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
Use the Internet to select a public accounting 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:
- 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.
- 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.
- 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.
- 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.
- 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.
AUDITING PLANNING AND CONTROLS 2
- Use at least two (4) quality academic resources in this assignment. Note: Wikipedia and other
Websites do not qualify as academic resources.
Auditing Planning and Controls
Auditing Planning and Controls
AUDITING PLANNING AND CONTROLS 3
Auditing can be viewed in a myriad of dimensions, the key determinant being the
context and environment in which it is carried out. The widely accepted description defines
auditing as the examination and analysis of source documents, books of original entry, books
of accounts, financial statements, and other relevant accounting documents to ascertain
whether they present a fair and true view of the financial performance of an organization
(Robertson, 2010). Auditing is quite independent from accounting, with the aim of the latter
being collecting, recording, summarizing, analyzing, classifying and interpreting financial
accounting information for financial decision making by the users of accounting information
Auditing largely borrows from the International Accounting Standards (IAS),
International Financial Reporting Standards (IFRS), Generally Accepted Accounting
Principles and Standards (GAAPs), and the laws of the particular country to affirm whether
the books of accounts have been maintained properly (Robertson, 2010). Owing to this,
auditing is a legal requirement and it is hence mandatory for books of accounts to be audited
either at the lapse of a financial year or on a systematic basis after a certain period. Auditing
is meant to safeguard the interests of stakeholders and ensure that there is maximization of
their value (Robertson, 2010). Auditing also helps in the minimization of the agency problem,
which arises when managers work to satisfy their own interests rather than the maximization
of shareholder value. Auditing also ensures tax compliance. Either the managers of a firm
who are the stewards can carry out auditing internally, or an independent auditor can do it
externally (Robertson, 2010).
Auditing, like many other processes, occurs in stages. The preliminary stage is the
initiation of the audit, followed by the initial preparation of the audit prior to the audit being
conducted. After the audit is conducted, audit reports are prepared and the audit is concluded
(Pickett, 2006). In these stages, there are a number of tools used to abet the audit work. These
AUDITING PLANNING AND CONTROLS 4
include working papers, the permanent file, the current file, and most imperative, the audit
plan (Pickett, 2006). Audit planning takes place at the commencement of the audit work, and
it entails formulating a framework of how the entire work will be conducted with major focus
placed on areas that are potentially significant. It encompasses the nature, scope, and duration
of the audit to ensure it is performed effectively, efficiently with consideration to timeliness
External public accounting firms conduct external audits to assure outside
stakeholders that the financial statements of the company are harmonized with the
International Financial Reporting Standards (IFRS), International Standards on Audit (ISA),
and Generally Accepted Accounting Principles and Standards (GAAPs). Deloitte & Touche
is among several public accounting companies and one of the big four, with the other three
being Ernst & Young, PricewaterhouseCoopers and KPMG (Kettle & Cooper, 2002). The
company spans over one hundred countries from various continents (Kettle & Cooper, 2002).
For companies such as Deloitte & Touche to conduct effective auditing of their
clients, audit planning needs to be effected. The planning of the audit will involve several
steps, the first being understanding of the business a client is involved in and analyzing the
entire industry (Pickett, 2006). This is followed by the assessment of the client’s business
risk. Preliminary analytical procedures are then performed, and an assessment is done to
determine the inherent risks and audit risks that are acceptable (Pickett, 2006). Planning
further calls for the clear understanding of the internal control system, and the control risk
that may be posed. The development of the audit plan and program is thereafter preceded by
the gathering of information vital in the assessment of fraud risks (Pickett, 2006).
There exist performance ratios that are utilized so as to determine which analytical
tests to perform. These consist of the liquidity ratios and the profitability ratios (Pickett,
AUDITING PLANNING AND CONTROLS 5
2006). Liquidity ratios are concerned with how a firm is capable of meeting its short-term
obligations and some of the ratios include the quick and current ratio, and the cash ratio. The
accounts majorly involved are current assets and current liabilities (Pickett, 2006).
Profitability ratios are concerned with the effectiveness of a firm in the generation of revenue.
Some of the ratios under this category are the earnings per share (EPS) and the profit margin.
These ratios deal with sales, incomes, and the share structure of a company (Pickett, 2006).
The ratios aforementioned are critical in determining the analytical measures auditors should
enforce while auditing a business concern.
Analytical procedures involve the analysis of relationships that exist amongst
financial accounting data to identify whether they depict a significant relationship and to
identify consistency (Pickett, 2006). The analytical procedures utilize relationships and
comparisons to determine whether the accounting information and account balances are
reasonable. One analytical procedure is comparison between client data and that of the
industry, as in regards to inventory turnover (Pickett, 2006). Another analytical procedure is
comparing client data and previous data of a similar period. An example is comparing the net
income of the period with that of the previous period. The third analytical procedure is the
comparison of client data with auditor-determined expected results (Pickett, 2006).
Audit evidence can be obtained by means of substantive testing which allows the
auditor to form an opinion. Methods that can be utilized to collect audit evidence entail
observation, inspection, computation, sampling, analytical procedures, inquiry and
confirmation, and representations by management (Kelting, 2011). From the analysis of the
financials of Deloitte & Touche, analytical procedures are preferred for collecting evidence.
As previously mentioned, analytical procedures necessitate the analysis of financial
data to identify consistencies and anticipated patterns. In this perspective, financial data will
AUDITING PLANNING AND CONTROLS 6
be the income statement and the balance sheet of the company. This method is bound to lead
to evidence that is sufficient since, being generated internally from financial statements, it
relates directly to the accounting internal control system that is usually effective. In addition,
evidence that has been obtained in the form of documents and written representations are
deemed more reliable compared to oral representations (Kelting, 2011).
Audit risk is the risk posed to an auditor by financial statements that are materially
misstated, hence resulting to the auditor giving an inappropriate audit opinion (Kelting,
2011). The audit risk model consists of the inherent risk, the control risk and the detection
risk (Kelting, 2011). Inherent risk is a result of lack of effective internal controls, leading to
accounts and transactions susceptible to misstatements. The control risk arises in the
existence of an effective accounting internal control system. It is where a material
misstatement in an account or a transaction cannot be detected or prevented by the accounting
internal control system. The detection risk arises when substantive procedures executed by
the auditor will not be capable of detecting material misstatements in accounts or transactions
Audit sampling entails the application of substantive tests or compliance procedures
to accounts and transactions that are less than a hundred percent of the entire items involved
(Kelting, 2011). This facilitates an auditor to come up with a conclusion concerning the entire
accounts and class of transactions. Audit sampling can take two approaches; judgemental or
non-statistical sampling and statistical sampling (Kelting, 2011). Judgemental sampling
engages the use of the auditor’s knowledge and experience pertaining the client’s business to
decide on the sample to be used without necessarily involving any statistical or mathematical
tools (Kelting, 2011).
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Statistical sampling on the contrary involves the use of probability theory in the
establishment of the sampling size by the application of various statistical and mathematical
models. The statistical sampling is the best technique in this milieu, since it is scientific and
the auditor is capable of justifying selected samples. This technique is also vital in the
elimination of personal bias by the auditor since the end sample selected is unbiased. The
method further results to uniformity amongst various auditors, making comparisons between
results possible (Kelting, 2011).
AUDITING PLANNING AND CONTROLS 8
Kelting, W. R. (2011). Audit Planning: An empirical investigation into the timing of principal
substantive tests. Arbor, Mich: University Microfilms.
Kettle, R., & Cooper, E. (2002). Deloitte & Touche. New York, NY: Vault Inc.
Pickett, K. H. S. (2006). Audit Planning: A risk-based approach. Hoboken, N.J: Wiley.
Robertson, J. C. (2010). Auditing. Homewood, IL: BPI/Irwin.