Question

What are the stages of the audit planning process as described by your textbook? In your opinion, which stage creates the largest risk for the auditor? Which step is the most important? Which stage is the most difficult? Why?

Answer 1

Stages of audit process are as follows-

1. Business understanding- Basic discussions with client on company operations, industry performance, sales, business fundamentals, mode of operations, assets, offices and branch locations etc.

2. Audit documentation reviewand materiality - collection and review of basic details regarding client performance will help determine the materiality and identify focus areas for the audit . Assessing acceptable audit risk and interest risk is critical

3. Recent developments in the company or in the industry which may materially affect the operations of the company. For example a new competitor may be making strong inroads into the industry bringing price pressure on products

4. Interim financial statements - obtaining and reviewing latest financial statements, variance analysis and reasons for any major deviations, focus areas based on increased spends in any particular area, any huge capital expenditure, debts, accounts receivable and payable etc

5. External consultants meeting to understand any other issues e.g in taxation matters, legal etc so that they may be factored in the review

6. Timing of the audit - determining when to conduct the audit and the time that will be required to conduct the fieldwork and prepare the report

7. Staffing - whether any external help is required depending on the bandwidth of audit team and nature of the audit area whether requiring any specialized skills e.g. Technical

8. Risk assessment - assessing the risk for the company based on the entire review of the business

Risk assessment stage is the most important part of the audit planning process, because if the risk is incorrectly assessed, it can affect the entire audit procedures and undermine the audit quality. For example if a major business risk has not been considered in risk management, it can lead to a major issue for the business, be it financial or reputational, which may not be highlighted in the audit. The likelihood and impact of each risk needs to be assessed.

Risk assessment is also the most difficult part of the audit planning process as assessment of risk is subjective. There are a number of different factors to be considered, and the likelihood and impact also has to be determined which is based on certain assumptions which may not hold true.