Response Post on the Importance of Audit Planning

Planning the audit is incredibly important as it sets the base for how the proceeding audit will go - what information is needed, what are the risk levels, how are their controls, etc. As is the next question, naturally, internal controls relate to the auditee’s companies ability to detect errors themselves. If the company’s internal controls are poor, then not only is there a heightened risk for material misstatements, but there is far more evidence needed to gather on the audit engagement.
Materiality is another critical metric. This relates to how much numbers can be off to satisfy the idea of being a “material misstatement”, or put more simpler, explains the metrics on a per-audit-case basis of what numbers have to do to have an economic influence. For example, if “De Sum Materiality” is $250,000, and we see an audit difference of 142.155 million and 142.176 million, there is only a difference of $21,000, which is deemed “immaterial” as it is less than the De Sum Minimus number of $250,000…. You can’t be perfect!
In planning, addressing fraud risk is crucial. A big part of addressing fraud is first having a solid strategy and plan, check internal controls, as well as analytical procedures, internal inquiry of management, observations and inquiries, discussion with the audit team, and more. Auditors take this responsibility very seriously.
Finally, because material misstatements due to fraudulent financial reporting often involve management override of internal control, resulting in overstatement of revenue, auditors ordinarily should presume that there is a fraud risk related to revenue recognition. Even if specific risks of material misstatement due to fraud are not identified by the auditors, there is always a possibility of management override of internal control. Therefore, the professional standards require the auditors to address this risk apart from whether they identify other fraud risks.