Fiveable
Fiveable
Fiveable
Fiveable

🏷️Financial Statement Analysis

🏷️financial statement analysis review

9.1 Audit planning and risk assessment

7 min readLast Updated on August 21, 2024

Audit planning and risk assessment are crucial steps in conducting a thorough financial statement audit. These processes help auditors identify potential issues, allocate resources effectively, and develop strategies to examine financial information systematically.

Key components of audit planning include risk assessment, materiality determination, and strategy development. Understanding the client's business, evaluating internal controls, and performing analytical procedures are essential for identifying risks and tailoring the audit approach accordingly.

Overview of audit planning

  • Audit planning forms the foundation of an effective financial statement audit, ensuring a systematic approach to examining and verifying financial information
  • This critical phase aligns with the broader objectives of financial statement analysis by establishing a framework for identifying potential misstatements and assessing reporting incentives
  • Proper planning enhances audit efficiency, effectiveness, and helps maintain professional skepticism throughout the engagement

Objectives of audit planning

Top images from around the web for Objectives of audit planning
Top images from around the web for Objectives of audit planning
  • Establish the scope and timing of the audit to focus resources on high-risk areas
  • Identify potential problems and develop appropriate audit procedures to address them
  • Coordinate work among audit team members and specialists to ensure comprehensive coverage
  • Facilitate proper supervision and review of audit work

Key components of audit plan

  • Risk assessment procedures to identify and evaluate potential misstatements
  • Materiality determination to guide the extent of audit testing
  • Audit strategy outlining the nature, timing, and extent of planned audit procedures
  • Resource allocation plan detailing staffing requirements and timelines
  • Communication protocols with client management and those charged with governance

Audit planning process stages

  • Preliminary engagement activities (client acceptance, independence evaluation)
  • Understanding the client's business and industry environment
  • Performing risk assessment procedures
  • Developing the overall audit strategy
  • Preparing the detailed audit plan
  • Ongoing reassessment and modification throughout the audit

Understanding the client

Client's business and industry

  • Analyze the client's business model and revenue streams
  • Evaluate industry-specific accounting practices and regulatory requirements
  • Identify key stakeholders and their potential influence on financial reporting
  • Assess the impact of economic conditions and market trends on the client's operations

Internal control systems

  • Map out the client's organizational structure and key decision-making processes
  • Evaluate the design and implementation of internal controls over financial reporting
  • Identify IT systems and applications used in financial reporting processes
  • Assess the client's risk management practices and their effectiveness

Previous audit findings

  • Review prior year audit reports and management letters
  • Follow up on unresolved issues or control deficiencies from previous audits
  • Analyze trends in audit adjustments and uncorrected misstatements
  • Consider changes in accounting policies or estimates since the last audit

Risk assessment procedures

Types of audit risks

  • Inherent risk involves the susceptibility of financial statements to material misstatement
  • Control risk relates to the effectiveness of internal controls in preventing or detecting misstatements
  • Detection risk represents the possibility that audit procedures may fail to identify material misstatements
  • Business risk encompasses factors that could impact the entity's ability to achieve its objectives

Risk assessment techniques

  • Conduct inquiries with management and key personnel to understand potential risk areas
  • Perform analytical procedures to identify unusual trends or relationships in financial data
  • Observe business operations and processes to gain insights into potential vulnerabilities
  • Review industry reports and competitor analysis to identify external risk factors

Materiality considerations

  • Determine overall materiality based on financial statement users' needs and expectations
  • Set performance materiality to guide the extent of audit testing for specific accounts or transactions
  • Establish thresholds for clearly trivial misstatements to streamline the audit process
  • Reassess materiality levels throughout the audit as new information becomes available

Audit strategy development

Audit approach selection

  • Choose between a substantive approach or a combined approach with reliance on internal controls
  • Determine the extent of analytical procedures versus detailed testing based on risk assessment
  • Consider the use of computer-assisted audit techniques (CAATs) for data analysis and testing
  • Evaluate the need for specialists or experts in complex areas (valuation, IT systems, tax)

Resource allocation

  • Assign experienced team members to high-risk areas and complex transactions
  • Balance workload among team members based on their skills and expertise
  • Allocate sufficient time for review and quality control procedures
  • Consider the need for external resources or specialists for specific audit areas

Timeline and milestones

  • Establish key dates for interim and year-end fieldwork
  • Set deadlines for completion of specific audit procedures and deliverables
  • Plan for timely communication of audit findings to management and those charged with governance
  • Allow flexibility in the timeline to address unexpected issues or scope changes

Preliminary analytical procedures

Financial ratio analysis

  • Calculate and interpret key financial ratios (liquidity, profitability, efficiency)
  • Compare current year ratios to prior years and industry benchmarks
  • Identify significant fluctuations or unusual trends for further investigation
  • Assess the impact of ratio analysis on planned audit procedures and risk assessment

Trend analysis

  • Examine multi-year trends in account balances and financial statement line items
  • Identify consistent growth patterns or unexpected fluctuations in key metrics
  • Analyze the relationship between financial and non-financial data over time
  • Use trend analysis to inform expectations and develop more precise analytical procedures

Comparative analysis techniques

  • Perform horizontal analysis to compare year-over-year changes in financial statement items
  • Conduct vertical analysis to assess the relative proportion of accounts within financial statements
  • Compare client's financial data to industry averages and close competitors
  • Utilize benchmarking techniques to evaluate the client's performance against best practices

Internal control evaluation

Control environment assessment

  • Evaluate management's commitment to integrity and ethical values
  • Assess the effectiveness of board oversight and audit committee involvement
  • Review organizational structure and assignment of authority and responsibility
  • Analyze human resource policies and practices related to competence and accountability

Control activities identification

  • Map key business processes and identify critical control points
  • Evaluate the design of preventive and detective controls
  • Assess the implementation of automated controls and IT general controls
  • Identify compensating controls that mitigate risks in areas of control weakness

Tests of controls planning

  • Determine the nature, timing, and extent of tests of controls based on risk assessment
  • Design procedures to test the operating effectiveness of key controls
  • Plan for the use of dual-purpose tests to gather evidence on both controls and transactions
  • Consider the impact of control reliance on the extent of substantive testing required

Fraud risk assessment

Fraud risk factors

  • Evaluate incentives or pressures that may motivate fraudulent behavior
  • Identify opportunities for fraud within the organization's structure or processes
  • Assess attitudes or rationalizations that could justify fraudulent actions
  • Consider industry-specific fraud schemes and emerging fraud trends

Fraud detection procedures

  • Design analytical procedures to identify unusual fluctuations indicative of fraud
  • Plan for surprise audit procedures to maintain unpredictability in testing
  • Incorporate data analytics and continuous auditing techniques to detect anomalies
  • Develop tailored audit procedures to address specific fraud risks identified

Professional skepticism importance

  • Maintain an questioning mindset throughout the audit planning and execution
  • Challenge management's assumptions and representations critically
  • Remain alert to conditions that may indicate material misstatement due to fraud
  • Encourage open communication among audit team members about potential fraud indicators

Audit team composition

Roles and responsibilities

  • Define clear roles for engagement partner, manager, senior, and staff auditors
  • Assign specific areas of responsibility based on team members' expertise and experience
  • Establish protocols for escalating issues and resolving conflicts within the team
  • Ensure proper supervision and review at each level of the audit engagement

Expertise requirements

  • Identify specialized skills needed for complex areas (derivatives, IT systems, tax)
  • Evaluate team members' industry knowledge and experience with similar clients
  • Assess the need for subject matter experts or specialists to support the audit
  • Consider involving internal firm resources for technical consultations

Supervision and review process

  • Establish a structured review process for work papers and audit evidence
  • Plan for timely partner and manager involvement in critical audit areas
  • Implement a system for tracking and resolving review notes and questions
  • Schedule regular team meetings to discuss progress, issues, and next steps

Documentation requirements

Audit planning memorandum

  • Summarize key decisions and rationale for the overall audit approach
  • Document significant risks identified and planned responses
  • Outline the audit strategy, including materiality considerations and resource allocation
  • Include timelines, milestones, and key deliverables for the audit engagement

Risk assessment documentation

  • Record the procedures performed to obtain an understanding of the client and its environment
  • Document identified and assessed risks of material misstatement at the financial statement and assertion levels
  • Maintain evidence of discussions among the engagement team regarding fraud risks
  • Include the basis for conclusions reached on the planned audit approach

Planning meeting minutes

  • Record key discussion points from team planning meetings
  • Document assignments and responsibilities for audit team members
  • Capture decisions made regarding audit strategy and approach
  • Include action items and follow-up tasks assigned during planning discussions

Continuous planning considerations

Adapting to changing circumstances

  • Monitor changes in the client's business environment or operations throughout the audit
  • Assess the impact of new transactions, events, or accounting issues on the audit plan
  • Adjust audit procedures and resource allocation in response to new information or risks
  • Maintain flexibility in the audit timeline to accommodate unexpected developments

Reassessment of audit strategy

  • Periodically review the appropriateness of the initial audit strategy
  • Evaluate the effectiveness of planned audit procedures as they are performed
  • Consider the need for additional or alternative audit procedures based on audit findings
  • Reassess materiality and risk assessments as new information becomes available

Communication with management

  • Establish open lines of communication with client management throughout the audit
  • Promptly discuss significant findings or issues that arise during the engagement
  • Seek timely updates on changes in the client's business or financial reporting processes
  • Coordinate with management to address any scope changes or additional information needs


© 2025 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.

© 2025 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.