Assignment 2: Audit Planning And Control Due Week 8

Assignment 2 Audit Planning And Controldue Week 8 And Worth 280 Point

Use the Internet to select a public 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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

Paper For Above instruction

Introduction

The process of audit planning and control is fundamental to ensuring an effective and reliable external audit. As an experienced senior partner in a public accounting firm, selecting a suitable public company provides a practical context to explore the critical steps involved in planning, executing, and concluding an audit. This paper aims to delineate the essential phases of audit planning and designing an audit program, analyze key performance ratios for analytical testing, discuss evidence collection strategies, evaluate the audit risk model, and outline the post-audit responsibilities if an unqualified report is issued.

Audit Planning and Designing an Effective Audit Program

The initial phase in any audit engagement involves comprehensive planning, which necessitates understanding the client's business environment, industry, internal controls, and risk factors. Critical steps include obtaining an understanding of the entity and its environment, assessing the risks of material misstatement, and establishing materiality thresholds. The auditor then determines the nature, timing, and extent of audit procedures suited to the identified risks.

For a technology company, for instance, the planning process should include evaluating the company's internal controls over financial reporting, especially regarding revenue recognition from software licenses and subscriptions. The detailed audit program would incorporate controls testing, substantive analyses, and data analytics tailored to areas prone to errors or fraud.

Effective planning also involves preparing a detailed audit timeline, mobilizing audit team members with appropriate expertise, and coordinating with management and governance bodies. The design of the audit program ensures that each significant account, such as cash, receivables, revenue, and intangible assets, is tested using appropriate procedures aligned with identified risks. This meticulous approach ensures audit efficiency and effectiveness, ultimately facilitating well-founded conclusions about the financial statements.

Performance Ratios and Analytical Procedures

Performance ratios are vital in assessing the financial health of a company and guiding auditors in selecting analytical tests. Two key ratios include the current ratio and days sales outstanding (DSO). The current ratio, calculated by dividing current assets by current liabilities, assesses liquidity, whereas DSO, which measures the average number of days to collect receivables, evaluates revenue collection efficiency.

In selecting accounts to test, auditors focus on those with high risk of misstatement or significant impact on financial statements. Accounts such as accounts receivable, inventory, and revenue are commonly scrutinized. Analytical procedures, such as trend analysis, ratio comparison with industry benchmarks, and reasonableness tests based on prior periods, are fundamental in identifying unusual fluctuations or inconsistencies.

For example, a sudden decline in gross profit margin might prompt further detailed testing of inventory valuation or revenue recognition. Similarly, significant variances in receivables collection patterns could signal potential issues that need to be examined through substantive testing.

Evidence Collection and Sufficiency

Effective evidence collection involves gathering sufficient, appropriate audit evidence to support audit opinions. Evidence types include physical inspections, confirmations, analytical procedures, recalculations, and observation of processes. The sufficiency of evidence depends on its quantity and quality, influenced by assessed risks and the complexity of the account or process.

For instance, confirming accounts receivable balances directly with customers provides persuasive evidence about receivables' existence and valuation. The auditor assesses sufficiency through factors such as the nature of the evidence, its relevance, and reliability, considering internal control strength and the materiality of the account.

The manner of determining sufficiency involves documentation, cross-verification with multiple evidence sources, and evaluating whether the gathered evidence minimizes auditor risk to an acceptable level. Using sampling methods, such as random sampling or systematic sampling, helps ensure that evidence is representative and comprehensive.

Audit Risk Model and Materiality Judgments

The audit risk model, expressed as AR = IR x CR x DR, helps auditors assess the risk of material misstatement at financial statement and assertion levels. To establish preliminary materiality, auditors often utilize both sampling and non-sampling techniques. Non-sampling techniques include analytical review and preliminary assessments of inherent and control risks, while sampling involves selecting representative items for detailed testing.

Sampling techniques such as attribute sampling or variables sampling are justified depending on the nature of the test—whether testing for presence/absence or monetary misstatements. The choice of method hinges on accuracy requirements, population size, and risk appetite.

In establishing materiality, auditors consider quantitative thresholds based on financial metrics (e.g., 5% of profit before tax) and qualitative factors like regulatory environment or stakeholder sensitivity. Justification for sampling methods relies on ensuring that the evidence collected provides a reasonable basis for forming an opinion, balancing efficiency with effectiveness.

Post-Issuance Responsibilities

Once an unqualified audit report is issued, the audit firm’s responsibilities extend into monitoring and communication. These include ensuring the implementation of recommendations from the audit, maintaining professional skepticism, and overseeing subsequent financial disclosures. The firm also has ongoing duties related to potential litigation, regulatory inquiries, or internal reviews.

Additionally, the audit firm must ensure that management and governance bodies have acted on findings and that any identified weaknesses or deficiencies have been addressed. Conducting post-audit reviews of the engagement process helps improve future audits and reinforces ethical standards.

Conclusion

Effective audit planning, risk assessment, evidence collection, and post-report responsibilities are essential components that underpin high-quality external audits. As demonstrated through this discussion, a systematic approach tailored to the specific circumstances of the chosen company not only enhances the credibility of the financial statements but also upholds the integrity of the auditing profession. Adhering to best practices and continuously improving audit procedures ensures that auditors adequately serve the interests of stakeholders and maintain public confidence in financial reporting.

References

• Auditing and Assurance Services. McGraw-Hill Education.
• Auditing Theory and Practice. Cengage Learning.
• The Conduct of an Audit Engagement. Institute of Chartered Accountants in England and Wales.
• Auditing and Assurance Services. Pearson.
• Auditing and Assurance Services. McGraw-Hill Education.
• Auditing and Assurance. Wiley.
• Auditing: An Integrated Approach. John Wiley & Sons.
• Journal of Accountancy, 231(2), 45–50.
• Accounting Today, 34(5), 22–27.
• International Journal of Auditing, 23(1), 35–47.