How to Develop an Audit Plan in 6 Steps

Audit plans are comprehensive plans that professional auditors create to evaluate how a company performs and whether they’re doing so in a manner that’s ethical and efficient. If you’re a certified accountant, you may encounter a time when you conduct an audit on a company or organization. If you’re interested in performing audits, you may be curious about what they involve and how to develop a plan for doing so.

In this article, we define an audit plan, explain why they’re important, review what this type of plan commonly includes and give you a step-by-step guide on how to develop an audit plan.

What is an audit plan?

An audit plan is a detailed plan that professionals create before performing an audit on a company or organization. This plan includes information about the standards the auditors aim to uphold while performing the audit. It also includes the specific procedures and policies that the auditors are to use to complete the audit. An audit plan also contains information about the scope of the audit, the name and other defining information about the company in question, the time frame over which the audit occurs and the professionals in charge of the audit.

Why are audit plans important?

Audit plans are important for a variety of reasons, many of which impact the auditor’s ability to smoothly and efficiently conduct an audit for a company. Typically, developing an audit plan to follow provides the following important benefits to the auditor:

  • Defines the steps to take to complete an audit
  • Assists the auditor in obtaining documents, records and other evidence for the circumstances
  • Helps with identifying any problems or challenges the auditor may encounter
  • Ensures the audit runs in a well-defined manner
  • Gives an idea of how much the audit is to cost
  • Establishes the scope of the audit
  • Ensures both the company and the auditor remain informed and updated on the audit

What does an audit plan include?

Typically, audit plans include several components that allow them to be as comprehensive as possible and address all needed topics. These components commonly include the following:

  • Extent of audit plan’s risk assessment procedures
  • The nature of all procedures involved in the plan
  • The timeframe for which the plan completes
  • Nature of tests of controls
  • Nature of substantive procedures
  • Time frame for test of controls
  • Time frame for substantive procedures

How to develop an audit plan

Developing an audit plan can be a straightforward and effective process if you follow a few steps. It’s important to note that depending on specific auditing requirements as outlined by the state you live in, the company or organization you’re auditing and any specific requests made to you, there may be more or fewer steps to follow to develop this plan. You can follow these steps when creating this type of plan:

1. Review risks

An important aspect of a company’s health and standing is the amount of risk associate with it and how ready the company is to handle that risk. As such, the first step in developing an audit plan is to carefully asses all risks related to the company. It’s important to pay close attention to anything that may impact a company’s ability to reach its goals and document this risk. Additionally, it’s important to consider the company’s business risk in addition to its operating environment.

2. Analyze accounting policies

Verify the appropriateness of accounting policies and procedures. When designing an audit plan, the auditors will want to spend sufficient time developing an understanding of significant accounting policies in use at the company. Accounting policies include procedures related to revenue recognition, capitalization, accounting for inventory, consolidation, impairment and valuation.

The company typically provides flowcharts and other documentation that help auditors quickly understand the accounting policies and controls. Identify areas where special audit consideration may be necessary. Special consideration is important for areas that are highly complex or have a high likelihood of error. Auditors can reference their assessment of the company’s business risks and accounting policies and procedures to determine where special attention is appropriate.

3. Determine materiality thresholds

Materiality thresholds refer to the size at which a misstatement can have a significant impact on an individual’s decision-making capabilities. This is an important size to gauge when creating an audit plan for a company, so it’s important to determine what the company’s material thresholds may be. This materiality is commonly relative to the actual size of the company in question, so you typically use a percentage of the company’s total assets or a percentage of its revenue as its materiality threshold number.

4. Create plan expectations

Before you can design your audit procedures, it’s important to outline your audit plan expectations. In this step, you develop expectations for analytical procedures that you plan to follow to perform your audit. Usually, these procedures include both ratio analysis and trend analysis. Ratio analyses refer to comparing a company’s financial standings in addition to its financial condition and performance with that of the industry’s averages. Trend analyses aim to identify any anomalies in the company’s accounting practices over certain periods of time.

5. Design audit procedures

A main component of your audit plan development involves the creation of auditing procedures to following when conducting the audit. Audit procedures exist under two main categories, which are substantive testing and tests of internal controls. Substantive testing refers to the direct testing of transactions or tests that a company performed during a specific period documented on financial reports. Depending on what you determine, you may conduct substantive testing in a number of different areas or several times on areas where you place special consideration.

Tests of internal controls refer to methods of reviewing a company’s ability to detect and prevent any types of material misstatements. This type of testing means to gauge the effectiveness of the company’s overall ability to handle risk and take impacts to its financial standing.

6. Proof the plan

To conclude the development of your plan, try to reassess it and review it for precision, clarity and accuracy. As you complete your audit, you actually reassess and change it as needed as you uncover any additional risks to the company or any adjustments required. It’s important to remember to update anyone else involved with the audit, including fellow auditors and the company you’re auditing, of any changes you make to the plan so everyone’s as informed and updated as possible.

Original Source: Indeed