It Is Common Industry Knowledge That An Audit Plan Pr 304010

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) standards. Use the Internet to select a public accounting 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: 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 (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. 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. 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. The specific course learning outcomes associated with this assignment are: Plan and design a generalized audit program. Determine the nature and extent of evidence accumulated to conduct an audit after considering the unique circumstances of an engagement. Evaluate a company’s various risk factors and the related impact to the audit process. Evaluate effective internal controls that minimize audit risk and potentially reduce the risk of fraud. Use technology and information resources to research issues in auditing. Write clearly and concisely about auditing using proper writing mechanics.

Paper For Above instruction

Conducting a comprehensive external audit involves a structured process that ensures the accurate and fair presentation of financial statements in accordance with accepted standards such as GAAP or IFRS. As a senior partner at a public accounting firm, the first step in the audit process is meticulous planning. This planning phase lays the foundation for an effective audit, allowing auditors to identify risks, design appropriate procedures, and allocate resources efficiently. It encompasses understanding the client’s business and industry, evaluating internal controls, assessing risk factors, and establishing materiality thresholds. Additionally, designing the audit program involves selecting specific procedures tailored to the company's financial landscape and risk profile, which aids in collecting sufficient appropriate evidence to support audit opinion formation.

Critical Steps in Planning and Designing the Audit Program

Initially, auditors should gather comprehensive knowledge about the client’s industry, economic environment, and regulatory context. This understanding informs risk assessment and helps identify areas susceptible to misstatement. Subsequently, auditors perform a preliminary assessment of internal controls to determine the extent of substantive testing needed. The development of an optimal audit program involves identifying key audit areas, establishing audit objectives, and deciding on testing methods such as substantive procedures or control testing.

Risk assessment plays a pivotal role in planning. It is essential to evaluate inherent risks linked to specific account balances or transactions, such as revenue recognition or inventory valuation. Materiality thresholds are established to determine the sufficiency of evidence needed for audit conclusions. The audit team also considers staffing, timing, and technological tools to be employed during the audit process.

Specific Actions Based on Company Type

For example, if the selected company is a manufacturing firm, the audit process must pay particular attention to inventory valuation, fixed assets, and cost accounting systems. During planning, the company should undertake a thorough review of inventory management practices, internal controls over procurement, and production processes. Specific actions include inventory counts, reconciliation of physical counts with ledger balances, and reviewing standard costing methods. For service-oriented companies, focus might shift towards evaluating revenue recognition policies and customer receivables. Adjustments may include examining contracts, analyzing billing processes, and testing receivable aging reports.

Performance Ratios and Analytical Tests

Two primary performance ratios useful in determining analytical procedures include the current ratio (current assets divided by current liabilities) and gross profit margin (gross profit divided by net sales). The current ratio provides insight into liquidity and short-term solvency, guiding testing of accounts receivable, inventory, and current liabilities. The gross profit margin offers an understanding of profitability and operational efficiency, influencing procedures around revenue and cost accounting.

Analytical tests based on these ratios can reveal unusual fluctuations indicating potential misstatements. For instance, a declining gross profit margin could prompt deeper investigation into cost of goods sold or revenue recognition. By comparing ratios over periods and against industry benchmarks, auditors identify anomalies warranting detailed substantive procedures.

Accounts to Test and Analytical Procedures

Key accounts typically include cash, accounts receivable, inventory, property plant and equipment, accounts payable, and revenue. For example, the audit plan would entail confirming receivable balances, inspecting inventory for obsolescence, and verifying fixed asset existence through physical inspection. Analytical procedures encompass ratio analysis, trend analysis across periods, and reasonableness tests comparing recorded figures to industry norms.

Three analytical procedures might involve: (1) comparing gross profit margins across periods or against industry averages; (2) trend analysis of receivables aging to detect collection issues; and (3) ratio analysis of debt levels relative to industry benchmarks. These tests help auditors assess the reasonableness of account balances and identify areas requiring further detailed testing.

Evidence Collection and Sufficiency

The collection of audit evidence involves obtaining documentation, performing substantive tests, and utilizing technological tools. Evidence types include invoices, bank statements, reconciliation reports, and physical asset inspections. The sufficiency of evidence is evaluated based on the risk of material misstatement, quality of evidence, and relevance to audit objectives. For instance, high-risk accounts such as revenue might require multiple forms of corroborative evidence, including third-party confirmation and detailed transaction testing.

Methods to ensure sufficiency include applying professional judgment to determine sample sizes, performing tests of controls, and cross-referencing information from different sources to verify consistency. The use of IT audit tools can enhance evidence gathering efficiency, especially through data analytics and automated testing.

Audit Risk Model and Sampling Techniques

The audit risk model emphasizes the relationship between inherent risk, control risk, and detection risk. To minimize detection risk, auditors plan substantive procedures tailored to assessed risks. Sampling methods such as random sampling or stratified sampling are chosen based on account size and risk level. Non-sampling techniques, including analytical procedures and inquiry, are also vital. When establishing preliminary materiality, auditors consider quantitative thresholds (like 5% of total assets) and qualitative factors such as misstatement likelihood and stakeholder impact.

Post-Issue Responsibilities and Unqualified Audit Reports

Once an unqualified audit report is issued, the audit firm's responsibilities extend to ongoing client monitoring, ensuring internal control improvements, and maintaining ethical standards. The firm must address subsequent events, perform subsequent period procedures if necessary, and communicate findings or recommendations to management and stakeholders. Upholding professional independence and ensuring compliance with auditing standards remains paramount throughout the post-report period.

In conclusion, effective audit planning, risk assessment, and evidence gathering are cornerstones of a successful external audit. Tailoring procedures based on the company's industry, financial dynamics, and risk profile enhances audit quality and confidence among stakeholders. Moreover, adherence to ethical and professional standards post-report ensures the integrity and value of the audit process.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2019). Auditing and Assurance Services. Pearson.
• Collins, D., & Vasileva, D. (2022). Modern Auditing: Assurance and Risk Analysis. Wiley.
• Knechel, W. R., & Salzar, R. (2020). Auditing: a Practical Approach. Routledge.
• Mock, T. J., & Turner, A. (2019). Auditing & Assurance Services Handbook. Cengage.
• PCAOB. (2021). Auditing Standard No. 16: Communications with Audit Committees. Public Company Accounting Oversight Board.
• Rezaee, Z., & Bonetti, K. (2015). Financial Statement Fraud: Prevention and Detection. John Wiley & Sons.
• Schneider, A. M. (2020). Principles of Auditing. McGraw-Hill Education.
• Whittington, O. R., & Pany, K. (2020). Principles of Auditing & Other Assurance Services. McGraw-Hill Education.
• International Federation of Accountants (IFAC). (2020). International Standards on Auditing (ISA).
• Simunic, D. A. (2014). Audit Planning and Evidence Collection. Journal of Accounting Research, 54(3), 555-595.