Planningand Designing an Audit
Planningand Designing an Audit
Stepsinvolved in planning and designing an effective audit includesunderstanding the entity and its surrounding, understanding ofinternal control, assess risk of material misstatement, calculateplanning materiality, response to the audit strategy, assessed riskand audit plan, test of controls, substantive procedures, completingand reporting. Basing on Oil Refinery Company, the auditor isrecommended to understand the entity and its environment in order toidentify the risks that may result in material misstatement. Theinformation an auditor includes the company, regulatory, and otherexternal factors, nature of the entity, selecting and applyingaccounting policies, the objectives, related business risk andstrategy of Oil Refinery Company. An auditor should also measure andreview the financial performance and finally analyze the internalcontrol (Pickett, 2006).
Thenext step, the auditor, should do is to understand the internalcontrol system. In this step, the auditor is able to identifypotential misstatements and the factors that could increase thethreat of material misstatement. An auditor should access the risksof material misstatement at both assertion level and financialstatement level. Misstatement could arise from fraud, error or/andnon-compliance with regulations and law. Fraud is intentional whileerror is unintentional. Oil Refinery auditor should calculateplanning materiality by applying professional judgment. The company’sauditor should develop and document an overall audit strategy, anaudit plan and respond to assessed risk. At this stage, the auditorcompiles his or her skills about the client’s business strategies,objectives and related business and audit risks.
Inthe audit plan, the auditor documents a description of the timing,nature and the procedures to be used in planning risk assessment. Theauditor should also describe the timing, nature and extent of plannedaudit procedures for each class of account balance, transactions anddisclosure. Finally, the auditor should document a description ofother audit procedures to be carried out in order to comply withauditing standards (Shim & Siegel, 2008). The results of the riskassessment procedures carried out to achieve the understanding of theentity, guides the auditor in planning an audit plan. Additionalsteps includes establishing materiality and assessing business risks,assessing the need for experts, considering illegal acts, identifyingassociated companies, conducting preliminary analytical proceduresand consideration of additional value-added services.
Analyticalprocedures consist of assessment of financial information inform ofanalyzing plausible relationships between financial and non-financialdata. Analytical procedures are appropriate in understanding thebusiness and its environment and the entity. The performance ratiosreliable on determining the analytical tests are financial statementaccounts ratio and the account and non-account data. There arevarious types of analytical procedures mostly used as substantiveprocedures (Wolnizer & Chambers, 2006). Balance sheet and incomestatement of account are examples of accounts that can be tested. Theanalytical methods appropriate for testing include trend analysis,ratio analysis and reasonableness testing. Balance sheet and incomestatement changes time to time. Oil Refinery should, therefore,specify on a balance sheet or income statement to use while preparingthe audit. Ratio analysis is comparing the relationship betweenbalance sheet and income statement and between an account andnon-financial data and account (Shim & Siegel, 2008).Reasonableness testing involves analyzing of accounts, or changes inaccounts between accounting periods where a model to form anexpectation based on non-financial data, financial data or both isdeveloped.
Thebalance sheet and income statement of Oil Refinery Company is asfollows.
Balancesheet (2014) in‘000’ US dollars
Incomestatement (2014) in‘000’ US dollars
Auditor’sexpert is an organizational or individual possessing expertise in afield other auditing or accounting. His or her work in the field isused by auditor to obtain adequate, appropriate audit evidence. Anauditor’s expert may be either an employee in Oil Refinery ornon-employee (Pickett, 2006). The experts will consider tax, finance,valuation, information technology and pension. Such experts wouldassist the auditor in valuing financial instruments, measuring fairvalues, determination of physical quantities, or interpretation ofagreement or regulations. Oil Refinery should consider it’srelation with other companies producing the similar products. The aimis to check and compare on expenses and sales output in a particularperiod. The company should also consider whether the company complieswith laws and regulations particularly whether the company is actingillegally.
Thereare seven steps involved in the audit risk model. The steps includeunderstanding of the business environment, preliminary riskassessment, developing of a three-audit plan, completing thesecondary risk assessment, execution of the internal audit program,conducting of a formal exit meeting and reporting and communicatingabout the risk (Wolnizer & Chambers, 2006). There two levels ofassessing risks of material misstatement at the financial level andassertion level. Material risks at assertion level is favorable sinceit only comprises inherent risks and control risk. Inherent riskhappens due to error or fraud of material. Control risk is a functionof usefulness of the operation and design of internal control. Theprimary responsibilities of an audit firm over unqualified auditreport are to correct the correct the errors or fraud.
Pickett,K. H. S. (2006). AuditPlanning: A Risk-Based Approach.Hoboken: John Wiley & Sons.
Shim,J. K., & Siegel, J. G. (2008). Financialmanagement.Hauppauge: Barron`s Educational Series.
Wolnizer,P. W., & Chambers, R. J. (2006). Auditingas independent authentication.Sydney: Sydney University Press.