What are The Essential Audit Approaches?
Audit approaches are the techniques or methods which the auditors would use when conducting their audits.
Choosing the correct audit approach is vital. It may aid the auditor to improve audit performance from the perspective of effectiveness and efficiency.
The correct audit approach can be helpful to the auditors in focusing high risks sections and put in less effort on the areas with low risks. Different audit firms in Johor Bahru could implement different audit approach when they are performing their audit testing.
Substantive Procedures Audit Approach
Generally, the auditors will use this audit procedure when the company’s internal control over its financial reporting or the financial reporting system have low reliability.
Auditors will not test on the internal control on financial reporting of that company. Instead, they are going to implement substantive testing by concentrating on the material or large transactions.
Some people will call this approach as a vouching approach. This means that the auditors will choose the significant and substantial amounts of transactions and inspect whether they have sufficient and dependable supporting documents.
Also, the auditors are going to examine whether the accounting classification, double entries (Also see Advantages of double entry accounting) and recognition are following the applicable accounting frameworks and standards (Also see FRS 1) when a company is preparing its audit financial statements.
The drawback of such an approach is that it needs to examine a lot of transactions. Hence, it will require more audit resources than others.
The advantage of using this approach is that it can aid auditors to decrease the risks that the internal control over financial reporting cannot discover.
Balance Sheet Audit Approach
The concept of this approach is that the auditors believe that when the records of the account balance in the balance sheet are correct, the records of the accounting transactions in the income statements will be right also.
By using this approach, the auditor will pay more attention to the testing of balance sheet items with high values, whereas for the transactions in the income statement, the auditor will not focus that much.
In the balance sheet audit approach, auditors assume that if the accounting balance or the items in the balance sheet is accurate, then there is a low probability that one will misstate the transaction in the income statement materially.
In the balance sheet, rights and obligations, valuation, as well as existence, are the major financial assertion.
System Based Approach
In this approach, firstly, the auditors know that a company is using a strong internal control system according to their understandings from the management of the company.
However, before the auditors rely on the internal control system, they will require to acquire a full understanding of the internal control over financial reporting of their customer.
Once the auditors have understood the internal control, they will have to conduct testing and validate those internal controls (Also see What is a Test of Control?). By doing so, the auditors can make sure that the controls are strong enough to generate accurate financial reports.
Even though the auditors may conclude that the internal control over financial reporting of the company is strong, they also have to carry out substantive testing. However, the volume of transactions that they need to test is not as large as by using the substantive method.
Risk-based Audit Approach
This approach could be the one which you have heard of the most, and this might be the most popular approach.
The principal concept of a risk-based approach is to do fewer works, lower audit risks, as well as meet the purposes. That is why most of the auditors prefer using this approach.
This approach principally performs by having an in-depth understanding of the business, environments, as well as the internal control of the customer. Then, auditors will have to analyse the possible risks areas as well as material misstatements which may occur on the financial statements.
As soon as the auditors have determined the risk areas, they are going to create the auditor’s resources and programs for the detection of the risks.
By doing so, the auditors do not have to spend much time testing the areas that have lower risks, and at the same time, they will be able to fulfil the audit objective.