An audit strategy is a broad plan that outlines an audit’s scope, timing, and direction. It is a general strategy for performing an audit efficiently and effectively. Audit strategies are applied by auditors to identify the nature and level of audit procedures needed to fulfill audit objectives. An effective audit strategy assists in risk assessment, resource planning, and adherence to auditing standards. This article will address what audit strategy is, why it is important, its types and main contents, and the differences between audit strategy and audit plan.
What is Audit Strategy?
An audit strategy is a plan based on which an auditor can quickly and systematically perform the audit. It comprises the audit scope, risk assessment, materiality considerations, audit resources, and procedures needed for the audit. The audit approach incorporates an understanding of the client’s business, risks of the industry, and financial reporting obligations.
Example: An internal auditor of a retail company can perform an internal audit over high-risk areas, including cash transactions, inventory management and revenue recognition. The strategy will describe how these areas will be tested and what evidence will be gathered.
Importance of Audit Strategy
A proper audit strategy after identifying your planning activities is necessary for conducting an effective audit so that the audit is done efficiently and effectively.
- Improves Efficiency of the Audit Process: A clearly defined audit strategy avoids redundancy in work and helps auditors concentrate on significant areas. This alleviates the efforts in audit procedures and saves time. This approach allows auditors to prioritise the areas that matter most, enabling them to address issues faster and conduct a more productive audit.
- Enhances Risk Management: An audit strategy highlights potential high-risk financial and internal controls areas. It enables auditors to assign resources effectively to manage risks. Focusing on these high-risk areas allows the strategy to prevent material misstatements and proactively manage risk.
- Helps Ensure Compliance with Auditing Standards: An effective audit strategy is essential for auditors to ensure compliance with the International Standards on Auditing (ISA) and Generally Accepted Auditing Standards (GAAS). It also ensures that the audit complies with applicable laws and regulations. Most experts suggest these standards to guarantee the auditing process is comprehensive, accurate, and industry-aligned.
- Maximizes Resource Use: An appropriately designed audit strategy distributes audit assignments to team members according to expertise, which increases overall productivity. It saves costs by ensuring time and resources are utilised the best way. This ensures quality assurance while performing the audit without overextending and engaging resources during the audit phase.
- Enables Effective Communication and Coordination: A well-structured audit strategy enhances communication among the audit teams, management, and other stakeholders. It makes sure that all parties clearly define the audit objectives and procedures. It provides a better understanding of the objective to work towards and ensures that the audit can proceed smoothly, with fewer communication breakdowns.
Types of Audit Strategy
Auditors follow various approaches depending on the type of audit conducted, the risk involved, and the auditors’ resources. The different types of audit strategies are as follows:
Substantive Audit Strategy
The audit strategy covering the substantive part of the audit establishes plans to obtain sufficient and appropriate audit evidence to detect material misstatements in the financial statements. This approach examines monetary transactions, account balances, and disclosed information. Auditors will conduct more substantive tests on transactions and balances without significantly relying on the company’s internal controls. This test is often employed when internal controls are poor, or the risk of misstatement is high.
Control-based Audit Strategy
The first control-based strategy depends on assessing and testing the strength of the company’s internal control, which is in place to prevent or find material misstatements in the financial statements. For example, if an auditor identifies that internal control over financial reporting is effective, then the auditor can reduce substantive testing. This is a common approach when the client possesses effective internal controls and the auditor believes they are working.
Combined Audit Strategy
The combined audit approach is a combination of the substantive and control strategies. In this strategy, auditors conduct tests on the internal controls and the details of the financial statement. They assess the quality of the internal controls and, if they think they are effective, use them to lessen the amount of substantive testing required. Auditors use their training to balance the efficiency of using controls with the need to obtain enough competent evidence to assure financial statements.
Risk-based Audit Strategy
The other type is a risk-based audit in which the audit plan, as well as the number and form of tests to be carried out, is based upon the risk of the surrounding financial environment. An auditor will assess the areas with the most risk of misstatement and spend more resources testing that area. This includes evaluating the risks of material misstatement at both the financial statement and assertion levels. After identifying all possible risks, auditors shape their procedures so that the audit tackles the most significant concerns.
Incremental Audit Strategy
An incremental audit strategy means conducting audits in steps, usually over years. This process essentially builds the audit evidence over some years, where the auditor assesses and checks a subset of the financial data or controls each year. This technique is widely used for periodic audits of larger organisations or more complex systems where no complete audit may be practically achieved in one year.
Content of Audit Strategy
Audit strategy consists of the key ingredients essential for an audit process. Below are the common content of a good audit strategy:
- Significant Risks: This section outlines the significant risks and explains how the auditors will respond to them.
- Materiality: This covers performance materiality and overall materiality.
- Deliverables and Timetable: Auditors describe the audit timetable with deliverable documents in this section.
- Independence: In this section, the authors explain how the auditors maintain independence in the audit engagement.
- Audit Approach and Scope: This section contains information about the approach and standards adopted by the auditors. And this section also names whose works the auditors endorse as reliable.
- Audit Engagement Team: This section of the audit strategy document generally describes the senior members of the audit team, such as the tea manager and leader.
- Overview: This section summarises the auditors’ responsibilities and engagement, such as providing an opinion on their client’s financial statements and reviewing their arrangements for value for money.
Audit Strategy vs Audit Plan
While an Audit Strategy and an Audit Plan are essential for an effective audit, they have different purposes. The strategy sets the overall direction and purpose of the audit. Additionally, the plan provides detailed steps for execution, covering the logistical aspects that translate ideas into practical actions.
| Aspect | Audit Strategy | Audit Plan |
| Definition | High-level framework for conducting an audit | Detailed step-by-step process for executing the audit |
| Focus | Defines audit scope, risk assessment, and approach | Specifies audit procedures and testing methods |
| Level of Detail | Broad and strategic | Detailed and operational |
| Objective | Guides the overall audit direction | Provides specific instructions for audit execution |
| Example | Deciding whether to use a risk-based approach | Listing documents to be verified for revenue audit |
Audit Strategy FAQs
1. What is audit strategy?
An audit strategy is an overall plan specifying the scope, risk analysis, and method for performing an audit effectively.
2. Why is audit strategy important?
It makes resource use effective, enhances risk management, and facilitates adherence to auditing standards.
3. What are the types of audit strategy?
The types are risk-based audit, control-based audit, substantive audit, and hybrid audit strategies.
4. How does audit strategy differ from audit plan?
An audit strategy gives a general outline, whereas an audit plan outlines specific procedures to be followed in the audit.
5. What are the main components of an audit strategy?
The main components are audit scope, risk assessment, materiality, resources, and compliance requirements.
