Question

Audit procedures may be classified into several categories, including:

1.    Procedures designed to obtain an understanding

2.    Tests of controls

3.    Analytical procedures

4.    Substantive testing of transactions

5.    Substantive testing of balances.

Required

(a)   Describe the relationship between the above five categories and how these need to be considered when designing audit strategies.

(b)   How would consideration of the audit risk model affect the audit strategy and therefore the extent to which these types of procedures are performed?

Answer 1

An audit strategy sets the direction, timing, and scope of an audit. The strategy is then used as a guideline when developing an audit plan. The strategy document usually includes a statement of the key decisions needed to properly plan the audit.

On the basis of the finding of the audit procedures an audit strategy which is the backbone of the audit needs to modified

The procedures mentioned above can be broadly categorised into compliance procedures and substanstive procedures.Compliance Procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect. Substantive Procedures are tests designed to obtain evidence to ensure the completeness, accuracy and validity of the data produced by the accounting system. On the basis Compliance Procedures test results the Substantive Procedures are undertaken.

Audit risk model is a tool used by auditors to understand the relationship between various risks arising from an audit engagement enabling them to manage the overall audit risk. Audit risk model suggests that overall audit risk of an engagement is the product of the following three component risks: Inherent Risk. Detection Risk and Control Risk.

If the risk level is too high, the auditor conducts additional procedures to reduce the risk to an acceptable level. When the level of control risk and inherent risk is high, the auditor can increase the sample size for audit testing, thereby reducing detection risk. Conversely, when control risk and inherent risk are considered to be low, it is safe for the auditor to reduce the sample size for auditing testing, which increases detection risk.