Table Of Contents
What Is Audit Strategy?
An audit strategy outlines how an audit must be conducted and sets the timing and scope of audits. It helps develop an audit plan comprising detailed responses to an auditor’s risk evaluation. Moreover, it enables audit firms to complete their audit engagement efficiently and effectively.
Besides establishing an audit’s time frame, this strategy is vital in helping audit firms identify the resources utilized in the engagement. In addition, it outlines the documentation requirements for the audit procedures. Some aspects defined by this strategy are reporting objectives, the audit engagement’s scope, and the nature of communications with the client and management.
Table Of Contents
- Audit strategy meaning refers to a strategy developed by auditors to the set scope, direction, and timing of an audit.
- Its objective is to help create an audit plan and enable auditors to do their work efficiently.
- The contents of the audit strategy document include multiple components, for example, the audit scope, overview, deliverables, and the significant risks that auditors must deal with to perform an audit effectively.
- A key difference between an audit plan and an audit strategy is that the former is based on the latter. In other words, the strategy helps auditors develop a plan.
Audit Strategy Explained
Audit strategy meaning refers to the combination of the audit approach taken by an auditor, resource allocation and management, the way of managing the audit engagement, and the audit timing. Overall, the purpose of this method is to reduce audit risks and offers a complete way to handle audit engagements efficiently.
By utilizing this method, auditors can determine the necessary resources and identify the expertise and experience levels required to perform the audit. Moreover, the strategy can help auditors determine how to direct, supervise, and manage the resources. In such a case, the method can help auditors set the meetings and guide the audit team members in carrying out their duties and reviewing the work done by the senior team members.
This strategy also involves developing an audit approach, including the substantive test and test of control. For instance, auditors may reduce some of their substantive work and carry out the test of control if they plan to depend on their client’s internal control. Alternatively, they may go directly to the substantive tests without relying on internal control.
Apart from the ones mentioned above, let us look at the areas in audit engagements outlined by this strategy.
- Alterations in accounting standards, laws, and regulations
- Engagement budgets
- Audit timing
- Engagement characteristics
- The preliminary engagement activities with their results.
- Timing, extent, and the nature of the resources that are part of the audit engagement
- The knowledge acquired from different audit engagements
Auditors must decide what details such a strategy must include. They can have a short strategy for small companies. On the other hand, the strategy can be comparatively long for big companies.
One must note that auditors can create this strategy per internal requirements. In other words, there is no predetermined format.
Contents
An audit strategy document consists of the following details:
- Significant Risks: This part describes the significant risks and mentions how the auditors will address them.
- Materiality: This includes performance materiality and overall materiality.
- Deliverables And Timetable: In this section, auditors describe the audit’s timetable with the deliverable documents.
- Independence: This section describes how the auditors ensure they are independent in the audit engagement.
- Audit Approach And Scope: In this part, one can find the details of the approach and standards auditors use. Moreover, this section also mentions whose works the auditors consider reliable.
- Audit Engagement Team: This part of the audit strategy document usually describes the senior members of the audit team, including the tea manager and leader.
- Overview: This part summarizes the auditors’ responsibilities and engagement. For example, offering an opinion on their client’s financial statements and assessing their practices concerning value for money.
Importance
One can go through the following points to understand the importance and purpose of audit strategy:
- First, this method sets an audit engagement’s scope.
- Second, it establishes the requirements concerning documentation for the audit methodology.
- Third, such a strategy sets the correct audit approach.
- Fourth, it establishes the audit’s timeframe.
- Finally, this strategy allows auditors to arrange and manage the audit correctly and efficiently.
Audit Strategy vs Audit Plan
People new to the world of finance often find audit plans and strategies confusing. That said, they can avoid such confusion if they understand the distinct features of these two concepts. So, the table below highlights the differences between an audit plan and an audit strategy.
| Audit Strategy | Audit Plan |
|---|---|
| It is not as detailed as an audit plan. | An audit plan is much more detailed as it states the timing, extent, and nature of the audit procedures to be carried out by auditors. |
| It guides the development of an audit plan. Hence, auditors develop it before the audit plan. | Auditors prepare an audit plan based on the audit strategy. |
| It is the strategy auditors must use to manage their audit engagement. | An audit plan refers to how auditors will use the strategy to perform their audit work effectively. |
Frequently Asked Questions (FAQs)
The approaches used by auditors are —
- Balance Sheet Approach: In this case, auditors believe that if the account balance in a company’s balance sheet is correct, the organization’s profit and loss account is also accurate.
- Substantive Procedures Approach: This conventional approach involves using high transaction values and large volumes to reduce the possibility of misstatement.
- Risk-Based Approach: In this case, auditors perform risk evaluations to identify all the potential misstatement risks.
- System-Based Approach: This approach involves the auditors testing and validating a business’s internal control after comprehending the business’s process.
One can develop such a strategy by following these steps:
1. Spot the audit engagement characteristics defining the scope.
2. Obtain the reporting objectives to plan the nature of communication and audit timing.
3. Consider the factors that are crucial in directing the efforts of the engagement team.
4. Factor in the preliminary engagement activities’ results.
5. Determine the extent, timing, and nature of the resources required to conduct the audit.
It summarizes the audit approach, highlights the noteworthy audit risks and the key judgment areas, and offers the audit team’s details.
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