Question

Assignment 2: Audit Planning and Control


It is common industry knowledge that an audit plan provides the specific guidelines auditors must follow when conducting an external audit. External public accounting firms conduct external audits to ensure outside stakeholders that the company’s financial statements are prepared in accordance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) standards.

Use the Internet to select a public company that appeals to you. Imagine that you are a senior partner in a public accounting firm hired to complete an audit for the chosen public company.

Write a four to six (4-6) page paper in which you:

1. Outline the critical steps inherent in planning an audit and designing an effective audit program. Based upon the type of company selected, provide specific details of the actions that the company should undertake during planning and designing the audit program.
2. Examine at least two (2) performance ratios that you would use in order to determine which analytical tests to perform. Identify the accounts that you would test, and select at least three (3) analytical procedures that you would use in your audit.
3. Analyze the balance sheet and income statement of the company that you have selected, and outline your method for evidence collection which should include, but not be limited to, the type of evidence to collect and the manner in which you would determine the sufficiency of the evidence.
4. Discuss the audit risk model, and ascertain which sampling or non-sampling techniques you would use in order to establish your preliminary judgment about materiality. Justify your response.
5. Assuming that the end result is an unqualified audit report, outline the primary responsibilities of the audit firm after it issues the report in question.
6. Use at least two (2) quality academic resources in this assignment.

Answer 1

1)

The plan and design for an audit of the public company as an external auditor is as under:

1.     Assembling audit team.

2.     Understanding the business of the company considering it's nature of entity, objectives and strategies of the business.

3.     Evaluation of Financial statement by scrutinizing every aspect of the business.

4.     The auditor should have a knowledge whether any internal changes have been occurred that have an effect on the company policies, procedures, operations , record keeping and reporting.

5.     The auditor must take into account the information regarding legal matters of the company.

6. Thorough checking of the records, documents of the company from which the financial statements have been prepared to ensure that financial statement has been correctly prepared.

7.     Checking the preparation of financial statement whether GAAP and IFRS has been complied with wherever it needed.

8.     Preparing summary report to the company by the external auditor at the end of the audit which includes all the finding, irregularities, non-compliance of rules and regulations etc.

2)

Ratio analysis is a good way to evaluate the financial results of your business in order to gauge its performance. Ratios allow you to compare your business against different standards using the figures on your balance sheet.

·        Current ratio - current assets divided by current liabilities. This assesses whether you have sufficient assets to cover your liabilities. A ratio of two shows you have twice as many current assets as current liabilities.

·        Quick or acid-test ratio - current assets (excluding stock) divided by current liabilities. A ratio of one shows liquidity levels are high - an indication of solid financial health.

·        Debtors' turnover - average of credit sales divided by the average level of debtors. This shows how long it takes to collect payments. A low ratio may mean payment terms need tightening up.

·        Creditors' turnover - average cost of sales divided by the average amount of credit that is taken from suppliers. This shows how long your business takes to pay suppliers. Suppliers may withdraw credit if you regularly pay late.

·        Stock turnover - average cost of sales divided by the average value of stock. This ratio indicates how long you hold stock before selling. A lower stock turnover may mean lower profits.

Analytical procedures are "evaluations of financial information through analysis of plausible relationships among both financial and non financial data," According to an American Institute of Certified Public Accountants statement on audit standards related to analytical procedures. "Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount."

In other words, analytical procedures are an important aspect of not only understanding financial data, but also of flagging and researching inconsistencies. As a result, accountants are often planning and evaluating the results of analytical procedures.

In review engagements, analytical procedures are used to help provide limited assurance that the financial statements do not require material adjustments. For example, accountants develop expected values regarding various financial ratios, based on the accountant's understanding of the company and industry trends as well as the accountant's understanding of potential areas of increased risk of misstatement.

In audit engagements, according to the American Institute of Certified Public Accountants statement AU Section 329, analytical procedures are used:

·        To assist in planning the nature, timing, and extent of other auditing procedures;

·        As a substantive test to obtain audit evidence about particular assertions related to account balances or classes of transactions; and

·        As an overall review of the financial information in the final review stage of the audit.

In other words, analytical procedures are used throughout the audit engagement – in audit planning, execution, and review. As a result of their importance, developing and documenting analytical procedures can consume a lot of time.

4)

Part III

Statistical Sampling

(i) Random selection of the sample items. And

(ii) The use of probability theory to evaluate sample result, including measurement of sampling risk.

This method is more scientific as it involves use of laws of probability.

This method has reasonably wide application where a population consists of a large number of similar items.

Non Statistical sampling

(i) A sampling approach that does not have characteristics of random selection and use of probability theory is considered as non statistical sampling.

(ii) In this method the sample size and its composition are determined on the basis of personal experience and knowledge of the auditor.

(iii) This method because of its simplicity in operation was in common application for many years.

5)

If that the end result is an unqualified audit report, the auditor's primary responsibility is to issue the audit report to the shareholders describing that financial statement are free from material misstatement and shareholders can make financial decision upon the basis of the report.