Analytical Procedures Performed in the Final Review Stage of an Audit Generally Would Include

This article teaches yous how to develop your audit plan and strategy. In one case you complete your gamble assessment, it's time to build these disquisitional pieces of your audit date.

Effectiveness and efficiently are both possible with a good audit plan. Below I explain how to do this. Additionally, we'll also take a look at three common mistakes made in planning. See if you make whatever of these.

To be in compliance with inspect standards, we need to develop:

• Our audit strategy
• Our inspect plan

Developing Your Audit Strategy

What's in the audit strategy? AU-C 300, Planning an Audit, states that the inspect strategy should include the following:

• The characteristics of the engagement (these ascertain its scope)
• The reporting objectives (these affect the timing of the audit and the nature of the reports to be provided)
• The meaning factors (these determine what the audit squad will practise)
• The results of preliminary engagement activities (these inform the auditor'south deportment)
• Whether knowledge gained on other engagements is relevant (these potentially provide additional insight)

Think of the audit strategy as the big picture.

We are documenting:

• The scope (the boundaries of the work)
• The objectives (what the deliverables are)
• The significant factors (due east.g., is this a new or complex entity?)
• The gamble assessment (what are the adventure areas?)
• The planned resources (eastward.g., the engagement squad)

Much tin be achieved with the right strategy—fifty-fifty walking on the moon.

Strategy for Walking on the Moon

When NASA planned to put a homo on the moon, a strategy was created. It could take read as follows:

We will put a man on the moon. The significant factors of our mission include mathematical computations, gravitational pull, thrust, and mechanics. The risks include threats to our astronauts' lives, so nosotros need to provide sufficient nutrient, air, sound communications, and a safe vessel. The deliverable will be the placement of one man on the moon and the safe render of our three astronauts. The engagement squad will include 3 astronauts, launch personnel at Kennedy Space Middle, and mission-control employees in Houston, Texas.

A sound strategy led to Neil Armstrong's celebrated walk on July 20, 1969.

Our audit strategy—in a more pedestrian pursuit—is a summary of objectives, resources, and take a chance. Information technology'southward the big picture. Our strategy leads to the successful issuance of our inspect opinion (not quite as exciting as walking on the moon, just nonetheless important).

What'southward in an Audit Strategy?

The audit strategy doesn't have to exist complicated or long, particularly for smaller entities—it can be a short memo. What are nosotros later on? A summary of risks, needed resource, and objectives.

My house uses an internally-developed strategy grade—mainly, to ensure consistency. The form contains structure, such every bit references to risk assessment piece of work and blank boxes in sure areas—such as partner directions—so it is flexible. Every bit a result, the form has structure and flexibility.

Hither are the chief areas nosotros embrace:

• Deliverables and deadlines
• A time budget
• The audit team
• Fundamental client contacts
• New accounting standards affecting the audit
• Problems encountered in the prior year
• Anticipated challenges in the current year
• Partner directions regarding fundamental risk areas
• References to work papers addressing hazard

Who Creates the Audit Strategy?

Who should create the strategy? The in-accuse can create it with the assistance of the engagement partner,  or the partner can do so.

Audit Strategy as the Fundamental Document

If you want to see 1 document that summarizes the entire audit, this is it. As you can run across, the strategy is full general in nature, but you also need a detailed plan to satisfy the demands of the strategy—this is the audit plan (ordinarily referred to as the inspect program). NASA had a mission statement for Apollo eleven, merely—I'm sure—written guidelines directed the footstep-by-step execution of the project.

Inspect Plan (or Audit Program)

At present we create the detailed planning steps—the audit program. Retrieve of the inspect program as the concluding stage of audit planning. What take nosotros done to get to this stage of the audit?

1. Performed risk assessment procedures
2. Adult our audit strategy

At present it's fourth dimension to create the inspect plan.

The inspect program is the linkage betwixt planning and further audit procedures.

What are "farther audit procedures"? They are the tactical steps to address risk including substantive procedures and test of controls. The inspect program links back to the identified risks and points frontward to the substantive procedures and test of controls. Substantive procedures include tests of details and noun analytical procedures.

Creating the Inspect Programme

How—in a applied sense—do nosotros create the inspect programs? Most auditors tailor the prior twelvemonth inspect programs. That works—as long as we revise them to address the electric current year risks. Audit programs are not—at to the lowest degree, they should not be—static documents. Withal, the electric current year audit program can be the same as last year—as long as the risks are the same.

Sufficient Inspect Steps

How do we know if we have adequate inspect program steps? Look at your risks of material misstatement (RMM)—which, hopefully, are assessed at the exclamation level (eastward.grand., completeness). An auditor assesses the risk of material misstatement considering it informs the audit plan—or the steps to be performed.Audit steps should address all high and moderate RMMs.

Integrating Risk Assessment with the Audit Program

How else can we integrate our documentation? Put the relevant assertions next to each inspect pace—this makes the connections betwixt the RMMs (at the assertion level) and the audit steps clear.

AU-C 330 says the accountant is required to apply substantive procedures to all relevant assertions related to each material grade of transactions, account residue, and disclosure. So, the audit program should reflect steps for all material areas.

Creating Efficiency in the Audit Programme

Once you complete your risk assessment piece of work, you desire to ask, "Which is the more efficient route? Testing controls or performing substantive procedures." And then go with your instincts.

More often than not, I assess command hazard at high. While nosotros can't default to a high control, we tin can—in one case the risk cess work is complete—make up one's mind to appraise command take chances at high as an efficiency measure. Why? If we assess control risk at beneath high, nosotros must test the controls equally a footing for the lower take a chance assessment. The testing of controls can—sometimes—have longer than substantive procedures.

For example, is it meliorate to examination the controls related to stock-still asset additions or is it more than efficient to vouch the invoices for significant additions? Usually, the vouching of the invoices will go you lot to your desired destination quicker than testing controls. Generally—at to the lowest degree in my opinion—this line of reasoning is less true for more complex organizations. Larger organizations procedure more transactions and tend to have ameliorate controls. So information technology can be meliorate to exam controls for larger entities.

There you lot take it—the creation of the inspect strategy and the inspect programme. Your strategy includes the risks, needed resource, and objectives. And your inspect programme contains the tactical steps to address risks. Yous are prepare to go.

I find that auditors usually empathise the higher up, only nevertheless make i of the following 3 audit planning mistakes.

Iii Mistakes in Audit Planning

Auditors make 3 common planning mistakes: (1) non tailoring audit programs and (2) allowing prior year work papers to drive the audit process, and (3) using a balance sheet inspect approach. Let's see how these happen.

1. Not Tailoring Audit Programs

Where do most audit programs come from? They are purchased from forms providers, commonly international publishing companies. These purchased programs are useful, merely they can become a crutch, leading to canned inspect approaches that are not responsive to risks.

If we use unrevised audit programs and if our audit arroyo is always the same, what good is risk assessment? Another way to say this is, If audit programs never change, why perform walkthroughs, preliminary analytics, and other run a risk cess procedures?

Canned inspect programs are one reason auditors requite lip-service to risk assessment. In the auditor's mind, he may be thinking, I already know what I'g going to exercise, and so why waste fourth dimension with chance cess? This cookie-cutter arroyo is dangerous, but quite common. And why is information technology dangerous? Because it can lead to an intentional blindness toward internal controls and significant risks. And deficiencies in hazard assessment lead to deficiencies in audit procedures. The result: cloth misstatements are non identified and an unmodified audit opinion is rendered. In other words, audit failure occurs.

Audit programs tin can be tailored: steps tin exist added, changed, or deleted. These steps can be amended based on the take a chance of material misstatement. Just some auditors don't change their audit plan.

And not tailoring audit programs tin can pb to several problems such as:

• Audit team members signing off on steps non performed
• Team members typing Non Applicable (N/A) next to several audit steps
• Auditors performing unnecessary procedures
• Auditors not performing necessary procedures

In add-on to non tailoring audit programs, some auditors hit autopilot and use their prior year work papers as their electric current year plan.

2. Prior Year Work Papers as the Audit Plan

Inspect documentation should develop sequentially:

1. Risk cess
2. Audit programs
3. Audit work papers

Merely poor auditors tend to follow the prior twelvemonth work papers and complete the audit program every bit an reconsideration. Worse notwithstanding, the take chances assessment piece of work is completed at the cease of the engagement, if at all. The tail wags the dog. This same-as-terminal-year approach leads to incongruities in risks of fabric misstatement and the procedures performed. In effect, the prior yr work papers get the current twelvemonth audit program.

Another common audit planning mistake is the employ of a balance sail inspect approach.

three. Rest Sheet Audit Approach

Many auditors use a fully substantive approach, meaning they don't test controls for effectiveness. Moreover, some auditors test balance sheet accounts and little else. Only this approach can pb to problems.

I have heard auditors say: If I inspect all of the residual sheet accounts, then the only matter that can exist incorrect is the composition of revenues and expenses. But is this truthful?

The accounting equation says:

Totals assets = Total liabilities plus Total equity

Some other way to say this is:

Total equity = Total assets minus Full liabilities

If we disregard stock purchases and sales, equity is usually the accumulation of retained earnings. And retained earnings comes from the earnings or losses on the income statement. In other words, retained earnings comes from revenues and expenses. And then the net income or loss (revenues minus expenses) has to fit into the accounting equation (equity equals assets minus liabilities).

Therefore, if we audit all assets and liability accounts, doesn't information technology brand sense that the merely matter that can be incorrect is the composition of revenues and expenses? Mathematically I see why someone might say this, but a flaw lurks in the construct.

Audit Failure Example

I once saw an audit business firm sued for several 1000000 dollars. The CPAs audited the company for several years, issuing an unqualified stance each yr, but a theft was occurring all along.

And so what were the audit business firm'southward mistakes? They relied likewise heavily upon a balance sheet inspect approach, and they did not gain an understanding of the company's key internal controls.

The auditors used substantive procedures such as:

• Testing bank reconciliations
• Sending receivable confirmations and vouching subsequent collections
• Computing annual depreciation and like-minded it to the general ledger
• Vouching additions to plant, property, and equipment
• Performing a search for unrecorded liabilities in payables
• Confirming debt

The residuum sheet accounts reconciled to the general ledger, and no problems were noted in the audit of the balance sheet accounts. But millions were missing.

Then what flaw lies in a balance sheet inspect approach? Millions can get missing while the balance canvass accounts reconcile to the general ledger. Consequently, auditing the rest canvass accounts solitary may not notice theft. Therefore, gaining an agreement of the internal controls and developing appropriate responses is critical to identifying material misstatements, peculiarly when fraud is possible.

So as we plan our substantive procedures, nosotros need to avert the flawed residue canvas approach. Yes, noun procedures for the balance sheet accounts are of import, just fraud detection procedures are necessary when control weaknesses are present. A examination of details is necessary when a meaning risk (such as a fraud risk) is present.

In Summary

Develop an audit strategy and plan one time you consummate your take a chance assessments procedures. Then link the risks of material misstatement to your further audit procedures. Doing so will assistance ensure that your audit is successful. In other words, that no material misstatements are present when you issue an unmodified opinion.

Moreover, don't brand these three inspect planning mistakes: (i) non tailoring inspect programs and (2) allowing prior yr work papers to drive the audit procedure, and (three) using a remainder sheet inspect approach.

Meet my audit serial The Why and How of Auditing to learn even more than most thefull audit procedure, including how to audit transaction cycles such as cash, receivables, payables, and debt.

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Source: https://cpahalltalk.com/audit-plan/

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