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New audit methodology flowchart

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Levente Szekely

on 29 September 2010

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Transcript of New audit methodology flowchart

New audit methodology flowchart ABCTD = Account Balance, Class of Transactions or Disclosure Is the ABCTD
material ? NO Do nothing Consider following: 2 Qs
Quantitative factors
Qualitative factors if PM < ABCTD < 2*PM then:
we need a thorough documentation for our decision rule of thumb:
we usually HAVE TO consider an ABCTD material, if it is higher than 2*PM YES NO RISK reassess if ABCTD is material NOT SIGNIFICANT RISK SIGNIFICANT RISK decide on further audit procedures which might be:
- test of OE of controls
- ToD
SAP or ToD have to be used in the following cases:
- for at least one of the risks in any material ABCTD, even if control reliance exists
- for any risk regarding related parties earlier not disclosed by management or accounting estimates, even if control reliance exists evaluate the D&I of controls implemented to mitigate significant risk
decide on further audit procedures which might be:
- test of OE of internal controls;
- ToD
if no control reliance exists, the further audit procedures must include ToD Special Things 1 at Financial Statements level (aka. "pervasive")
at Assertion (ABCTD) level (aka. "specific") risk of material misstatement due to "management override of internal controls" is ALWAYS presumed to be a significant risk at FS level [ISA 240.32]
risk of material misstatement due to "fraud in relation to revenue recognition" is USUALLY presumed to be a significant risk at Assertion level [ISA 240.26]
if 2nd from above is considered not applicable, the reasons should be documented [ISA 240.47]
if we plan to rely on controls over a risk we have determined to be a Significant Risk, we shall test those controls in the current period. [ISA 330.15]
For Tests of Details, we shall project Misstatements found in the sample to the Population. [ISA 530.14]. We shall obtain an understanding of Control Activities relevant to the audit, being those we judge it necessary to understand in order to Assess the Risks of Material Misstatement at the assertion level and design Further Audit Procedures responsive to assessed risks. An audit does not require an understanding of all the Control Activities related to each significant* class of transactions, account balance, and disclosure in the Financial Statements or to every Assertion relevant to them. [ISA 315.20] Assess
RISK Special Things 2 STAR module
can be used with following conditions:
- Not Significant Risk & Control reliance --> use factor 0.7
- Significant Risk & Control reliance --> use factor 1.7
- Not Significant Risk & NO Control reliance --> use factor 1.7

If SAP and ToD are both used (DAAM G130) --> use professional judgment to calculate sample size for ToD or threshold for SAP --> ask the manager.

Old "directional testing" model (under-/over-/misstatement) --> works well when all debits are tested for one direction and all credits for the other.
Under the new methodology --> test Risk affecting 2 or more ABCTDs only once, but test well!
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