Question

Explain the purpose and each of the key components or steps of Phase I, plan and design an audit approach. Use the subsequent material for each of these steps or components as well as any online sources that you find to help you explain the steps.

Answer 1

The purpose of audit is to provide the users of financial statements ,an opinion ,by the auditor, that the financial statements are true and fair in all material aspects and have been prepared in accordance with the applicable financial reporting framework. To carry out an audit of financial statements effectively, it is important for the auditor to plan and design the audit approach effectively.

The purpose of proper audit planning is:

a) to obtain sufficient appropriate audit evidence,

b) to keep audit costs reasonable,

c)t o avoid misunderstandings with client and maintain a good client relationship.

The key components for planning and designing an audit approach are as follows:

1) Accept the client and perform initial audit planning- To plan and design an audit, the auditor must first accept the audit engagement with the client. An investigation about the company is required to be carried out by the auditor, before accepting the engagement. The client's integrity must be considered by the auditor. The auditor must select proper staff for the engagement as per the Generally Accepted Auditing Standards.

2) Understand the client's business and industry-The auditor must be thorough with the client's business and industry, its external environment and the risks associated with each industry,the business operations and processes,the managemnt and governance of the company, its charter and bylaws,the client objectives and strategies and measurement of its performance.

3) Assess client business risk -The auditor must evaluate the client's business risk and also see to it that the Sarbanes -Oxley Act has been adhered to, that the material business risks are made known to auditors and significant deficiencies and material weaknesses in internal controls are made known to the auditors.

4) Perform preliminary analytical procedures - Here the client's ratios are compared with industry's standard ratios and also with its previous year figures to evaluate its performance with respect to the industry and previous year.

5) Set materiality and assess acceptable audit risk and inherent risk- The auditor is required to identify the material components of the audit . The auditor is also required to set a range of audit risk within which acceptable audit risk can be determined and outside which remedial action needs to be taken and he is also required to identify and mitigate inherent risk.

6) Understand internal control and assess control risk- The auditor must possess a good understanding of internal controls in the organisation and must assess control risk on a timely basis , as per the needs of the organisation.

7) Gather information to assess fraud risks- The auditor must collect sufficient appropriate audit evidence which is required to assess fraud risks and must deal with assessed risks as per the Genarally Accepted Auditing Standards.

8) Develop overall audit plan and audit program- Based on the above information, the auditor is required to develop and overall audit plan and audit program , to conduct an effective audit, and to give an independent opinion and true and fair view about the materials aspects of the organisation.