Practical steps
(know which variable from the AR function is captured in which step)
- Accept client
- Understand business (RMM)
- Perform preliminary analytical procedures (RMM) take overall financial statement assertions numbers, look at them
potentially compare with last year to see where the key areas are in financial statements - Set materiality and audit risk (AR and Materiality)
- Assess inherent risk (RMM)
- Understand and assess internal controls (RMM)
- Develop audit plan (DR)
- Perform test of controls (DR)
- Perform substantive tests (DR)
- Re-assess RMM (IR, ICR) (RMM)
- Contingent liabilities and subsequent events
- Evaluate results
- Report
Client acceptance, which factors determine when to accept?
- Control factors (expertise, staffing, independence) within control of auditor (Is there enough resources available to
complete audit in timely fashion at quality that is required?) - Evaluated factors (integrity, reputation, accounting practices) outside control of auditor, but evaluated in audit file
- Business factors (profitability) of auditor
Business risk audit
Auditor needs to see the whole organization and
its environment to understand the nature of the
audit challenges
Holistic approach to auditing (complete systems
rather than dissection the audit in separate
subparts)
What is the use of strategic analyses of the auditor?
- Understanding how client adds economic value
- Use of business processes to achieve this
- How client identifies and reacts to external threats/risks
- Gaps in risk management
- Effect on financial statements
What components do we typically have in Strategic analysis?
- Understand objectives and strategy
o PEST analysis: political, economic, social, technological
o Porter 5 forces: suppliers, entrants, buyers, substitutes, rivalry
o Generic strategies: cost leader - differentiate - Identify strategic business risks
- Assess control environment
- Select critical processes
Management control systems:
system maintain/alter pattern in organizational activity.
Management controls:
activities by senior management to mitigate strategic risks to the organization
Strategic analysis and auditor risk judgments – Kochetova-Kozloski and Messier (2005)
Results
RQ1: if the auditor users strategic analysis, he does not identify more business and statement risks. So it is not that it generates
more risks.
But
- RMM more consistent to the expert panel assessment.
- Control environment more consistent
If the auditor uses as part of the risk assessment strategic analyses, he or she is better able to make ARMM assessment, so it
works.
Practical implications
- Strategic analysis enhances:
o Understanding of risk factors that create pressure points on financial statements
o Greater appreciation for entity level controls
Benchmarked performance measures and strategic analysis – Knechel, Slaterio, Kochetova-Kozloski (2010)
Findings
- Benefits of using a benchmark
o Broader set of performance measures assess business risk and RMM
o … regardless of whether the performance measures are benchmarked
- Cost of using a benchmark
o Auditors start to disregard non-benchmarked performance measures
