Understanding Audit Strategy And Risk: ISA Standards 300, 320, And 520

Introduction to Auditing

In today’s business organizations, auditing is considered as a major aspect. Under the process of auditing, the responsibility of the auditors is to examine and inspect the financial statements of the companies with the aim to find any material misstatements in them caused by fraud and errors (Louwers et al. 2015). It needs to be mentioned in this context, it is on the auditors to consider the formulation of a audit strategy before conducting the audit procedures. After the formulation of audit strategies, the auditors are needed to document them.

In this whole process, the auditors are needed to comply with some specific standards and regulations at the time to develop the audit strategy and to conduct the audit operations (Knechel and Salterio 2016). There are three specific standards that the auditors are needed to comply with; and they are International Standards of Auditing (ISA) 300 Planning and Audit of Financial Statements, ISA 320 Materiality in Planning and Performing an Audit and ISA 520 Analytical Procedures. The main aim of this report is the development of the overall audit strategy document for Unite Group Plc. For this reason, this report involves in the analysis of the concepts of audit risks of the financial statements of the companies.

Knowledge and Understanding of Audit Strategy Document as per ISA 300

According to ISA 300, the main objective of the auditors is the effective planning of the audit program with the aim to perform it in the effective manner (ifac.org 2018). ISA 300 puts some specific requirements on the auditors that they are needed to consider at the time of auditing and they are discussed below.

As per ISA 300, it is the major requirement for the audit engagement partner as well as other key members of the audit team to involve in the process of audit planning. After that, the auditors are needed to undertake certain engagement activities prior to the audit engagement operations. They are the to perform the procedures as stated in ISA 220 related to the continuance of the relationship of the clients; to evaluate the compliance with the required ethical standards like audit independence and others; and to establish an understanding about the required terms of audit engagement as per ISA 210 (ifac.org 2018).

After that, according to ISA 300, the need for the auditors is to formulate an audit strategy including scope, timing as well as direction of the audit process. Some specific aspects that the auditors are needed to consider; they are identification of the engagement characteristics; ascertainment of the objectives of reporting in the audit process, consideration of the crucial factors that can affect the audit judgments and others (ifac.org 2018).

Knowledge and Understanding of Auditing Standards

After the development of the audit strategy, ISA 300 puts the obligation on them to document them. In this document, the auditors are needed to include certain aspects like the overall audit strategy, the audit plan and any significant changes in the audit engagement process during the engagement time. Lastly, the auditors are needed to consider some additional aspects like the requirements as per ISA 220, communication with the previous auditors and others (ifac.org 2018).

Knowledge and Understanding of ISA 320 Materiality

As per ISA 320, it is the objective of the auditors for the application of the concept of materiality in effective manner while planning and performing audit. According to the concept of materiality in ISA 320, materiality is considered as an amount set by the auditors at less than the materiality level of the financial statements with the aim to reduce the probability that the amount would not affect the financial statements of the companies (ifac.org 2018).

There are some specific requirements in ISA 320 that the auditors are needed to follow while determining materiality. As per ISA 320, it is needed for the auditors to determine the materiality of the financial statements as a whole at the time of audit process (ifac.org 2018). After that, the need for the auditors is to revise the level of materiality as a whole at the time of audit procedures. Lastly, as per ISA 320, the auditors are needed to include some specific aspect in the audit document such as materiality amount of the financial statements, performance materiality and any revision in materiality while conducting audit (ifac.org 2018). 

Knowledge and Understanding of ISA 520 Analytical Procedures

As per ISA 520, the objective of the auditors is to obtain reliable and relevant audit evidence at the time to use substantive analytical procedures; and to design as well as perform analytical procedures at the near to the audit process (ifac.org 2018).

As per ISA 520, at the time to design and perform substantive audit procedures, the auditors are needed to determine the suitability of that specific substantive audit procedure with the provided audit assertion by considering the risk, to evaluate data reliability and to determine the amount of differences. After that, as per ISA 520, the auditors are majorly responsible for the investigation of the results of the audit analytical procedures in case there is major fluctuation in the amounts (ifac.org 2018).

Audit Risk

ISA 300: Planning and Audit of Financial Statements

Audit risk can be considered as the risks that can be encountered while performing the audit procedures. The audit risk model is shown below:

Audit Risk = Inherent Risk x Control Risk x Detection Risk

Inherent Risk: Inherent risk is regarded as the risk of material misstatements in the financial statements and it occurs as a result of omission or errors. The auditors consider this risk as higher when the presence of high degree of judgment and estimation can be seen in the financial transactions (Botez 2015).

Control Risk: Control risk is considered as the material misstatement risk in the financial statements and it arises as a result of the absence or failure in the internal control of the business organizations. In order to prevent this risk, the auditors are needed to have effective internal control within the organizations (Goh, Krishnan and Li 2013).

Detection Risk: Detection is the kind of audit risk that occurs due to the failure of the auditors to detect the material misstatements in the financial statements. This risk needs the application of effective audit procedures to be detected and prevented (Chan and Vasarhelyi 2018).

Calculation of materiality 

Auditors set the level of materiality on the financial statements as the whole at the stage of planning itself. While computing the materiality 3 key steps are followed – (i) selecting appropriate benchmark (ii) determining the level of benchmark usually in percentage term and (iii) justifying choice (Bentley-Goode, Newton and Thompson 2017). Various benchmark considered for computing the materiality are –

• Profit before tax – 5% of profit before tax
• Total revenue – 1% of revenue
• Net asset – 2% of net assets (Icaew.com 2018).

From the annual report of Unite Group Plc, it can be found that the materiality level for the company will be as follows –

• Profit before tax – (£4 * 5%) =  £11.47 million
• Total revenue – (£3 * 1%) = £1.19 million
• Net asset – (£1,754.20 * 1%) = £54 million

Generally materiality level is set at amount that is highest among the above. Hence, the materiality level for Unite Group Plc will be at £ 17.54 million. However, irrespective of the amount involved some of the accounts are always considered for material misstatement as they are susceptible to misstatement, fraud or errors. These accounts are revenue, cash, inventories, trade receivable, trade payables and borrowing (Christensen et al. 2016).

Analytical Procedure for Determining Risk of Audit

The analytical procedure is performed by an auditor to identify and assess the risk of material misstatement present in the financial statement along with the level of assertions. Audit opinion is based on the audit evidences.

The analytical procedures are of different types.

Ratio Analysis

Auditors use ratio analysis while auditing the financial components in order to compare ratios for the present year with the ratios of the previous area. If the auditor finds the material difference in the ratio that has been calculated shall be explained with the valid reason justifying the change. (Alzeban and Sawan 2013).

ISA 320: Materiality in Planning and Performing an Audit

Trend Analysis

Trend analysis the comparison of the balances in the current year with previous year .to perform the trend analysis the auditor has the two approaches that is casual and diagnostic. Under diagnostic approach is regarded for evaluating the balance of a current account diverges meaningfully from the drift recognized in the preceding year’s balances for that item. Under casual approach, the auditor computes a balance predictable for the account then associated to the definite sum. For Unite Group PLC trend analysis is used.

Reasonable Tests

Non-financial data in regard of the current period is used in order to compute an predictable amount for the balances of items. This procedure does not require the data of previous events instead of this it uses data those are operating in nature in that period in consideration of audit. This is suggested and is more applicable for the components of income statements as it is easier to collect data for the current period in order to collect for the previous year. This amount that is collected is used in order to check the reasonability of the account in audit process.

The below table describes the process of eliminating the risk by identifying the audit risk of common accounts head.

Account Head	Evaluation/ Analysis	Auditing Risks	Steps for Eliminating Risks
Accounts Receivables	The amount under this is due to the company by the clienteles and consumers of the company. The amount represents the figure that is being outstanding and is yet to be received by the company.	The company operation and goods are retailed under the outstanding basis of sales methodology to its clienteles. (Sadgrove, 2016).	The business risk of the company is high the auditor need to cautiously reconsider the total of sales and the amount of debtors that are being identified. The auditor needs to sensibly identify dissimilar apparatuses of the account and deliver materiality concerning the identical.
Account Balance	Amount £	Assertion(s)	Audit Procedure	Audit Evidence
Cash and cash equivalents	51.20	· Existence-occurs in the balance period. · Completeness-all objects related to cash are recorded as on balance period.	Ask and check the confirmations from banks. 2. Accept tests of bank reconciliations and trail-up integration item.	Bank Validation credential are collected from the Bank (Document). Obtain Xerox copies of customer’s bank reconciliations (Document). Investigation and proceedings of incorporation item (oral)
Inventories	4.50	Accuracy- the item is specifically recorded as on the balance date.	check the bookings and inventory flow.	Inventory records to be verified with the inventory ledger.
Accounts Receivables	82.90	Accuracy- the item is recorded correctly by the accountant.	Request for the bills and summarize the figures from the administration of the company.	Check the bills of the receivables.( Document and oral) Double-checked the earlier imbursement received. (Document and oral)
Trade and other Payable	152.10	Accuracy- the element is logged appropriately	Demand for the bills and record of the totals from the organization of the corporation	Inspect the earnings of the payables.( Document and oral) Double-checked the previous imbursement made. (Document and oral)
Borrowings	511.50	Accuracy- the figure logged is precise as on the balance day.	Petition for the evidences of the deal detailed made against the element.	Censoriously inspects the papers presented.(Document and oral)

Timetable for reporting

The report prepared by the auditors of Unite group Plc is usually reported at the end of every financial year. However, the unaudited reports are prepared and published by the reporting entities in every quarter months or published in the half yearly financial report (Cohen, Krishnamoorthy and Wright 2017). On the basis of the audit report prepared for the current year ending mentions that there are no inconsistencies and misstatements that is regarded material in respect of the financial statements as a whole. Auditors discuss the areas with risk of material misstatement in the absence of management of organization by holding private meeting at each committee meeting. However, for the year ended 2017 the audit of the company has been carried out Deloitte and the report were signed on 21^st February 2018 (Unite-group.co.uk 2018).

Audit Budget

The auditing of budget is prepared for examining the process of budgeting. Through audit`s budget it can be concluded that the budget process is operating efficiently. This also evaluates the effort of budget. The audit budget helps in evaluation of techniques, procedures and how much the budget is effective. The audit budget shall be dynamic in nature. The budget audit shall be conducted after every two to three years. This budget audit shall be conducted by an independent individual but not by those who are a part of budgeted staff. After the plan of audit budget, auditor shall inform to the upper level of management for accurate action. The plan of audit helps us to analyze the areas that need corrections. The budget audit contemplates

• Revision of budget.
• Level of adequacy of analyzing costs
• Trend of cost and control
• Classification and identified of costs
• Flexibility of budget allowances
• Completeness of records, schedules and documentation of budget
• Grade of involvement by staffs and managers
• Class of data used for support (Rahman et al. 2016).

ISA 520: Analytical Procedures

As the materiality level for the company is set at £ 17.54 million, it can be stated that the level is low. It will lead to more number of items to be checked from the income statement and balance sheet of the company. With increasing number of items the budget of the company for audit will also go up (Abbott et al. 2016). Based on the materiality level of Unite group Plc audit budget will be as follows –

Particulars	Percentage	Amount
Total	100%	£      22.50
Planning matters	18%	£        4.05
Audit working file operation	12%	£        2.70
General procedure	10%	£        2.25
Checking for materiality	20%	£        4.50
Performing analytical review	24%	£        5.40
Final audit	8%	£        1.80
Preparing and presenting the report	8%	£        1.80
Total	100%	£      22.50

Conclusion 

From the above analysis it can be concluded that the strategy of Audit in general refers to the audit approach combination that is to be utilised in company. It includes the system of timing and allocation of audit and the audit management process. The audit strategy also assesses the knowledge that is gained by the auditors along with the outcomes, whether the pre analytical reviews are consistent. The process in general takes place with the comparison between the knowledge of the auditors that is obtained normally with the association with the management and understanding the nature of the same.

In order to follow the detailed explanation of audit strategy and the process in which the audit strategy is to be maintained, the audit must be based on ISA 300. Further, as per the analysis carried on above and level of materiality, it can be stated that various accounts those need special attention are revenue, cash, inventories, trade receivable, trade payables and borrowing. Moreover, it is found that on the basis of the items selected for material misstatement analysis total budget for the audit will be amounted to £ 22.50 million. Hence, it can be stated that audit planning forms major part for carrying out the audit appropriately.

Reference 

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