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13 - 1
Presentation Outline
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I. Application of Audit Testing
A. Tests of Controls
B. Testing for Monetary Misstatement
C. Reduction of Risk
D. Audit Assurance at Different Levels of
Internal Control Effectiveness
E. Simultaneous Testing of Controls and
Substantive Testing of Transactions
F. Timing of Audit Testing
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A. Tests of Controls
Acceptable C3
assurance AUDIT ASSURANCE
Audit assurance
C2 from control risk
Audit assessment and
assurance tests of control
C1
from
substantive
tests
No
assurance A C B
INTERNAL CONTROL EFFECTIVENESS
Weak control Strong control
Reliance on controls: C3 None, C2 Some, C1 Maximum
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E. Simultaneous Testing of Controls and
Substantive Testing of Transactions
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A. The Cost of Testing
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B. Appropriate Evidence for Audit Testing
Type of Evidence
Reperformance
Documentation
Confirmation
Examination
performance
Observation
Inquiries of
the client
Analytic
Physical
Type of Test
Procedures for internal control
Tests of controls
Substantive tests of transactions
Analytical procedures
Tests of details of balances
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C. Risk and Testing in the Audit Process
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III. Design of the Audit Program
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A. Tests of Controls and Substantive Tests of Transactions
A four-step approach when the auditor plans to reduce
assessed control risk below the maximum:
Transaction related audit objectives are applied to the class
of transactions being tested, such as sales.
Key controls that should reduce control risk for each
transaction-related audit objective are identified.
For all internal controls used to reduce the initial assessment
of control risk below the maximum (key controls),
appropriate tests of controls are developed.
Design appropriate substantive tests of transactions,
considering weaknesses in internal control and expected
results of tests of controls (allows for simultaneous tests of
controls and substantive testing).
Note: If control risk is assessed at 1.0, only substantive tests of
transactions will be used in this part of the audit program. 13 - 15
B. Analytical Procedures
Yes
Perform tests of controls.
Perform substantive tests of transactions.
From
Phase II
Likelihood of Misstatement
in Financial Statements
Low Medium High or
unknown