The nature timing and extent of planned audit procedures is a way of describing the contents of the audit program for an audit engagement.
The nature of a planned audit procedure refers to both the type of procedure and method used to gather the evidence. As some types and methods are considered to gather evidence of greater reliability than others and as the required reliability of evidence relating to a particular account balance assertion is directly associated with the risk relating to that account balance assertion, then the greater the risk, the more reliable is the planned type of procedure and method of gathering evidence for that account balance assertion.
| Audit stage | Type of procedure | Manual methods of gathering evidence include: |
|---|---|---|
| Substantive testing | Test of detail | Physical examination, recalculation, confirmation, vouching, cut-off test, inquiry. |
| Analytical procedure | Reasonableness test, ratio analysis, scanning, roll-forward procedure. |
Auditors consider the risk of material misstatement [RMM] relating to a particular account balance assertion. The greater this risk, the more reliable the planned method used in substantive testing. In this regard, tests of detail are considered to gather more reliable evidence than analytical procedures; within tests of detail, the approximate order of reliability is physical examination of tangible assets (most reliable), recalculation, third party confirmations, vouching, cut-off tests and inquiry (least reliable). All methods of applying analytical procedures are less than reliable although in some circumstances, a reasonableness test may gather evidence that is moderately reliable.
The timing of a planned audit procedure refers to when the audit procedure is to be performed. Audit procedures may be performed prior to balance date (e.g. during interim visits), on balance date or after balance date (e.g. during final visit). The greater the RMM relating to a particular account balance assertion, the more critical is the timing of the substantive testing procedure.
For example, if the RMM relating to the validity of inventory is high, the auditor will plan substantive procedures relating to the validity [existence] of the account balance assertion (for example, inventory counts) to be performed on balance date, but not before or after balance date. If this risk is not high, then the timing of these procedures is not as critical.
The extent of planned audit procedures simply refers to the extent of the nature of the procedures. For example, how many requisitions should be examined for evidence of authorization? How many purchases invoices require vouching? How many computations (e.g. quantity on hand x unit cost) should be checked? The greater the RMM relating to an account balance assertion, the greater is the quantity of evidence that is required to be gathered in relation to that assertion. In other words, the greater the risk, the more extensive the planned evidence gathered [fn]. Auditors select for examination all material account balances and, where appropriate, material transactions, as well as a random selection of other account balances and/or transactions. Refer to separate section on Audit testing and sampling procedures.
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