Audit - How Do Auditors Plan for an Audit?

Audit - How Do Auditors Plan for an Audit

The highest level of assurance (Also see Types of Assurance Engagement) that a Certified Public Accountant firm (Also see Accounting Services Malaysia) can give to an organisation’s financial statements on its compliance with the GAAP or other applicable accounting standards is through an audit. Usually, the auditors from an audit firm in Johor Bahru will plan for the audit in a general way straight away after the engagement. However, they will develop the plan considerably as they are performing the audit. The process of planning is crucial as it helps in ensuring that the auditors are following the GAAS (Generally Accepted Auditing Standards).

Examine business risks

The auditors should focus on any factors that may threaten the management’s ability to achieve the goals it has set. They should consider the operating environment as well as business risks that the company is facing when they plan for an audit.

Confirm the suitability of accounting procedures

When the auditors are doing audit planning, they need to spend ample time on understanding the accounting policies that the company is using. These policies consist of the processes which are related to capitalisation, revenue recognition, accounting for consolidation, valuation, inventory and impairment. Typically, the company will provide flowcharts and other documents which help the auditors in understanding the controls and policies related to accounting quickly.

Determine areas which need special audit considerations

Auditors need to give special considerations to areas which are highly complicated or have a high possibility for errors to occur. They can refer to the assessment they have conducted on the accounting policies and procedures as well as business risks of the company so that they can identify whether giving special attention to those areas is suitable.

Set up materiality threshold

When an item has significant importance, it is material. In most cases, there is a close relationship between the materiality and the size of that company. Thus, most of the audit firms prefer using a percentage of the revenue or total assets to determine the materiality threshold.

Establish assumptions for analytical procedures

Ratio analysis and trend analysis are among the analytical procedures which can help the auditors in reviewing the reasonableness of the company’s financial statements. Ratio analysis helps in comparing the financial position of the company and the average performance of other entities in the industry. On the other hand, trend analysis searches for inconsistencies or irregularities over some time.

Establish audit procedures

There are two general classes of audit procedures (Also see What are the Audit Procedures for Accounts Receivable?), which are substantive tests and tests of internal controls. Substantive tests refer to the direct tests of the balances on the company’s financial statements or the transactions which happen throughout a certain period. If the areas require special considerations, the auditors need to increase the substantive tests the conduct on those areas. On the other hand, tests of internal controls serve to assess the efficiency of those controls in detecting and avoiding material misstatements. Generally, if the company has excellent internal controls, the auditors will not have to conduct many substantive tests.

Reevaluate the audit plan

Throughout the audit (Also see Essential Audit Objectives for Payroll Audits)  process, the auditors should reassess their audit plan continuously. If there are any material concerns, or the analytical procedures uncover more risks that the company may be facing, they might require to make adjustments or perform more procedures so that they can issue a clean audit opinion. 

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