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Michael Daniel

on 4 June 2014

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Transcript of Deloitte

Deloitte LLP
Walkthroughs and D&I

Testing Design Effectiveness
Control Roll Forwards
Purpose of Walk-throughs
To understand the likely sources of misstatements, and aid in selecting the controls to test. The auditor should achieve the following objectives:
Understand the flow of transactions related to relevant assertions, including how transactions are initiated, authorized, processed, and recorded
Achieving Objectives
AS No. 5.34
Walkthroughs will frequently be the most effective way of achieving the aforementioned objectives
Performing a walkthrough, the auditor will
follow a transaction from origination through the company's processes to the company's financial records
AS No 5.37
Conducting Walkthroughs
In performing a walkthrough an auditor:
Questions the company's personnel about their understanding of the company's processes and controls.
Selecting Controls to Test
Identify the points within the company's processes where a misstatement—including fraud—could arise that, individually or in combination with other misstatements, would be material
Identify controls over the prevention / detection of unauthorized acquisition, use, or disposition of the company's assets that could result in a material misstatement of the financial statements.
Identify the controls that management has implemented to address potential misstatements
Inquire about the process / control
Observe the process / control being performed
Inspect relevant documents
Re-perform the control (highest level of assurance)
Asks probing questions in order to gain an understanding of the process and identify points at which a control is missing or not designed effectively.
AS No 5.37
It is neither necessary to test all controls related to a relevant assertion nor necessary to test redundant controls, unless redundancy is itself a control objective
AS 5.39-41
Test only the controls that pertain to our conclusion about how the company's controls address the assessed risk of misstatement to each relevant assertion.
Selecting a control for testing depends on which controls, individually or in combination, address the assessed risk of misstatement to a given relevant assertion
PCAOB Auditing Standard 5
ICFR provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.
If one or more material weaknesses exist, the company's internal control over financial reporting cannot be considered effective
Top-Down Approach
A top-down should be used to select controls for testing.
Financial Statement Level
auditor's understanding of the overall risks to internal control over financial reporting
Entity Level Controls
Test ELC's to support the conclusion that the company has effective ICFR.
Our evaluation of ELC's can result in increasing or decreasing testing.
Control Environment
Management override
Significant Accounts &
Evaluate the qualitative & quantitative risk factors related to the financial statement line items and disclosures
Size & composition of the account
related party transactions
Susceptibility to misstatement due to errors or fraud
Changes in the process year over year?
Threshold of investigation?
Significant transactions?
In order to gain an understanding of controls auditors will conduct a
and test the
design and implementation
of the controls
Is the control operating as described by personnel of the appropriate authority?
The design effectiveness of controls is determined by the following:
Does the control satisfies the company's control objectives?
Does it prevent or detect errors or fraud that could result in material misstatements in the financial statements
Is the control owner competent enough to perform the control?
AS 5.42
Procedures to Test Design Effectiveness
Procedures the auditor performs to test design effectiveness include a mix of:
: Walkthroughs that include these procedures ordinarily are sufficient to evaluate design effectiveness
inquiry of appropriate personnel
observation of the company's operations
inspection of relevant documentation
Example of 6/30 AR control
Current View of Control Apportion
Requesting 13 selections for year-end
Takes time to coordinate with client
Delayed response from client
If we obtain Audit Evidence about the operating effectiveness of Controls during an interim period, we shall:
Obtain Audit Evidence about significant changes to Controls subsequent to the interim period
Determine the additional Audit Evidence to be obtained for the remaining period.
[PCAOB AS 5.56]
AS 5.43
Wasted time with documentation / most info sent in piece meal
Concluding on controls must be done at miniumum 4-3 months prior to the as-of date.
Still leaves the potential to make more substantive selections if controls fail - "not relying on control"
New CW Controls Roll Forward
Roll forward each site to 9/30 and conclude on controls
Document all samples as of 9/30 (i.e 5 for weekly) as required by
AAM 4200.2
Conclusion can be made for a period less than one year
Thus, as of 9/30 we can reasonably conclude all substantive testing completed to date can rely on controls
For the period 10/1-12/31 we obtain sufficient evidence as describe in
[PCAOB AS 5.56]
Conservatively we make 1-2 more selections to corroborate our 9/30 conclusion
AAM 4200.2
is a minimum requirement making additional selections would be fine
If any errors are found in these selections we run a substantive test on the Q4 sample alone not relying on controls and {tm} as to why our 9/30 selections can still reasonably be said to rely on controls
Thank you
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