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Today we tackle audit programs.
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The audit program is that insane checklist of
procedures that get performed by the audit team
to gather evidence.
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There are basically three type of procedures that
get listed on the audit programs:
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1.
Tests of controls
2.
Analytical procedures
3.
Tests of details
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Each transaction cycle will have its own audit
program with a mix of these types of procedures
that will vary depending on the risk
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assessments established during the audit plan.
Let's begin with the tests of control.
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As a reminder, tests of control are undertaken
for one of two reasons:
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First, it’s our hope that by relying on the client’s
controls we can reduce the amount of
substantive evidence
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we will need to gather in the test of details.
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Or second, it may be the only way we can test
certain objectives.
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For example, certain electronic or paper-less
systems may not generate a visible audit trail for
the auditor to inspect.
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Our approach for testing controls, assuming we
intend to place reliance, has three steps:
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Step 1: Identify the relevant control objectives-
you can think of this as the management
assertion that poses a material risk.
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Step 2: Identify the key controls in the process
that address that specific assertion.
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Step 3: Develop an appropriate control test.
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Next we need to plan our analytical procedures.
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We have already discussed how analytical
procedures are conducted throughout the audit
engagement.
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There is no prescribed way to do analytical
procedures, you need to use professional
judgment and financial savvy.
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Most analytical procedures use ratios and trend
analysis to identify areas that look out of the
ordinary and require further investigation.
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Further investigation entails documenting
management explanations for the variance,
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and gathering additional documentary evidence
until you get that warm fuzzy feeling.
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Finally, we have our tests of detail.
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Tests of detail are focus on establishing the
monetary correctness of the accounts they
relate to.
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It’s critically important to nail down evidence to
support the assets and liabilities at the specific
moment the fiscal year end.
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In doing so, we are indirectly gathering evidence
for the transaction based assertions,
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well at least in total, the classification of the
income statement might not be proven using
this approach.
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However, as we’ve discussed, accounts like
revenue are often high risk areas,
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and we would perform tests of detail directly on
this account as well.
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Tests of detail can be reduced by the work we
perform on the controls and the analytical
procedures we just discussed.
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The astute folks in our midst might pick up on
the fact that we could be looking at the same
evidence...
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as we perform both our tests of control and our
tests of detail.
This is true.
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And our audit program can be tailored to capture
this efficiency opportunity by performing was is
called a dual test.
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It saves us having to pull and inspect the same
invoice more than once.
[or using the same
evidence to serve more than one test/procedure]
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Sometimes we are confronted with tight
deadlines to finalize the audit.
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To minimize the turnaround time at year end, the
auditor can perform what is called interim
procedures at a time in advance of the year end.
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Roll forward procedures can be used on our
balance sheet accounts to enable us to perform
tests of detail a month or two ahead of year end.
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For instance, because of tight deadlines,
instead of sending out a receivable confirmation
at December 31st,
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we might choose to confirm the November 30th
balance.
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And then we would perform work on the controls
in place and recalculate the balance to ensure
the December 31st balance is not misstated.
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Audit programs are often based on a preset list
of procedures that are embedded within
software.
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The audit manager can tailor the audit
procedures to fit the circumstances.
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For those without software, there are standard
audit programs available for purchase, such as
the CICA’s Professional Engagement Manual.
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Auditors rarely sit down with a blank piece of
paper and begin drafting audit procedures from
scratch.
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However, that said, the tailoring of the auditor
program to fit the circumstances,
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and the evidence sought is a core professional
skill of the auditor.
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So let’s wrap up this discussion about audit
programs.
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Keep in mind our three different types of
procedures and the costs associated with
performing these procedures.
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Analytical procedures are the cheapest form of
audit procedures.
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Tests of controls are generally the next
cheapest.And finally tests of detail tend to be
the most expensive.
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Also you should understand and differentiate
between tests of controls and tests of detail,
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You should now be able to project forward the
implications of your findings arising from both of
these types of tests.
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When we find errors in our tests of detail, those
errors represent misstatements.
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Contrast this with when we find errors in our
tests of control.
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In this instance, a so called error does not
necessarily imply a misstatement,
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but rather that you cannot rely on the control as
much as you had hoped,
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and you will probably need to do additional
substantive work to validate the account.
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And finally, realize that there is a trade-off
between testing controls and performing
substantive tests.
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This gives the auditor flexibility in how they
approach the audit and there is more than one
way to reach a supported conclusion.
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Take a look at the follow chart to make a
conceptual connection of this tradeoff between a
controls-based audit and a substantive audit.
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The three points marked C1, C2, and C3
represent the flexibility the auditor has in
assessing control risk...
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at various levels of low (C1), Medium (C2), or
Maximum (C3).
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Note that substantive procedures can never be
eliminated, nor is there a perfect linear
relationship.
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To the right of the point marked B, substantive
work cannot be reduced any further,
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so you are always going to have to perform
some substantive work.
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There is no such thing as a purely controls
based audit, which is why they call that
approach a combined approach.
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So there you have it, audit in a box, well you
know what I mean.
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Until next time, don’t stop until you get to the
top and when you get to the top, don’t stop.