It Is Common Industry Knowledge That An Audit Plan Pr 632289

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 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

Auditing plays a crucial role in maintaining transparency, accountability, and confidence in financial reporting. The audit process is a systematic approach that ensures the accuracy and reliability of a company's financial statements. Developing an effective audit plan and program is fundamental to this process. In this paper, I will outline the critical steps involved in planning an audit, tailor these steps based on a selected public company, analyze key performance ratios for analytical testing, identify key accounts, detail methods for evidence collection, discuss audit risk and sampling techniques, and conclude with post-audit responsibilities of the audit firm.

Critical Steps in Planning an Audit and Designing an Effective Audit Program

The planning phase of an audit is foundational to its success. It involves understanding the client's business environment, assessing risks, setting materiality thresholds, and designing audit procedures tailored to the company's specific circumstances. Initial activities include gaining an understanding of the client's internal controls, evaluating industry and economic factors, and defining the scope and timing of the audit. Designing an effective audit program entails identifying the relevant accounts and assertions, determining the nature, timing, and extent of audit procedures, and setting clear objectives to obtain sufficient appropriate evidence.

Key steps include risk assessment procedures, developing an audit strategy, and preparing a detailed audit plan. The risk assessment involves understanding inherent risks, control risks, and detection risks associated with the company's operations. Based on this assessment, auditors develop tailored procedures that focus on areas with higher risks, ensuring efficiency and effectiveness in the audit process.

Company-specific Actions During Planning and Audit Program Design

Suppose I select Apple Inc. as my public company. Apple operates in the technology sector, which involves unique risks like rapid product obsolescence, complex supply chain logistics, and intellectual property vulnerabilities. During the planning phase, Apple should prepare detailed documentation of its internal controls related to revenue recognition, inventory management, and R&D capitalization. The company should also review prior audit findings and adjust internal procedures accordingly.

In designing the audit program, specific actions include detailed substantive testing of revenue transactions, verification of inventory existence and valuation, and examination of R&D expenses for proper capitalization. The company should implement controls such as segregation of duties in sales processing and periodic inventory counts. These measures will facilitate auditors' testing of financial assertions and support the overall audit strategy.

Performance Ratios and Analytical Tests

Two performance ratios critical in planning analytical tests include the gross profit margin and receivables turnover ratio. The gross profit margin indicates the efficiency of production and sales, helping auditors assess revenue and cost of goods sold accuracy. The receivables turnover ratio evaluates the effectiveness of the company's credit and collection policies. A decline or abnormal fluctuation in these ratios signals the need for detailed testing of related accounts.

Based on these ratios, auditors decide whether to perform analytical procedures such as trend analysis, ratio analysis, or reasonableness tests. For instance, a significant change in the receivables turnover ratio warrants detailed testing of accounts receivable balances and collection policies.

Accounts Tested and Analytical Procedures

The primary accounts for testing in Apple's case include accounts receivable, inventory, intangible assets, and revenue. These accounts are vital due to their materiality and susceptibility to error or fraud. Corresponding analytical procedures involve comparing current year balances against prior periods, industry averages, and expected ratios, along with investigating significant deviations.

Three analytical procedures I would employ are: conducting ratio analysis over multiple periods, performing reasonableness tests on revenue, and trend analysis on inventory levels. These procedures enable auditors to identify inconsistencies and areas requiring deeper substantive testing, thus enhancing audit quality and efficiency.

Evidence Collection and Sufficiency

Evidence collection involves examining supporting documentation such as invoices, shipping documents, and internal control records. Physical observation of inventory counts, confirmations from third parties for receivables, and testing of control procedures are essential evidence sources.

Determining sufficiency involves evaluating the quantity and quality of evidence obtained, considering the risk of material misstatement. High-risk areas necessitate more extensive testing and corroboration. Using audit techniques like sampling—either statistical or non-statistical—helps ensure that evidence collected is representative and reliable.

Audit Risk Model and Sampling Techniques

The audit risk model (ARM) assesses the risk of issuing a material misstatement without detection. It comprises inherent risk, control risk, and detection risk. In high-risk areas identified during planning, auditors may apply non-sampling techniques, such as detailed tests of transactions, or statistical sampling to draw conclusions about account balances. For preliminary materiality judgments, sampling methods like attribute sampling or variable sampling are effective, balancing the need for precision and audit efficiency.

Post-Audit Responsibilities and Conclusion

Upon issuing an unqualified audit report, the audit firm’s responsibilities extend to communicating findings with management, providing recommendations for improving internal controls, and maintaining documentation for quality assurance purposes. The firm must also comply with professional standards and regulatory requirements, including quality control procedures and ongoing supervision of audit staff.

In conclusion, crafting a thorough audit plan involves detailed risk assessment, strategic design of audit procedures, and effective evidence gathering. Tailoring these procedures to the specific company's nature ensures a robust and reliable audit process. The combination of analytical procedures, risk assessments, and professional judgment underpins the integrity of the audit and the credibility of the financial statements, ultimately fostering stakeholder confidence.

References

• Eye, M. (2017). Auditing and Assurance Services (16th ed.). Pearson.
• Arens, A. A., Elder, R. J., & Beasley, M. S. (2016). Auditing and Assurance Services: An Integrated Approach (16th ed.). Pearson.
• Public Company Accounting Oversight Board (PCAOB). (2020). Auditing Standard No. 5. Auditing Accounting Estimates. PCAOB.
• DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183–199.
• Messier, W. F., Glover, S. M., & Prawitt, D. F. (2018). Auditing & Assurance Services (11th ed.). McGraw-Hill Education.