Tailored audit programs: the link between audit planning and execution. (Auditing)by Wolfe, Donald N.
There are many reasons why goals are not always accomplished. One common reason is that a lot of time is spent planning an activity, but often the plans are not executed as intended. This is a typical problem for auditors, who sometimes rely too much on inflexible audit approaches and standardized audit programs during the execution phase of their audits. The use of audit programs tailored to specific audit circumstances, coupled with thorough audit planning, will help the auditor carry out the objectives of an audit.
The auditor's responsibilities for planning are set forth in the first standard of field work and in SAS 11 and various other pronouncements. These responsibilities include a duty to" ... prepare a written audit program (or a set of written audit programs)" AU 311.05. Audit programs, along with supervision and review, provide the primary sources of assurance that audits are carried out as intended. The programs are the direct line of communication between the planner and the gatherers of evidential matter.
An Assertion-Based Method for Building Effective Audit Programs
The building blocks of an effective audit program are described in SAS 31, Evidential Matter. SAS 31 asks the auditor to consider three things in the context of obtaining evidential matter to support an opinion on a financial statement: 1) management's assertions about the financial statements (existence and occurrence, completeness, rights and obligations, valuation and allocation, and presentation and disclosure); 2) audit objectives related to the assertions; and 3) audit procedures to accomplish the objectives.
The auditor's goal is to obtain reasonable assurance that management's assertions about the financial statements are materially correct. Therefore, before selecting auditing procedures to be performed, the auditor should understand what assertions management is making, either implicitly or explicitly, about the financial statements. In an audit of a manufacturing entity, for example, the auditor should understand that management asserts that recorded revenues represent amounts for goods shipped or amounts otherwise earned during the audit period. A related audit objective is to test that all items of revenue recorded are consistent with the assertion. The audit program should include a procedure, or group of procedures, designed to assist the audit team in meeting this objective.
Standard audit programs generally include procedures to address all significant assertions and major audit objectives, but often do not specify which procedures relate to which assertions and objectives. This presents a problem to auditors when they encounter unusual circumstances; for example, the existence of risk factors that affect assertions in unique ways, or an accounting system of such a nature that it can be tested more efficiently using alternative procedures not provided in the standard program. The auditor in the field is often unable to make the appropriate modifications to a standard program because of a lack of understanding. When this happens, the benefit of knowledge about risks and the accounting system gained during audit planning is lost.
Audit programs tailored specifically to individual engagements are the key to linking audit planning and execution, and to improving both. The process of tailoring a program helps to ensure proper attention to details in achieving the ultimate goals of the audit. Putting together an effective program requires the writer to narrow his or her understanding of audit-related aspects of the client's business down to a relatively fine level, because the task is to explain to the program users precisely what they are expected to do. This requires that the planning process be something more than a formality, and that the auditor truly understands the uniqueness of the client's business and the related accounting system and internal controls.
Tailoring audit programs also encourages effective risk assessment, as required by SAS 53. An auditor tailoring a program must analyze the specific risk factors present in order to decide what procedures are appropriate.
To visualize these points, assume the need to develop a tailored audit program to test the occurrence of revenues of a manufacturing entity. Among the testing options available are analytical procedures, audit sampling tests, and other techniques that combine aspects of analytical procedures and tests of details. However, it is not known which procedures will be best in the circumstances.
In order to decide which option will maximize effectiveness and efficiency, consideration will be given to the nature of the client's accounting system and the risk factors affecting the account (including internal control deficiencies). Upon studying these matters, it is determined that the client: 1) has fully utilized its limited manufacturing capacity during the audit period; 2) has a small product line priced in a narrow range; and 3) can provide readily verifiable data supporting these two facts. The client leaves the books open for a few days after the end of the accounting period because of occasional delays in forwarding documentation from the shipping department to the accounting department. Because of this, there appears to be increased risk that transactions that should be recorded in the subsequent period may be recorded in the audit period.
Accordingly, it would be appropriate to include in the audit program for revenues a procedure, or group of procedures, that addresses the potential for overstatement of revenues due to improper cutoff. For efficiency, the auditor should capitalize on the nature of the price and capacity data available from the client's accounting system. Assuming that the data meets the criteria described in SAS 56, it may be desirable to write analytical procedures that instruct audit staff to estimate the maximum amount of revenue for the audit period. You expect the estimate to closely match the recorded amount, and in no event to be less than the recorded amount.
Because of the existence of risk factors relating to cutoff of revenue transactions occurring after the audit period, it may be appropriate to also write procedures prescribing tests of details that require: 1) selection of specific transactions recorded just prior to the end of the audit period; and 2) examination of evidence that the selected items were shipped during the audit period. (Alternatively, tests of details involving selection of shipping documents dated just after the end of the audit period might also address the risk factor identified.) The result is an effective response to the conditions noted during planning, and the communication of that response to the persons who will perform the procedures.
A frequent by-product of tailoring audit programs is an enhanced ability to provide value-added service to the client. To properly tailor programs the auditor has to obtain a thorough understanding of the client's accounting system, and the risks affecting it. Such an understanding puts the auditor in a good position to render constructive value-added services.
Critics state that the chief disadvantage of writing tailored audit programs is that it requires too much time. Recognizing the obvious truth of the statement, it should be noted that the writing time could be spread over more than one period. Also, most, if not all, of the additional time can be recaptured if the tailored programs prescribe a more efficient audit approach.
The example in the previous section illustrates how audit efficiency may be improved using a tailored program. An inflexible, standardized audit approach that requires, for example, tests of details of revenue transactions throughout the audit period, would probably require more testing time than would analytical procedures, in light of the information available in the circumstances described. If, by gaining a good understanding of the client's business and accounting system, the auditor is able to design tests that can be accomplished more quickly but with equal or greater effectiveness, the additional program production time is compensated for.
Audit efficiency can be enhanced not only by including the proper types of procedures in tailored audit programs, but also by writing the procedures in a client-specific manner. Each engagement is unique with respect to the way procedures can be combined or interwoven to achieve multiple audit objectives or to test two or more accounts simultaneously. Also, client-specific terminology can be used to describe documents to be located and tested, persons to whom inquiries can be directed, etc. This can be a particular benefit to inexperienced personnel, or personnel newly assigned to an engagement, by reducing the time required to gain an understanding of the client's records and the auditing procedures themselves.
Standard audit programs, or an audit program preparation guide, may be a good starting point for developing tailored audit programs. Another starting point is a reasonably extensive "library" of audit procedures that can be used as a reference for the program designer. Such a library is especially useful if the procedures in it are grouped by, or cross- referenced to, the assertions and audit objectives they are designed to address.
Use of the microcomputer can also speed up the audit program-building process. If libraries of audit procedures are maintained, even on simple word-processing software, the auditor can simply copy a master file of procedures and use the copy to delete those procedures that he or she does not want to include in the program. It is a simple matter to rearrange the procedures in a logical order, and to modify the language of the procedures included, if necessary. Software specifically designed to assist in performing program-building functions (the Audit Program Generator) is available from the AICPA.
Once an audit program or set of audit programs has been created for a particular client, it is no more time-consuming to use the tailored programs in future years than to use standard audit programs. Of course, the audit team should always consider the need for modification of audit programs as risks and accounting systems change in subsequent years. Updating the programs is ordinarily a simple process, especially if the tailored programs are maintained on microcomputer file.
To maximize the effectiveness of substantive auditing procedures applied to any account, the auditor should select procedures for inclusion in the audit program that are oriented to the risk factors that exist in the specific circumstances and the potential effect that such factors may have on each of management's assertions. Secondly, the auditor should consider the efficiency of available alternatives in light of the information provided by the client's accounting system. Only by establishing the link between the assertions and the related audit objectives in light of these considerations, can the auditor expect to choose auditing procedures that represent an appropriate audit response.
There is the potential for a generic approach to audit testing to miss the mark, resulting in overstating assertions that have low risk of being incorrect, and/or undertesting assertions that have a higher risk of being incorrect. The key to the assertions-based tailoring approach is to do a thorough job of audit planning, and to translate the knowledge gained during the planning process into audit procedures that comprise a sensible response. In that way, the link between audit planning and execution is assured, resulting in increased effectiveness, and often, increased efficiency.
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