Increasing Audit Profits Series No. 36—Designing Efficient Tests of Balances Procedures

Approach to Designing Efficient Tests of Balances Audit Programs

Audit program modification should begin with an all-inclusive, worst-case, high-risk standard program.  Using a standard program that is designed considering the nature, size and complexity of a reporting entity, the audit program modification should normally follow this process:

1.    Identify relevant assertions (objectives) for each financial statement classification.
2.    Depending on the nature, size and complexity of the reporting entity, determine if risks should be considered separately for each relevant assertion or for account classifications as a whole.
3.    Review the assessed level of risk of material misstatement for each significant classification.
4.    Consider planned analytical procedures and their contributions of substantive evidence to evaluating the appropriateness and reasonableness of relevant financial statement assertions.
5.    Determine the specific nature and timing of auditing procedures necessary to provide substantive evidence commensurate with the planned audit strategies for each material financial statement classification.
6.    After calculating materiality levels based on the assessed risk of material misstatement in significant financial statement classifications, determine the extent (number of items, days, balances, transactions, etc.) of the planned auditing procedures.

Nature, Extent and Timing of Tests of Balances

Reductions in tests of balances will occur in the nature, extent and timing of the procedures.  

The nature of audit procedures generally relate to their reliability.  For example, audit procedures for evaluating the existence assertion for accounts receivable balances include positive confirmations, negative confirmations and alternative procedures such as examining sales documents and evidence of subsequent collections.  The most reliable evidence is auditor-generated evidence, examining sales documents and evidence of subsequent collections.  Because the most reliable evidence for accounts receivable is the most costly to obtain, some combination of positive confirmations and alternative procedures may be used for individually significant items. A combination of positive and negative confirmations may be selected from the remaining population.

The extent of audit procedures is always based on the assessed level of risk in significant financial statement assertions.  Normally the number of days, transactions, balances or other information selected for testing represents the extent of procedures. For example, a sales cutoff test is performed by selecting recorded sales from a number of days before and after the reporting date. High risk will require selections from more days, low risk less days.

The timing of audit procedures will also vary with the assessed level of risk in significant account classifications.  Normally a good system of internal control is necessary to enable auditors to perform procedures before the reporting date.  Observation of inventories or confirmation of accounts receivable may be performed before the reporting date when internal controls are good and appropriate roll-forward procedures can be performed.  

Smaller entities may have good key controls at the entity level that enable performing audit procedures off yearend.  For physical inventories, effective controls normally include good inventory instructions, training for count teams and owner or manager control and testing of count procedures.  For accounts receivable, an owner or manager’s key controls over the sales and collections cycle may provide reasonable assurance about management’s assertions and enable the auditor to perform procedures before the reporting date.

Performing interim work may enable an auditor to gather substantive evidence prior to the reporting date.  Gathering certain evidence and performing planning activities during interim work can enable the auditor to complete risk assessment procedures and plan the analytical and tests of balances procedures well in advance of the fieldwork.  This represents a major opportunity for creating engagement efficiencies. Another major benefit of performing interim work is moving work out of busy seasons and eliminating some of the time pressures that normally occur at that time.

For more information on designing efficient audit programs, see my live and on-demand webcast entitled, Staff Training for New In-Charge Accountants No. 5—Modifying Audit Programs.  You can obtain a syllabus and register by clicking the applicable box on the left side of my home page,


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by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (, an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

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