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Audit Strategy
There is more than one way to audit a company's financial statements. For each client, an appropriate strategy needs to be considered, which covers the scope, timing and direction of the process: brief summary of the company's activities (and any changes during the last year) what is the reporting framework (e.g. What accounting standards does the company follow, and what audit standards will be followed) understanding key dates for reporting Deciding audit approach should time be spent testing internal controls, or is a full substantive approach more effective. preliminary assessment of materiality Timing of audit work (e.g. is an interim audit necessary, what work should be done at the client's year end, which locations of the client will be visited and when etc.) Identification of higher risk areas in the financial statements.
THE AUDIT RISK MODEL AUDIT RISK = the risk of giving the wrong audit opinion = the risk of material errors in the FS, which the auditor fails to detect
Financial Statement Risk FS Risk is the risk of material errors in the Financial Statements, and comprises 2 parts: INHERENT RISK the risk of material errors in the FS due to the nature of the business and its transactions
CONTROL RISK the risk that a company's own checking procedures (internal controls) fail to prevent or detect these material errors from happening. Detection Risk - Detection Risk is the risk that the auditor's substantive tests fail to find material errors in the FS so...
AUDIT RISK = FS RISK x DETECTION RISK. = INHERENT RISK x CONTROL RISK RISK
x DETECTION
The auditors response to assessed risks (ISA 330) Once audit risks have been identified, the auditor needs to respond to these risks in an appropriate way. This will include taking steps such as: Designing tests of control and substantive tests to address the risk areas Emphasising to the audit team the need to maintain professional scepticism. Assigning more experienced staff or those with special skills or using experts. Providing more supervision. Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed.
the financial statements as a whole are consistent with the auditors knowledge of the entitys business.