Audit Strategy: Key Steps and Best Practices for Effective Audits
Learn how a structured audit strategy enhances efficiency, ensures compliance, and supports informed decision-making through clear planning and documentation.
Building an effective audit strategy is fundamental for ensuring that audits are thorough, efficient, and aligned with organizational goals. Whether conducted internally or by external firms, a well-planned approach helps auditors focus on important areas, manage risks appropriately, and deliver meaningful insights. As businesses navigate increasing regulatory demands and operational complexities, a clear audit strategy becomes increasingly valuable.
This article explores how organizations can create robust audit strategies by following established steps and practices, highlighting the role documentation plays in supporting the audit process.
Purpose of an Audit Strategy
An audit strategy serves as the blueprint for an audit engagement, establishing its overall direction. Its primary objective, reflected in standards from bodies like the Public Company Accounting Oversight Board (PCAOB) and the American Institute of Certified Public Accountants (AICPA), is to plan the audit for effective execution. This involves setting the scope, timing, and direction, which guides the development of the detailed audit plan.1Public Company Accounting Oversight Board. AS 2101: Audit Planning
A well-defined strategy facilitates the efficient allocation of resources. It helps determine the type, timing, and amount of resources needed, considering the entity’s size and complexity. This allows for appropriate assignment of tasks to team members based on their skills and helps coordinate work done by specialists or other auditors.
The strategy is also integral to managing audit risk. By considering preliminary findings and assessing risks of material misstatement early, auditors can tailor their approach. Proactively identifying and responding to potential high-risk areas, such as those related to financial reporting or internal controls, is fundamental to a quality audit.2Public Company Accounting Oversight Board. AS 2201: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements
Finally, establishing a clear strategy ensures compliance with relevant auditing standards, like Generally Accepted Auditing Standards (GAAS) or International Standards on Auditing (ISAs). Adherence to these professional standards supports the quality, consistency, and credibility of the audit, facilitating communication about the planned approach among the audit team and with management or governance bodies.
Steps to Develop an Audit Strategy
Developing an audit strategy begins with preliminary engagement activities. These initial steps involve evaluating the continuance of the client relationship and the specific audit engagement, alongside confirming compliance with independence and ethics requirements. Establishing a clear understanding of the engagement’s terms with those charged with governance, such as the audit committee, is also foundational. For initial audits, these steps may expand to include communication with the predecessor auditor, following standards like AS 2610 or AU-C 210.
Following these activities, gaining a deep understanding of the entity and its environment, including internal controls, is necessary.3American Institute of Certified Public Accountants. SAS 145: Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement This involves learning about the client’s industry, regulatory landscape, operations, objectives, strategies, and performance measures. Understanding the applicable financial reporting framework is also part of this phase. This knowledge forms the basis for identifying areas where financial statements might be materially misstated.
With this understanding, the auditor performs risk assessment procedures. This involves identifying and evaluating the risks of material misstatement at both the financial statement and assertion levels. Auditors consider factors like operational complexity, preliminary analytical results, fraud potential, and information from client acceptance procedures. The outcome directly influences the audit procedures planned.
Determining materiality for the financial statements as a whole is a subsequent step. This involves judging the magnitude of misstatements that could influence the decisions of financial statement users. Auditors may also set lower materiality levels for specific transactions, balances, or disclosures. Performance materiality, set lower than overall materiality, is also determined to reduce the probability that aggregate misstatements exceed the overall threshold. These levels guide decisions about the nature, timing, and extent of audit procedures.
Based on the risk assessment and materiality, the auditor identifies significant accounts, disclosures, and their relevant assertions, focusing effort on higher-risk areas. Preliminary analytical procedures performed during planning can also help identify unusual items indicating previously unrecognized risks.
Consideration is given to whether specialized skills are needed for specific audit areas. If specialists, like valuation experts or IT specialists, are required, the strategy incorporates plans for their involvement.
These steps culminate in establishing the overall audit strategy, defining the scope, timing, and direction. This includes determining necessary resources, assigning experienced team members appropriately, especially to high-risk areas, and planning supervision. For multi-location engagements, the strategy addresses procedures at selected sites.4American Institute of Certified Public Accountants. SAS No. 149: Special Considerations — Audits of Group Financial Statements This comprehensive strategy guides the detailed audit plan, outlining specific procedures. The strategy and plan are dynamic and should be updated as needed throughout the audit based on new information.
Documentation
The audit strategy must be formally documented, as required by professional auditing standards from the PCAOB and AICPA. This documentation serves as the primary record showing the audit was adequately planned and provides a basis for the detailed audit plan. It outlines key decisions on scope, timing, direction, and resource allocation.
Audit documentation for the strategy should be detailed enough for an experienced auditor, unfamiliar with the engagement, to understand the significant planning decisions made. According to standards like PCAOB Auditing Standard (AS) 1215 and AICPA AU-C 230, the record should include the rationale behind decisions like materiality levels, risk identification, the planned approach to address risks, and resource planning, including team assignments and supervision.5Public Company Accounting Oversight Board. AS 1215: Audit Documentation
This documented strategy is a component of the overall audit documentation, often called working papers. These papers provide evidence that the audit complied with relevant standards (like GAAS or PCAOB standards). Documentation facilitates the direction, supervision, and review of work by senior team members and enables quality control reviews and inspections, demonstrating accountability.
Documentation must also capture significant changes made to the strategy or plan during the engagement and the reasons for them. Professional standards dictate requirements for assembling and retaining audit documentation. For PCAOB audits, documentation typically must be assembled within a set period after the report release date (recently proposed to shorten from 45 to 14 days) and retained for at least seven years. AICPA standards generally require retention for at least five years, though state regulations might mandate longer periods. This ensures supporting evidence is available for future reference or inspection.