Module 3 Project
You will be designing an attestation plan for the core business process (or one of the sub-processes) that you analyzed in your Module 2 projects. As designing an entire attestation plan for a core business process is beyond the scope of this assignment, you will develop attestation plans for two process-level risks that have significant financial statement implications. You should follow these steps when developing your attestation plans:
1. Identify the two process-level risks that you want to address with your attestation plan. The most important consideration is the potential for significant financial statement implications (See #2).
• You are welcome to use process-level risks that you did not discuss in your project if you feel they are better suited for this project.
2. Identify two financial statement implications for each process-level risk (4 total implications). Implications should relate to a specific management assertion about a specific line item on the balance sheet (e.g., accounts receivable) or income statement (e.g., cost of goods sold). The most common management assertions are:
• Rights and Obligations
• Presentation and Disclosure
3. Develop an audit objective for each implication. These objectives should be brief (e.g., to test the completeness of accounts payable).
4. For each audit objective, identify two controls that management could implement to address the risk and its financial statement implications. It is difficult to identify actual controls used by the company. So, come up with your own controls that the company may have in place (consult your textbook).
• Hint: You do not necessarily need to identify 8 total controls. It is beneficial in terms of audit efficiency to identify controls that address multiple risks/implications.
5. Develop your assessment of the risk of material misstatement (IR x CR) and detection risk for each audit objective. These assessment can be numerical (0-100) or categorical (Low/Medium/High). Your assessment of control risk should be based SOLELY on the controls you identified in #4 (i.e., assume there are no other controls in place).
6. Based on your assessment of control risk in #5, decide if you are going to test and rely on the internal controls. If you choose not to rely on the controls, document your rationale. If you choose to rely on the controls, identify two control tests for each control.
7. For each audit objective, identify one analytical procedure. The analytical procedure can be used for planning (i.e., ratio analysis) or substantive testing (i.e., development of a formal expectation), but at least analytical procedure needs to be a substantive test (i.e., for at least one audit objective).
• Ratio Analysis: Be sure to clearly identify the ratio that you propose to analyze and the relevant benchmark that you are going to compare it to.
• Substantive Testing: Be sure to clearly identify how you are going to develop a formal expectation. You could provide an actual equation (like the commission expense example in the lecture notes) or say you are going to use regression analysis and list your explanatory variables (things that predict your financial statement balance). At least one of your information sources used in your analytical procedures has to be EXTERNAL to the organization.
8. For each audit objective, identify a battery of substantive tests. The number of substantive tests will be higher (lower) if you decided not to rely (to rely) on internal controls testing and the precision of your analytical procedure. The number of substantive tests should also be based on your risk assessments. If RMM is high, you should have quite a few tests. In general, I would expected somewhere between 2-6 tests for each audit objective based on RMM, your reliance on internal controls, and the precision of your analytical procedure.
• Hint: As with #4, it is beneficial in terms of audit efficiency to identify tests that address multiple audit objectives.
• A precise analytical procedure would be a substantive analytical procedure whereas an imprecise analytical procedure would be comparing ratios to prior years, competitors, etc. for audit planning purpose. Either type is acceptable, but the choice will affect the extent of your other procedures.
• Be sure to specify your sample sizes. For low, medium, and high risk assessments, use 10, 20, and 30, respectively. Also, you may want to consider “stratifying” your sample to target specific high risk transactions (e.g., high dollar value, specific customers, etc.)
• See textbook and lecture notes for examples of analytical procedures, control tests, and substantive tests.
The deliverable will consist of one “planning memo” and four separate audit programs (one for each audit objective). The planning memo should describe the rationale underlying the key decisions (e.g., risk assessments, control reliance, etc.) that went into the audit programs. The memo should also include a brief summary of the tests that you plan on performing and how they achieve the audit objective. The memo should not exceed 4 pages double-spaced. The audit programs should only describe the procedures. The format should be 1) audit objective, 2) controls, 3) control tests, 4) analytical procedures and 5) substantive tests. Each audit programs should not exceed 3 pages double -spaced (describe your procedures as concisely as possible). Thus, the complete report should not exceed 16 pages double-spaced (4 page planning memo and 4 – 3 page audit programs).
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