Audit Test Plan: Building and Execution

• Study notes for Phase III, Part 1: Building and Execution of the Test Plan

Audit Process Model

• Phase I: Client acceptance
• Phase II: Planning
• Phase III: Testing and evidence
• Phase IV: Evaluation and Judgement.

Tests of Controls

• Techniques that assess how effectively controls are operating
• Inquiry: Asking management/staff about control procedures
• Observation: Watching a control process in action, such as inventory count
• Inspection: Reviewing documents related to controls, such as authorization of transactions
• Reperformance: Independently executing a control to test its effectiveness

Inquiry

• Inquiry of company personnel alone isn't enough audit evidence to reduce audit risk or support the effectiveness of a control
• An auditor should gather evidence to back up inquiry evidence, since it might be biased
• Auditors may observe control procedures or review related documentation
• In a US court case, the court ruled against the auditor for not following up on management's answers to inquiries

Observation

• Observation involves looking at the process or procedure being performed by others
• Auditors are able to observe the counting of inventories or internal control procedures that leave no audit trail
• Observation provides audit evidence about the performance of a process or procedure
• Observation is limited to the point in time at which the observation takes place
• The act of being observed may affect how the process or procedure is performed
• Auditors typically visit the client's facilities to see how internal controls are implemented, what equipment is used, and whether equipment is obsolete
• Sufficient evidence is rarely obtained through observation alone
• Observational evidence should be backed up by a detailed inspection by an expert

Inspection

• Inspection of records and documents provides audit evidence of varying degrees of reliability based on nature, source, and effectiveness of internal controls
• The nature of documents includes the quantity of information contained, difficulty of access, and who has custody
• The source of documents may/may not be independent or competent
• Controls of the source may or may not be effective
• External documents used to be considered reliable evidence
• Documents are frequently provided in digital form, like contracts, invoices etc.
• Reliability of digital documents can be secured by using digital security techniques
• Some documents are direct audit evidence of the existence of an asset
• Inspecting an executed contract may provide audit evidence relevant to the entity's application of revenue recognition

Using Previous Audit Evidence

• Previous audit evidence may provide audit evidence for the internal controls in certain circumstances
• Factors that may decrease the period for retesting include a deficient environment, deficient monitoring of controls, deficient general IT controls
• Factors that may decrease the period for retesting also include a significant manual element and personnel changes
• Changing circumstances that indicate the need for changes indicate that retesting must occur

Re-testing

• Testing controls through inquiry, observation, inspection, or re-performance of certain controls can provide sufficient evidence about whether the control is effective
• ISA 300 requires controls to be retested at least once in every third year

Khan Electronics Case Study

• Khan Electronics expanded its operations to online sales, preliminary audit review uncovered potential discrepancies
• Some sales transactions recorded in the online system had no corresponding delivery documentation
• There were several customer complaints about incorrect items/quantities

Gourmet Foods Case Study

• Gourmet Foods implemented a new system requiring a sales manager's digital approval for each sale above PKR 10,000
• Auditors have decided to conduct a test of control on sales transactions

Assertions, Controls, Audit Procedures on Sales

• Occurrence: Sales invoices approved only after matching to shipping documents (delivery notes)
• Completeness: Sequential numbering of shipping documents and invoices with regular reconciliation
• Classification: Clear guidelines and approval for classification of different revenue types (product vs. service sales)
• Accuracy: Price lists approved by management and sales invoices independently checked for accuracy before recording
• Cut-off: All shipping documents and invoices dated clearly, with periodic reviews at year-end