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Audit Planning and Control
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Audit Planning and Control

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Assignment 2: Audit Planning and Control

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:
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 (4) 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.


Auditing Planning and Controls

Auditing can be viewed in a myriad of dimensions, the key determinant being the context and environment in which it is carried out. The widely accepted description defines auditing as the examination and analysis of source documents, books of original entry, books of accounts, financial statements, and other relevant accounting documents to ascertain whether they present a fair and true view of the financial performance of an organization (Robertson, 2010). Auditing is quite independent from accounting, with the aim of the latter being collecting, recording, summarizing, analyzing, classifying and interpreting financial accounting information for financial decision making by the users of accounting information (Robertson, 2010).

Auditing largely borrows from the International Accounting Standards (IAS), International Financial Reporting Standards (IFRS), Generally Accepted Accounting Principles and Standards (GAAPs), and the laws of the particular country to affirm whether the books of accounts have been maintained properly (Robertson, 2010). Owing to this, auditing is a legal requirement and it is hence mandatory for books of accounts to be audited either at the lapse of a financial year or on a systematic basis after a certain period. Auditing is meant to safeguard the interests of stakeholders and ensure that there is maximization of their value (Robertson, 2010). Auditing also helps in the minimization of the agency problem, which arises when managers work to satisfy their own interests rather than the maximization of shareholder value. Auditing also ensures tax compliance. Either the managers of a firm who are the stewards can carry out auditing internally, or an independent auditor can do it externally (Robertson, 2010).

Auditing, like many other processes, occurs in stages. The preliminary stage is the initiation of the audit, followed by the initial preparation of the audit prior to the audit being conducted. After the audit is conducted, audit reports are prepared and the audit is concluded (Pickett, 2006). In these stages, there are a number of tools used to abet the audit work. These include working papers, the permanent file, the current file, and most imperative, the audit plan (Pickett, 2006). Audit planning takes place at the commencement of the audit work, and it entails formulating a framework of how the entire work will be conducted with major focus placed on areas that are potentially significant. It encompasses the nature, scope, and duration of the audit to ensure it is performed effectively, efficiently with consideration to timeliness (Pickett, 2006).

External public accounting firms conduct external audits to assure outside stakeholders that the financial statements of the company are harmonized with the International Financial Reporting Standards (IFRS), International Standards on Audit (ISA), and Generally Accepted Accounting Principles and Standards (GAAPs). Deloitte & Touche is among several public accounting companies and one of the big four, with the other three being Ernst & Young, PricewaterhouseCoopers and KPMG (Kettle & Cooper, 2002). The company spans over one hundred countries from various continents (Kettle & Cooper, 2002).

For companies such as Deloitte & Touche to conduct effective auditing of their clients, audit planning needs to be effected. The planning of the audit will involve several steps, the first being understanding of the business a client is involved in and analyzing the entire industry (Pickett, 2006). This is followed by the assessment of the client’s business risk. Preliminary analytical procedures are then performed, and an assessment is done to determine the inherent risks and audit risks that are acceptable (Pickett, 2006). Planning further calls for the clear understanding of the internal control system, and the control risk that may be posed. The development of the audit plan and program is thereafter preceded by the gathering of information vital in the assessment of fraud risks (Pickett, 2006).

There exist performance ratios that are utilized so as to determine which analytical tests to perform. These consist of the liquidity ratios and the profitability ratios (Pickett, 2006). Liquidity ratios are concerned with how a firm is capable of meeting its short-term obligations and some of the ratios include the quick and current ratio, and the cash ratio. The accounts majorly involved are current assets and current liabilities (Pickett, 2006). Profitability ratios are concerned with the effectiveness of a firm in the generation of revenue. Some of the ratios under this category are the earnings per share (EPS) and the profit margin. These ratios deal with sales, incomes, and the share structure of a company (Pickett, 2006). The ratios aforementioned are critical in determining the analytical measures auditors should enforce while auditing a business concern.

Analytical procedures involve the analysis of relationships that exist amongst financial accounting data to identify whether they depict a significant relationship and to identify consistency (Pickett, 2006). The analytical procedures utilize relationships and comparisons to determine whether the accounting information and account balances are reasonable. One analytical procedure is comparison between client data and that of the industry, as in regards to inventory turnover (Pickett, 2006). Another analytical procedure is comparing client data and previous data of a similar period. An example is comparing the net income of the period with that of the previous period. The third analytical procedure is the comparison of client data with auditor-determined expected results (Pickett, 2006).

Audit evidence can be obtained by means of substantive testing which allows the auditor to form an opinion. Methods that can be utilized to collect audit evidence entail observation, inspection, computation, sampling, analytical procedures, inquiry and confirmation, and representations by management (Kelting, 2011). From the analysis of the financials of Deloitte & Touche, analytical procedures are preferred for collecting evidence.

As previously mentioned, analytical procedures necessitate the analysis of financial data to identify consistencies and anticipated patterns. In this perspective, financial data will be the income statement and the balance sheet of the company. This method is bound to lead to evidence that is sufficient since, being generated internally from financial statements, it relates directly to the accounting internal control system that is usually effective. In addition, evidence that has been obtained in the form of documents and written representations are deemed more reliable compared to oral representations (Kelting, 2011).

Audit risk is the risk posed to an auditor by financial statements that are materially misstated, hence resulting to the auditor giving an inappropriate audit opinion (Kelting, 2011). The audit risk model consists of the inherent risk, the control risk and the detection risk (Kelting, 2011). Inherent risk is a result of lack of effective internal controls, leading to accounts and transactions susceptible to misstatements. The control risk arises in the existence of an effective accounting internal control system. It is where a material misstatement in an account or a transaction cannot be detected or prevented by the accounting internal control system. The detection risk arises when substantive procedures executed by the auditor will not be capable of detecting material misstatements in accounts or transactions (Kelting, 2011).

Audit sampling entails the application of substantive tests or compliance procedures to accounts and transactions that are less than a hundred percent of the entire items involved (Kelting, 2011). This facilitates an auditor to come up with a conclusion concerning the entire accounts and class of transactions. Audit sampling can take two approaches; judgemental or non-statistical sampling and statistical sampling (Kelting, 2011). Judgemental sampling engages the use of the auditor’s knowledge and experience pertaining the client’s business to decide on the sample to be used without necessarily involving any statistical or mathematical tools (Kelting, 2011).

Statistical sampling on the contrary involves the use of probability theory in the establishment of the sampling size by the application of various statistical and mathematical models. The statistical sampling is the best technique in this milieu, since it is scientific and the auditor is capable of justifying selected samples. This technique is also vital in the elimination of personal bias by the auditor since the end sample selected is unbiased. The method further results to uniformity amongst various auditors, making comparisons between results possible (Kelting, 2011).


Kelting, W. R. (2011). Audit Planning: An empirical investigation into the timing of principal substantive tests. Arbor, Mich: University Microfilms.

Kettle, R., & Cooper, E. (2002). Deloitte & Touche. New York, NY: Vault Inc.

Pickett, K. H. S. (2006). Audit Planning: A risk-based approach. Hoboken, N.J: Wiley.

Robertson, J. C. (2010). Auditing. Homewood, IL: BPI/Irwin.

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