What is an Audit Approach?
The term audit approach defines the strategy that auditors use when conducting an audit. It allows auditors to perform their tasks effectively and efficiently. The audit approach may differ based on several factors. These factors may include the nature of the client and its industry, the scope of the engagement, the adequacy of internal controls at the client, etc.
The audit approach differs from one audit engagement to another. Auditors must use their professional judgment to determine the focus area for an audit. Based on that, they must select an audit approach that allows them to meet their objectives. Once they consider all the relevant factors, they can choose from one of the four primary audit approaches.
What are the types of Audit Approaches?
There are several types of audit approaches that auditors can employ during audit engagements. However, four primary approaches are prevalent among most auditors. A brief description of each of these is as below.
Substantive procedures audit approach
The substantive procedures audit approach involves the use of substantive procedures to conduct audits. These procedures usually include the test of controls, the test of details, and substantive analytical procedures. This approach to auditing is often used when the auditor determines the client’s internal controls to be weak.
The substantive procedures audit approach places low or no reliance on the client’s internal controls. Therefore, auditors usually have to perform more work as a result. Another name used for this approach is the vouching approach.
System based audit approach
The system-based audit approach takes a different approach compared to the substantive procedures approach. Auditors use this approach when they determine the client’s internal controls to be reliable. By using this approach, auditors can significantly reduce the substantive testing required to conduct audits.
With the system-based audit approach, auditors usually prioritize testing and validating the client’s internal control systems. However, auditors still need to perform substantive procedures to support their initial findings.
Risk-based audit approach
In some cases, auditors may focus more on the risks associated with a specific audit engagement. The risk-based audit approach allows auditors to focus more on high-risk areas. By doing so, auditors can cover the risks associated with an audit engagement. As a result, they may also perform lesser work and still meet their audit objectives.
However, the risk-based audit approach may also neglect low-risk areas. Despite that, it is a beneficial audit approach that can be useful in risky audits. For this approach to be successful, auditors need to study the client and relevant audit risks.
Balance sheet audit approach
As the name suggests, the balance sheet audit approach primarily focuses on the client’s balance sheet. With this approach, auditors emphasize testing account balances rather than transactions. This approach assumes that testing account balances allows auditors to check any transactions that contribute to those balances.
In some cases, auditors may still check income statement items. The testing involved for those items is usually a low priority. Nonetheless, the balance sheet audit approach focuses more on material balances that exist in the balance sheet.
Auditors use an audit approach to conduct their audit engagement efficiently and effectively. The audit approach may differ based on several factors. There are four primary types of audit approaches that auditors may utilize. These include the substantive procedures, system-based, risk-based, and balance sheet audit approaches.