding of the client’s business – Detect possible misstatements – Reduce substantive testing – Evaluate Going Concern
What are tests of details of balance?
- Tests of Details of Balances test the final balances of accounts in the balance sheet and in the income statement
- The scope of these test strongly depends on the results of the previous four types of tests (i.e., understanding of internal control, test of controls, substantive tests of transactions and analytical procedures)
- Tests of Details of Balances are very reliable as they usually deliver audit evidence from a source independent from the client
Describe the relationship between Test of Controls and Substantive Tests of Transactions
• A deviation in the Test of Controls is only an indication for a possible misstatement in the financial reporting
This deviation only becomes material if it is identified repeatedly
• An omission is a misstatement
Describe the relationship between Analytical Procedures and the Substantive Tests of
Transactions
- Analytical Procedures merely provide an indication regarding the probability of misstatements
- Substantive Tests of Transactions or Tests of Details of Balances are conducted in order to ascertain if misstatements actually occurred
Name the three parts of an audit program
I. Tests of Controls und Substantive Tests of Transactions
II. Analytical Procedures
III. Tests of Details of Balances
Which “rules” do you have to follow when you use Tests of Controls and Substantive Tests of Transactions?
• Adequate segregation of duties
– E.g., responsibility for the accounting of sales must be separated from the responsibility for cash balances
• Appropriate authorization
– Authorization of credit sales prior to their actual sale
– Order delivery after authorization
– Authorization of prices
• Adequate documentation and accounting
– Numbered documents
– Internal procedures of verification
analytical procedures in the audit program
- Analytical procedures may be conducted in a cost-efficient manner, which is why they are used very often
- Analytical procedures in phases II and III are more focused (on single accounts, on a monthly basis etc.) and more extensive than they are in phase I and IV
Tests of Details of Balances in the audit program
• The preparation of Tests of Details of Balances is carried out in the planning phase
• The preparation of Tests of Details of Balances depends on the results of the Tests of Controls, the Substantive Tests of Transactions, and the Analytical Procedures, which have not been conducted to this point. Hence, the results of these tests have to be
estimated
• In the case that these estimations should not prove to be true, the Tests of Details of Balances have to be adjusted accordingly
Name the steps used to develop an audit plan an the audit program
• At the end of the planning phase, the external auditor should have an audit plan for the entire audit, as well as audit programs for each of the cycles / areas of focus
• Using and integrating all of the elements of the planning process:
– Materiality
– Audit risk and inherent risk
– Understand internal control and assess control risk
– Detection risk
– Gather information to assess fraud risk
