Question

Poroman Audit Firm was planning the audit for its existing client, Clay & Delta Corporation. The audit partner was trying to determine the best audit strategy to use. Clay & Delta Corporation is a small retailing company that does not have any warehousing facilities as all stock is kept on the premises. Being small, they only have a small team of staff, which makes the separation of duties principle difficult to achieve. The preliminary tests of controls found that the internal control procedures are well designed, but not always observed due to the small amount of staff. Previous experience with this client also showed that controls were not always observed. Despite this, Poroman has never discovered a material misstatement in the accounts.

Required: Determine what audit strategy should be used and justify your answer.

Answer 1

Audit strategy generally defines the best possible approach to be utilized, assets management and assignment, timing of the audit and review, and the way how the audit commitment is overseen.

For instance, the auditor will utilize risk based review approach or top-down approach  to deal with direct audit assignment.

Another example, auditor simply draw in with the new audit customers and they chose not to depend on the internal control financial statements by choosing not to test of control. They simply go to a substantive test. This is the manner by which the audit strategy implies.

Types of Audit strategy or approaches:-

1.Substantive procedure approach:-

This methodology is commonly utilized where the financial reporting framework or interior controls over financial reporting are not dependable.

Auditors won't play out their testing on the company's interior control on financial detailing. They will bounce to the substantive testing by concentrating on the huge or material exchanges. This methodology is likewise called a vouching approach which implies auditors select the huge and important measures of transactions and afterward check whether the exchanges chose have enough and reliable supporting reports.

2.Balance Sheet Approach:-

The idea of a balance sheet audit approach is that examiners accept that once the account balance in a balance sheet effectively records, at that point the accounting transactions in the income statement will likewise be accurately recorded.

This methodology, the auditor will center their testing high value balance sheet things where the transactions in the income statement will be less spotlight on. Auditors surveyed that if the items or accounting balance in the statement of financial position is correct, the exchange in the income statements is unlikely materially misstated.

Presence, Valuation, Right, and Obligation are the main financial assertion in balance sheet items.

3. System based approach:-

The system-based approach is quite different from the substantive based approach. In the substantive based approach, the auditor does not trust on the client’s internal control over financial reporting so they don’t test. They go for vouching for all material transactions in the financial statements.

In any case, in the system based audit approach, auditors initially comprehend that there is a solid internal control system being utilized dependent on their comprehension from the entity’s management team.

However, before depending on the framework or internal control, auditors should understand out a full comprehension of the customer's internal control over financial reporting.

When they performed out a comprehension of internal control, auditors will at that point need to perform testing and approving those internal controls. This is to guarantee that they are sufficiently able to deliver the right financial reporting.

4.Risk-based Audit Approach::-

Risk-based on the audit approach is likely the one that you heard the most and furthermore the most utilization of the approach.The principle idea of risks based methodology is: reduce audit risk, do less works, and meet the objective. That is the reason this methodology is significantly used by auditors.

Risks based approach essentially performs by understanding the customer's business, surroundings, and internal control. Auditors will at that point need to survey the potential risk regions and material misstatement that could possibly happen to the financial statements.

In the given case study, risk based audit approach should be followed, Firstly, it is to be noticed that the internal controls are strong but there are few areas where the internal controls are required to be improved and therefore auditors will then need to assess the possible risks areas and material misstatement that could possibly happen to the financial statements. If the approach is followed properly then the auditor will clearly find out the material mistatement in the financial statements in the red zone areas where there is lack of management decision making.