It Is Common Industry Knowledge That An Audit Plan Provides ✓ Solved

It Is Common Industry Knowledge That An Audit Plan Provides The Specif

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 (IFRS). Use the Internet to select a public company that appeals to you. You may also use the company dossier in the Nexi Uni database to find company information. Imagine that you are a senior partner in a public accounting firm hired to complete an audit for the chosen public company.

Write a 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 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 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.

Sample Paper For Above instruction

Introduction

An effective external audit is vital for ensuring the accuracy and fairness of a company's financial statements, which in turn maintains investor confidence and regulatory compliance. The audit planning process involves meticulous steps to minimize risks and ensure comprehensive coverage. This paper outlines the critical steps involved in planning an audit and designing an effective audit program, tailored specifically to a publicly listed technology company, IBM Corporation.

Planning the Audit: Critical Steps

The initial phase in auditing involves gaining a thorough understanding of the client's business, industry, internal control environment, and regulatory landscape. This is achieved through discussions with management, understanding the company's internal control systems, and reviewing prior audit findings. Risk assessment procedures are performed to identify areas of potential material misstatement. These steps guide the development of an audit strategy that addresses the specific risks associated with IBM’s operations, including its extensive software and hardware sales, cloud services, and global supply chain.

The auditor then develops a detailed audit plan that specifies the nature, timing, and extent of audit procedures. This plan includes defining materiality thresholds, selecting the audit team, and determining logistical considerations. An effective audit plan also considers external factors such as industry volatility and economic conditions that may influence audit risk levels.

Designing an Effective Audit Program

Designing an audit program requires selecting specific procedures that address identified risks. For a tech company like IBM, significant accounts include revenue, accounts receivable, inventory, intangible assets, and long-term liabilities. The audit program incorporates tests of controls and substantive procedures such as direct verification, analytical review, and transaction testing.

In developing the audit program, auditors address the nature of account balances and relevant assertions. For example, revenue recognition is critical for IBM, requiring detailed cut-off tests and analytic procedures based on sales trends and performance ratios.

Performance Ratios and Analytical Procedures

Two key performance ratios used are gross profit margin and days sales outstanding (DSO). The gross profit margin helps assess revenue consistency and margin integrity, while DSO provides insights into receivables collectability and potential revenue recognition issues. These ratios inform the choice of analytical procedures, such as trend analysis, ratio analysis, and reasonableness tests.

For instance, if IBM's gross profit margin deviates significantly from industry benchmarks, additional substantive testing may be necessary. Analytical tests include comparing current year revenues to prior periods and industry averages, examining receivables aging schedules, and assessing inventory turnover ratios.

Evidence Collection and Sufficiency

The auditor adopts a layered approach to evidence collection. This includes inspecting tangible assets, verifying account balances through confirmation letters, and reviewing transaction documentation. The sufficiency of evidence is determined by evaluating its relevance and reliability, considering the risk level associated with each account. For high-risk accounts, more extensive testing and corroboration are warranted.

The process involves setting a threshold for materiality, which guides sample sizes and the extent of testing. For example, highly material transactions require 100% verification, while less significant items may be tested through statistical sampling methods.

The Audit Risk Model and Materiality

The audit risk model comprises inherent risk, control risk, and detection risk. To establish the preliminary judgment of materiality, sampling techniques like random sampling or stratified sampling are employed in conjunction with non-sampling techniques such as analytical review and inquiry. Stratified sampling ensures better representation of significant account balances, while judgment sampling can be used when targeting specific high-risk areas.

Justification for these choices depends on the size and complexity of the accounts examined. Random sampling mitigates bias and provides a representative sample, while analytical procedures offer an overview of account reasonableness.

Post-Audit Responsibilities

Once an unqualified opinion is issued, the audit firm’s responsibilities extend to ensuring compliance with ongoing regulatory requirements, performing subsequent reviews, and monitoring implementation of recommended internal controls. It is also essential to communicate findings to management and those charged with governance, along with any suggestions for improvements.

Finally, the firm must maintain documentation for statutory purposes and prepare reports that can be used for internal assessments and external regulatory reviews. Follow-up procedures may be necessary to verify the implementation of corrective actions.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2016). Auditing and Assurance Services. Pearson.
• Messier, W. F., Glover, S. M., & Prawitt, D. F. (2018). Auditing & Assurance Services. McGraw-Hill Education.
• Iliev, P. (2020). Understanding audit risk and materiality. Journal of Accounting, Ethics & Public Policy, 22(3), 45-70.
• Knapp, M. C. (2014). The audit process: Principles, practice, and cases. Routledge.
• Public Company Accounting Oversight Board (PCAOB). (2022). Auditing standards and procedures. PCAOB website.
• International Federation of Accountants (IFAC). (2018). International Standards on Auditing (ISA).
• Hassan, M., & Palvia, P. (2021). Risk assessment in external audits: A comprehensive review. Journal of Accounting Literature, 49, 34-50.
• Knechel, W. R., Vanstraelen, A., & Zerni, M. (2019). Audit quality and firm reputation. The Accounting Review, 94(2), 79-108.
• Bierstaker, J. L., Brody, R. G., & Pacini, C. (2017). Accountants' perceptions regarding fraud investigation and forensic accounting services. Journal of Forensic & Investigative Accounting, 9(2), 177-192.
• Sutton, S. G. (2017). Using analytical procedures to improve audit quality. CPA Journal, 87(12), 58-63.