ISA 300 Planning an Audit of Financial Statements is an auditing standard that deals with audit planning. It defines auditors’ responsibility to plan an audit of financial statements. Audit planning involves various steps. This process usually occurs before the fieldwork starts. As a result, planning can significantly impact the work that auditors perform during their engagement.
Planning for an audit consists of two stages. The first stage comes before the actual engagement begins. These form a part of preliminary engagement activities. During this process, auditors decide whether to continue an engagement or not. The second stage is the planning stage. During this stage, ISA 300 requires auditors to develop an audit strategy and an audit plan.
What is Audit Strategy?
The audit strategy is an overall plan that sets the scope, timing, and direction of an audit engagement. It plays a crucial role in preparing the audit plan. However, most people think of the audit strategy and the audit plan as the same. It looks at the audit engagement with a much broader perspective compared to an audit plan.
The preparation of an audit plan depends on the audit strategy. An audit strategy involves defining various factors that are critical to an audit. It helps auditors identify and set the audit objective. Similarly, it deals with the resources and timing of the overall audit engagement. There are several advantages of audit strategies that also contribute to how important they are.
What are the Factors that an Audit Strategy Must Consider?
There are several factors that audit strategies must include. Firstly, it must identify the features of an audit engagement and also define the scope for it. Similarly, it involves ensuring the reporting objectives of the engagement to plan the timing of the audit. During this process, auditors also need to establish the nature of the communications that will be necessary.
It should also consider factors that auditors consider significant in directing the audit team’s efforts. However, there is no standard definition of what these factors will include. Therefore, auditors will need to use their professional judgment to do so. Similarly, it must ensure the nature, timing, and extent of the resources required to complete the engagement.
Lastly, it must also consider the results of the preliminary engagement activities. As mentioned, these include decisions related to the continuance of audit engagements or ethical issues. In addition, the auditors may also have any knowledge gained from other services performed by the engagement partner for the audit engagement.
What is the Importance of the Audit Strategy?
Developing an audit strategy for any audit engagement is mandatory under the auditing standards. Several factors contribute to the importance of it in auditing. Some of these are as below:
Set the scope of the audit engagement
As mentioned, it plays a significant role in setting the scope of the audit. Without a proper audit strategy, auditors will not understand the extent of the work they should perform. Similarly, defining the scope can help auditors with decisions about resource management. Overall, establishing an audit engagement’s scope is one of the primary roles of an audit strategy.
Establish resource allocation strategy
Audit strategy is also crucial for resource allocation and management. These resources may include the time required for each area of the engagement, the team members, etc. In addition, it can assist in the selection of the appropriate engagement team members. Once auditors establish it, they will understand which members will have the appropriate competence and experience to complete the engagement.
Set the right audit approach
The audit approach refers to the strategy used by auditors to conduct an audit engagement. This approach will vary according to the client and the type of engagement. With an audit strategy, auditors can define the proper audit approach to use. It can also help ensure the audit approach is both effective and efficient in completing the engagement.
Help identify potential problems
During some engagements, an audit may face problems. With an audit strategy, identifying and resolving these potential problems occurs on a timely basis. In the absence of this strategy, auditors will find it challenging to resolve issues. On top of that, these problems can impact the timing of the audit, which can add to the costs.
Audit strategy can also help auditors minimize their risks. It can allow them to allocate the proper time and attention to high-risk areas. On top of that, it can help them identify those areas to create awareness of those risks. Overall, it can help make the audit process efficient and effective, reducing the overall audit risk.
An audit strategy is a plan of action that auditors contemplate before fieldwork commence. Similarly, it sets the scope, timing, and direction of an audit engagement. ISA 300 sets the guidelines on audit strategies and audit plans. There are several areas which the audit strategy defines, which contributes to its importance. Some of the reasons why it is crucial are given above.