Question

Auditing and Assurance Services: An Integrated Approach, Ch. 21

In this chapter, focus on the following:

audit testing procedures

analytical procedures

physical observations

pricing and costing audit

Answer 1

1.Audit testing procedures : Each control objective or criteria has a number of supporting controls that are walked through and tested, and this is accomplished using a variety of testing methods/procedures. Audit the testing process, we look at results of a test cycle, the process by which the results were obtained, and the tools and components a test has used to obtain these results.

There are five main methods to walkthrough and test each control in place at the service organization.

1.Inquiry

2.Observation

3.Inspection of Evidence

4.Re-performance

5.CAAT

Most probably an audit is executed by an external resource to verify validity and adherence to standards. An external auditor is usually seen as a more credible source because the only interest they should have is a thorough and accurate assessment.

Types of procedures

1.analytical procedures : Analytical procedures generally provide less reliable evidence than the tests of detail

2.Tests of detail :  Tests of detail are only applied in the substantive testing stage.

2.Analytical procedures : Analytical procedures are financial audit processes which help an auditor understand the client's business and changes in the business, and to identify potential risk areas to plan other audit procedures.Analytical procedures are a type of evidence used during an audit. These procedures can indicate possible problems with the financial records of a client, which can then be checked more thoroughly. Analytical procedures involve comparisons of different sets of financial and operational information.

Analytical procedures are performed at three stages of audit: at start, in middle and at end of audit. These three stages are risk assessment procedures, substantive analytical procedures, and final analytical procedures.

Examples of analytical tests include:

• Trend analysis,
• Ratio analysis,
• Reasonableness testing, and
• Regression analysis.

Four phases of the analytical audit process :

1.Form an expectation

2.Identify differences between expected and reported amounts.

3.Investigate the reason.

4.Evaluate differences.

3.Physical observations: Physical observation is the process or procedure of observing processes take place or witnessing physical items in place and operating as described. It is best to use observations for controls related to physical security, logical security automated controls, data center hardware and for many process controls (this may overlap with re-performance).

Physical observation differs from physical examination because physical examination counts assets, while observation focuses on client activities.

Strengthen Observations with: Pictures of physical facilities if possible and screenshots of systems and processes in place- with system generated timestamps included on all pictures/screenshots collected.

Common mistakes to Avoid: Be sure to address all details of the control during observations the first time. Observations virtually always require the assistance of the client and sometimes travel, so carefully read each control and observe all aspects of the control, document sufficiently, and get it right the first time.

4.Pricing and costing audit :  pricing and costing audit In general, cost and price auditing consists in reviewing the information contained in the documents submitted by firms with respect to their pricing, referring either to estimated costs and proposed profit, or to the costs incurred in executing the contract, in order to issue a professional opinion as to whether this information complies with the rules or agreements applicable.

Types of cost and price auditing :

1.Bid auditing

2. Unit cost and price auditing

3.Incurred-cost auditing

4. Results obtained from cost and price auditing