Initial audit approach

During the planning stage of the audit, the auditor performs risk assessment procedures in order to understand the entity, it’s environment and internal control. With this understanding the auditor is able to identify risks of material misstatement. These are risks that could affect the fair presentation of the balances and class of transactions in the financial statements. These risks could arise as a result of the nature of the balance/class of transaction (inherent risks) or they could arise because the auditor is concerned that the controls put in place by management to address the inherent risks may not function effectively (control risks).

It is with this understanding that the auditors determine their audit plan and therefore their audit approach.

If the auditor believes that the controls put in place by management will address the inherent risks then the auditor will select a combined approach (test controls and perform substantive procedures). If the auditor believes that the controls put in place by management will not address the inherent risks or if there aren’t controls in place to address the inherent risks then the auditor will select a substantive approach (perform substantive procedures).

It is therefore their assessment of control risk that ultimately determines the approach. I must highlight that it is the auditor’s assessment after the performance of risk assessment procedures which means there is no evidence at this point and therefore this assessment could be wrong as it is largely based on the auditor’s professional judgement.

The auditor will now perform the audit procedures based on the audit approach selected and use the results of these procedures to determine whether the balances/class of transactions are fairly presented or whether there are material misstatements.

Changes to the audit approach

If in the performance of test of controls, the auditor identifies that the controls are not working effectively, the auditor will have to amend the initial audit approach from a combined approach to a substantive approach and perform detailed testing to identify if there are material misstatements. This is because in the planning stage if the auditor was not confident in the internal controls then the auditor would have selected a substantive approach so even though initially the auditor thought the controls would work, his subsequent assessment shows otherwise.

If however in the performance of test of controls the auditor identifies that the controls are working, then the auditor will perform substantive analytical procedures as reasonability tests and if the results are favourable then detailed testing can be limited if required at all.

Test of controls

When performing test of controls, you can only test the controls that the client has therefore you cannot assume the client has certain controls or you cannot test controls that you know the client should have that they don’t discuss having. It is therefore crucial that you understand the different types of controls so that you can identify them in order to test them.

Substantive testing

When it comes to substantive test of detail procedures, you need to test all the detail making up the balance/class of transaction. In testing the transactions that make up the class of transaction/balance you need to test the date, the description, the amount, the authorisation (validity of the transaction) and whether there are transactions that should have been recorded but have been left out. In testing the balance at year end, in addition to testing the transactions that are included in the balance you need to test whether that balance exists, that it has been correctly valued (testing the IFRS re-measurement requirements if applicable), whether they have the right to/obligation for that balance and again whether there are balances that have been left out.

You then need to check that the class of transaction/balance has been correctly presented and disclosed in the financial statements according to the IFRS requirements.

Once you have performed all of these procedures the results will be collated and you will conclude on whether there are material misstatements in the class of transactions and account balances making up the financial statements.