The overall audit strategy

Summary

This video explains the concept of an overall audit strategy, a crucial part of the planning stage in auditing. After understanding the entity and its environment and performing risk assessments, auditors develop this strategy to outline the audit's scope, timing, and focus areas. The video uses a vacation planning analogy to illustrate these components, emphasizing the importance of considering factors like client specifics, regulatory requirements, and operational locations. It advises learners to practice identifying focus areas through self-assessment and peer review for better understanding and preparation.

Takeaways

• 📈 The overall audit strategy is developed after the auditor understands the entity and its environment, and after performing risk assessment procedures and calculating materiality.
• 🗓️ The strategy includes planning the scope, timing, and direction of the audit, similar to planning a vacation where you decide what to do, when to go, and what to focus on.
• 🎯 The scope of the audit strategy involves identifying the range of activities to be performed, which can be influenced by factors such as the client's industry and regulatory environment.
• ⏰ Timing considerations for the audit strategy may include tight deadline constraints, the client's operational locations, and the need for third-party meetings.
• 🔍 The direction of the audit strategy is about determining focus areas, such as going concern issues or potential misstatements in financial reporting based on risk assessments.
• 🛠️ The audit strategy is part of the auditor's response to risk and provides a preliminary idea of how and when the audit will be executed, including resource requirements.
• 🏢 If the audit client is listed on a stock exchange like the JSE, the auditor must be familiar with relevant regulations, which affects the audit strategy.
• 💻 The use of automated systems by the audit client can influence the auditor's decision to use technology-assisted audit techniques (GATS).
• 🔑 The auditor must consider the opening balances and additional audit procedures if there are significant changes in the client's operations or industry.
• 👥 The involvement of third parties can affect the timing of the audit, as the auditor may need to coordinate meetings and gather information from external sources.
• 📝 It's important for the auditor to document and justify the timing and direction of the audit, not just stating general timeframes like 'before or after year-end'.

Q & A

What is the purpose of developing an overall audit strategy?

The overall audit strategy is developed to give a preliminary idea of how and when the audit will be executed, including what resources will be required to perform the audit.

What are the three main components of the overall audit strategy?

The three main components of the overall audit strategy are scope, timing, and direction.

How does the scope of an audit strategy influence the audit process?

The scope of an audit strategy includes a range of activities to be performed and affects the audit process by determining the target areas for the auditor to focus on.

What factors might affect the timing of an audit?

Factors that might affect the timing of an audit include tight order deadlines, the client operating from several locations, and the involvement of third parties.

Why is it important for an auditor to consider the client's systems when planning the audit strategy?

If the client's systems are automated, the auditor can decide to use audit procedures like Generalized Audit Software (GATS), which can influence the planning and execution of the audit.

How does the auditor's understanding of the entity and its environment contribute to the overall audit strategy?

The auditor's understanding of the entity and its environment is crucial for developing the overall audit strategy as it helps in assessing the risks and determining the necessary audit procedures.

What is the significance of materiality in the context of the overall audit strategy?

Materiality is significant as it influences the auditor's decisions regarding the extent of audit procedures and the allocation of audit resources.

Can you provide an example of how the audit strategy might differ for a client listed on the JSE?

For a client listed on the JSE, the auditor has to be familiar with JSE regulations, which may require additional audit procedures and affect the overall audit strategy.

What is meant by the 'direction' in the audit strategy, and why is it important?

The 'direction' in the audit strategy refers to the focus areas that the auditor needs to direct their attention to, which is important for ensuring that key risk areas are adequately addressed during the audit.

How should an auditor respond to identified going concern issues during the risk assessment procedures?

If going concern issues are identified during risk assessment, the auditor should include a risk evaluation of going concern in their focus areas as part of the overall audit strategy.

What is the role of self-assessment questions in understanding the overall audit strategy?

Self-assessment questions help in testing and reinforcing the understanding of the overall audit strategy by allowing the auditor to apply the concepts learned to practical scenarios.

Outlines

00:00

📈 Understanding the Overall Audit Strategy

This paragraph introduces the concept of the overall audit strategy, which is a part of the planning stage in auditing. It is developed after the auditor has gained insight into the entity and its environment and performed risk assessment procedures. The strategy is a response to risk and provides a preliminary roadmap for the execution of the audit, including the timing, resources, and focus areas. The analogy of planning a vacation is used to explain the components of the strategy: scope (the bigger picture or target areas), timing (when the audit will take place), and direction (focus areas during the audit). Practical examples are given to illustrate how different client scenarios can affect the audit strategy, such as assessing opening balances for new clients or adhering to JSE regulations for listed clients. The paragraph emphasizes the importance of these considerations for the auditor.

05:01

📝 Practical Application and Learning Process

The second paragraph discusses the practical application of the audit strategy concepts through self-assessment questions. It suggests that learners should test their understanding by working through these questions and then marking their answers, possibly with a study partner to simulate a real-world review process. The paragraph encourages continuous learning by adding new insights and examples to the study material, which will aid in the revision process. The speaker wishes the viewers good luck and thanks them for watching the video, highlighting the importance of the learning process in mastering audit strategy concepts.

Keywords

💡Overall Audit Strategy

The 'Overall Audit Strategy' refers to the comprehensive plan that an auditor develops at the beginning of an audit engagement. It is a critical component of the planning stage, after gaining an understanding of the entity and its environment, and performing risk assessments. The strategy outlines the scope, timing, and direction of the audit. In the video, it is likened to planning a vacation, where you decide on the destination (scope), the timing of the trip, and the activities you'll focus on (direction).

💡Risk Assessment Procedures

These procedures are part of the audit process where the auditor identifies and evaluates risks of material misstatement in the financial statements. The video mentions that the overall audit strategy is developed after performing these procedures and calculating materiality, indicating that risk assessment is foundational to shaping the audit strategy.

💡Materiality

Materiality is a threshold below which the magnitude of an omission or misstatement of accounting information is not expected to influence the economic decisions of users of the financial statements. The video explains that materiality is calculated as part of the planning stage, influencing the overall audit strategy by determining the extent of audit work needed.

💡Scope

In the context of an audit, 'Scope' defines the breadth and depth of work to be performed by the auditor. The video uses the analogy of planning a vacation to explain scope, suggesting that it includes deciding on the target areas or activities to be covered, such as assessing opening balances or adhering to regulations like those of the JSE.

💡Timing

The 'Timing' of the audit refers to when the audit work will be carried out. The video script discusses how factors like tight order deadlines or multiple client locations can affect timing, necessitating decisions such as conducting early verifications or planning inventory account audits accordingly.

💡Direction

The 'Direction' in an audit strategy indicates the focus areas or specific aspects that the auditor needs to concentrate on during the audit. The video gives examples such as assessing going concern issues or potential misstatements in profit due to director bonuses, highlighting the importance of direction in guiding the auditor's attention.

💡Audit Procedures

These are the specific tasks performed by auditors to gather evidence and evaluate the financial statements. While the video does not delve into specific procedures, it emphasizes that the overall audit strategy influences which procedures will be conducted, such as using GATS (Generalized Audit Software) if the client's systems are automated.

💡JSE Regulations

The video mentions that if a client is listed on the Johannesburg Stock Exchange (JSE), the auditor must be familiar with JSE regulations, which could affect the audit strategy. This keyword highlights the need for auditors to understand the regulatory environment of their clients.

💡Automated Systems

The script refers to client systems being automated, which could lead the auditor to use tools like GATS for audit procedures. This keyword is significant as it shows how technological advancements in clients' systems can impact the audit approach and the use of technology in audits.

💡Going Concern

A 'Going Concern' assessment is crucial when there are doubts about the entity's ability to continue operating. The video uses it as an example of a focus area in the audit direction, emphasizing the need for auditors to evaluate and address potential risks related to the entity's viability.

💡Mock Answer

The term 'Mock Answer' appears in the video's conclusion, suggesting a method of learning and practice where peers review each other's answers. This keyword is related to the video's educational theme, encouraging active learning and peer feedback as part of the process of understanding audit strategies.

Highlights

The overall audit strategy is a crucial part of the planning stage in auditing.

The strategy is developed after understanding the entity and its environment, and performing risk assessments.

Materiality calculation is a prerequisite for developing the overall audit strategy.

The strategy aims to provide a preliminary idea of how and when the audit will be executed.

Resources required for the audit are considered in the overall audit strategy.

The strategy is compared to planning a vacation for a better understanding of its components.

Scope, timing, and direction are the three main components of the audit strategy.

Scope includes the range of activities to be performed during the audit.

Timing refers to the schedule of when the audit procedures will take place.

Direction is about the focus areas that require the auditor's attention.

Practical examples are given to illustrate the application of the audit strategy components.

The audit strategy affects the procedures performed on opening balances.

Regulatory requirements, such as JSE regulations, influence the audit strategy for listed clients.

The use of automated systems by the client can impact the auditor's decision on audit procedures.

Tight order deadlines can necessitate early verification or pre-year-end audit procedures.

The client's multiple locations can influence the timing of inventory account audits.

Third-party involvement may affect the scheduling of audit meetings.

Focus areas in the audit direction might include going concern issues or director bonuses based on profits.

It's important to identify specific focus areas during the audit based on risk assessments.

The overall audit strategy does not require listing specific audit procedures, but rather the focus areas.

Self-assessment questions and peer review are recommended for testing and refining understanding of audit strategies.

The video concludes with encouragement to practice and learn from self-assessment and peer review.

Transcripts

welcome and thank you for watching this

video today I am going to explain a few

important concepts regarding the overall

audit strategy the overall audit

strategy forms part of the planning

stage of the audit after the auditor has

obtained a better understanding of the

entity and its environment and while or

after he or she performed the necessary

risk assessment procedures and

calculated materiality the auditor vault

developed the overall audit strategy the

overall audit strategy is part of the

auditors responses to risk and is

compiled to give a preliminary idea of

how and when the audit will be executed

including what resources will be

required to perform the audit to get a

better idea of what the order strategy

entails we can compare it with planning

a vacation first you need to have an

idea a bigger picture of what you want

to do what are you going to do for

example or you're going to the bush

veldt

or maybe to the coast in order to in

terms this is the scope then you need to

decide when are you going on vacation in

order to in terms this is the timing of

the audit and then lastly you need to

decide what your focus areas what

specifically need what do you want to do

do you just want to lie on the beach or

do you perhaps also do want to do

shopping in auditing we would refer to

this as a direction to be followed

during the audit so as we mentioned the

audit strategy consists of different

components which is also the big picture

so firstly you have the scope and there

it includes a range of activities to be

performed you can think of it as your

target areas then the timing is when

will the audit take place and lastly the

direction is the focus or areas that the

auditor needs to attain the to to direct

his attention to so what does this mean

we have to look at it practically and

here we have included a few examples for

you so for example in terms of scope

in terms of your range of activities

that you need to perform you need to

decide as in order to assess in your

audit client this will definitely affect

your audit strategy as you have to do

more audit procedures on the opening

balances the same with if your client is

listed on the JSE you as an auditor have

to be familiar with some of the JSE

regulations then also is the audit

client systems automated if yes then you

as an auditor can make a decision to do

your audit procedures using GATS and so

you can go through each of these

examples remember this is not a complete

list and as you work through your study

material you will be able to add to this

list just remember that these are

concepts that's important for you to

consider so if we look at the timing

this is bring your audits going to take

place and there are feel things that can

affect this for example is there tight

order deadlines if they are then you

need to decide or you're going to do

some of the order procedures before year

end just with a few adhere in all you're

going to do early verification what are

you going to do with a tight order

deadline also if your client operates

from several locations it might

influence the timing of your inventory

accounts so you need to plan for that

and also of these third parties involved

you might have to make sure that the

meetings are arranged honestly so it's

very very important to explain when the

audit will take place so you can't just

say before or after year in and so on

you need to substantiate your own Sam

and then last years in terms of the

direction of the audit you need to

decide what will the focus areas be for

example if you identified that the or

decline has going concern issues in the

red during your risk assessment

procedures you need to have you need to

do a risk evaluation going concern

evaluation also if you identify that

some of the directors are getting

bonuses based on profits there might be

a misstatement or overstatement of

profit and that's something that you

suppose for sure need to focus on

there are many many more examples that I

can think of but the only way for you to

identify them is to work through

questions so add new ones to this list

as you go through the study material and

remember for this section it's not

important to list the specific audit

procedures you just need to explain to

us what is your focus or areas during

the audit so now to conclude hopefully

you have a better understanding of this

topic so you firstly go and test this by

working out some of the self-assessment

questions then afterwards you need to

mark your answer you can also switch

with a buddy so that your she can mock

your answer and vice-versa

that that's also part of a learning

process and then as you mark your answer

will come across new things add the

notes it will just make your revision so

much easier hope you learned something

today

good luck and thank you for watching

this video