Audit Planning and Control
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Introduction
Amazon Company is among the best-selling online retailer across the world which has enabled it to grow at a very fast rate to cover most of the markets in many countries. Amazon conducts audits to ascertain its internal state as well as the external environment which comprises of the guiding policies and the factors affecting the market and customer behavior. Usually, amazon conducts audits annually where they hire skilled auditors to complete the audit. This paper focuses on the steps followed in planning an audit as well as designing an audit program, performance ratios, evidence collection, audit risk model, and the responsibilities of audit firms.
Steps in Planning an Audit and Audit Program
First, the auditor accepts the request from the firm and performs the first audit to verify if the client has integrity as well as determining the industry and the nature in which the firm operates (Johnson, 1997). The auditor must evaluate the risk condition of the firm to assess if it is within his/her threshold and whether the outcome will be of the desired quality. Second, the auditor identifies the reason as to why the audit is necessary and the main objectives of the audit (Johnson, 1997). The auditor obtains understanding with the firm and they agree on the terms of engagement through the submission of the engagement documents. The documents specify the expectation of firm and also describes the task that the auditor is to undertake. After engagement the auditor should select the staff with whom he/she will work with and whom shall provide the required data pertaining the firm. The staff should be efficient by first meeting the requirements stipulated in the Generally Accepted Auditing Standards.
Third, the auditor should access the firm’s information that contains information that enhances a better understanding of the firm’s activities and the general industry (Johnson, 1997). The auditor should pay special attention to the external factors affecting the firm, the operational processes, the governing policies, the objectives and goals of the firm as well as the standards of performance set. Fourth, the auditor should evaluate the condition of the risk facing the business through strategic approaches. Fifth, the auditor should conduct the initial analytical procedures by assessing the firm’s ratios in comparison to the industry set ratios (Johnson, 1997).
Sixth, the auditor is expected to explain the purpose of the assessment procedures and the time allocation for each procedure. The procedures to be stated include the planning section, the testing section as well as the completion phase (Johnson, 1997). Seventh, the auditor should select the most effective procedure among the many tested types and thereby set the expectation based on the previous tests and studies done on the firm and the industry.
Performance Ratios
The auditor calculates the different financial ratios such as the short-term ability to pay the liabilities which includes the cash ratio, current ratios as well as the quick ratios. More so, performance rations can be assessed using the liquidity ratios which involves the accounts turnover, inventory turnover as well as the sell-day inventory (Ainapure & Ainapure, 2009). In addition, auditors can use the profitability assessment ratios such as the percentage share earnings, profit shares, profit margins and the returns on assets and the common equity.
Accounts such as balance sheets and the statement of financial positions should be well assessed. The firm’s inventories as well as the books of accounts should be investigated to get the required data that will be used in the assessment (Ainapure & Ainapure, 2009). The auditing procedures that the auditor should apply involves; the assessment of the composite problem which can be done through the recognition and acceptance of the risks involved, observation of all the factors that relate and have an influence on the problem as well as the subdivision and categorizing of the different sections of the problem independently(Ainapure & Ainapure, 2009). Moreover, evidence is collected pertaining to the individual problems after which the appropriate procedure is developed. The procedure is then implemented and the evidence pertaining to every problem is obtained after which it is critically evaluated.
Evidence Collection Techniques
The auditor has to collect evidence that is used as a base in case of any challenge on how the outcomes and the opinions were arrived at. This evidence is collected through distinct methods and procedures known as audit tests. Some of the methods used to collect the evidence include physical examination and third party consultation (Ainapure & Ainapure, 2009).
First, the auditor physically examine the balance sheets and the income statements to verify the assets which includes the stocks that the firm owns as well as the certification documents of investments done by the firm. The personal analysis can also account for the fixed assets as thus it acts as evidence of the existence of the claimed condition (Ainapure & Ainapure, 2009). More so, the auditor can conduct some third party interviews to identify the missing information about the firm to minimize unfounded assumptions and misinformation. The amounts or figures indicated on the accounts should be confirmed with the loyal staff working together with the auditor to ascertain their sincerity and effectiveness in the processes to be carried out thereafter. The evidence collected should also be compared to the firm overall data to identify similarities or disparities in the information therein (Ainapure & Ainapure, 2009). The different types of data should be collected in different formats based on their sensitivity and their importance. Evidences that are very sensitive should be collected from senior officials in a firm to avoid personal based opinions which might be given by the junior officers.
Audit Risk Model
An audit risk is the general risk as a result of the audit of the financial statement. The audit risk model explains how the audit associated risks can be managed and probably corrected. The audit report might be unqualified as a result of many inappropriate opinions such as; where a qualification is reasonably justifies or when a significant matter in the audit is left unclarified.
The audit model works by multiplying the inherent risk by the control risk and also the detection risk to get the overall audit risk. The inherent risk occurs as a result of a misstatement of a certain material in the financial statements either caused by omission or editing error. The control risk is caused by the misstatement in the financial statements due to failure of the controls of the entity (Demartini & Trucco, 2017). Detection risk is the risk that happens when the auditor fails to identify a material misstatement in the financial statements which causes wrong computations.
Auditors use the audit risk model to examine the extent of the risk as they gain more understanding of the firm and the environment around it. The sample size from which the evidence was collected should be increased to avoid bias to achieve low levels of detection risks. Stratified sampling technique should be adopted to collect the evidence since it has very low precision which will reduce the risks and increase the firm’s confidence in the auditor’s opinion (Demartini & Trucco, 2017). Responsibilities of Audit Firms
The auditor/s and the auditing firm has a great responsibilities in case the given opinion and report is termed as unqualified by the firm or other bodies. First, the firm has a responsibility to conduct intense valuation and investigation to identify the sources of the errors made and probably detect cases of fraud or dishonesty among the firm’s officials (Demartini & Trucco, 2017). The investigation can unveil officials who gave misleading information deliberately and those who failed to disclose the necessary information to the auditing staff. Furthermore, the auditing firm is a financial adviser on how best the firm can and could have managed their finances to incur more pleasing financial ratios that will make the firm more competitive in the market (Demartini & Trucco, 2017).. The audit firm should outline the strengths and weaknesses of the organization and channel a way forward that will make sure that the company achieves continuous improvement.
Conclusion
Audit planning involves critical steps that should be followed to make a good auditing system. The steps facilitate better understanding of the task as well as better relations between the firm and the auditors. Performance ratios are computed after the auditing of the financial statements of a firm to identify its financial position. Evidence should be well collected for it to offer a strong ground to base the opinions of the auditor. The risks as a result of an error in the audit report are assessed through the audit risk model. The audit firm is both a financial adviser as well as an investigative unit for any misinformation from the employees from any organization.
Bibliography
Ainapure, V., Ainapure, M. 2009. Auditing and Assurance. New Delhi. PHI Learning.
Demartini, C., Trucco, S. 2017. Integrated Reporting and Audit Quality: An Empirical Analysis in the European Setting. UK. Springer.
Johnson, G. 1997. The ISO 14000 EMS Audit Handbook. USA. CRC Press.
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