- 15 Marks
Question
The overseas technical partners of Orlando Professional Services came for a review of operations and system of internal control of the firm. A number of audit engagement files regarding financial statements on which the firm had expressed audit opinion were selected for review. It was believed that the strategic review would be necessary to determine the appropriate audit approach for a detailed audit plan in the firm to bring efficiency and enhance good client service delivery. The review exercise also covered:
i. The firm’s basis of risk assessment on audit and assurance engagements;
ii. Determination of staff recruitment, training, reward, and evaluation;
iii. Previous audit opinions on financial statements and progress on ongoing jobs;
iv. System of archival and retrieval of documents;
v. Major risks and other factors such as industry issues;
vi. Procedures for engaging and monitoring experts both internal and external; and
vii. Reports from regulators.
The team interviewed partners, staff, and directors of major clients of the firm. It was believed that the outcome of the review exercise would help to reposition the firm and upscale strategies to get a fair share of the market in the upcoming mandatory rotation of auditors.
At the end of the exercise, it was reported that the audit strategy of the firm was not robust enough, too generic, and lacked focus to meet the firm’s need in the next decade. The team recommended that proactive steps should be taken to evolve a good strategy that would stand the test of time in the light of the increasing competition in the audit and assurance marketplace.
As a staff of the firm, you have been selected as a member of the committee to develop the new audit strategies for submission in the next two weeks for the consideration and approval of the executive council of Orlando Professional Services.
Required:
a. Outline the approaches to the main audit strategies your firm is expected to adopt.
(9 Marks)
b. Explain the factors that will be considered in the selection of audit strategies.
(4 Marks)
c. Explain the difference between Audit Strategy and Audit Plan.
(2 Marks)
Total: 15 Marks
Answer
a. The main audit strategies are as follows:
- Statement of Financial Position Approach:
This audit approach concentrates on the figures in the statement of financial position using substantive testing. It is based on the argument that if the opening and closing statements are accurate, the profit or loss for the year must also be stated accurately. - Substantive Testing Approach:
This approach focuses on applying substantive tests to a large number of transactions and account balances recorded in the client’s accounting system. It is appropriate where systems and controls are weak or not operating effectively. - Systems-Based Approach:
This approach emphasizes testing controls within the client’s system rather than focusing solely on the figures in the financial statements. It is supported by some degree of substantive testing and analytical procedures. - Risk-Based and Business Risk Approach:
This method involves assessing the likelihood of material misstatements in each area of the audit. High-risk areas are audited more extensively, using substantive tests and other procedures, while low-risk areas receive less attention.
b. The selection of the audit strategy will depend on several factors, including:
- Size of the Client’s Business:
Large businesses often suit a business risk approach, while a statement of financial position approach may be best for small companies. - Control Environment and Procedures:
A systems-based approach is suitable if the client has a strong control environment and internal control system. - Preferred Audit Techniques:
Larger audit firms may prefer a business risk approach due to their resources and client portfolios. - Nature of the Client’s Business:
The nature and sector of the client’s operations influence the audit strategy; for example, a systems-based approach may be suitable for clients in the e-commerce sector.
c. Explanation of the Difference between Audit Strategy and Audit Plan:
- Audit Strategy:
Sets the overall scope, timing, and direction of the audit, guiding the development of the audit plan. - Audit Plan:
Provides detailed instructions on the nature, timing, and extent of audit procedures. It is more specific and adjusts throughout the audit as needed.
- Topic: Audit Planning and Strategy
- Series: NOV 2023
- Uploader: Dotse