What is System Based Audit

When auditors commence an audit engagement, they must decide on what audit approach to use. The audit approach is a strategy auditors use to perform audits. This approach differs based on several factors and will vary for each audit engagement. There are several audit approaches that auditors may employ. One of these includes the system-based audit approach.

What is the System-Based Audit Approach?

A system-based audit approach is an audit approach that relates to a client’s internal controls. With this audit approach, auditors rely on a client’s internal control systems to conduct the audit. For that to be possible, the auditors must establish that the internal control systems at the client are appropriate and sufficient. This approach takes an opposing strategy to audits compared to the substantive procedures audit approach.

The system-based audit approach to auditing focuses on testing a client’s internal control systems. When auditors can rely on those systems, they may assume that the client’s financial reporting system will also be less risky. However, that does not imply that the system-based audit approach won’t require further work beyond testing internal control systems.

How does the System-Based Audit Approach work?

The system-based audit approach starts with the auditors studying a client’s internal control systems. Auditors must obtain an understanding of the client’s operations and fundamental control systems. Most importantly, they must assess the internal controls related to financial reporting. Auditors must determine how effective these internal controls are in preventing, or detecting, and correcting misstatements.

The primary procedure that auditors use during system-based audits is the test of controls. It is a procedure through which auditors assess two aspects of the client’s internal controls. The first relates to whether controls exist where they should. The second relates to whether those controls are effective in achieving the expected outcomes.

If auditors conclude that the internal control systems at the client are effective, they can use the system-based approach. However, if those systems are inadequate or ineffective, auditors cannot perform a system-based audit. Nonetheless, that does not conclude the work that auditors perform under this approach.

While system-based audits focus on internal controls, auditors still need to test additional areas. However, the threshold for testing may be more lenient compared to other audit approaches. The initial findings from assessing the internal controls help auditors determine the level of substantive tests that auditors need to perform. The higher the trust that auditors can put on the client’s internal control systems, the lower the substantive tests carried out will be.

What are the advantages and disadvantages of the System Based Audit Approach?

The system-based audit approach provides auditors with several advantages. This approach allows auditors to reduce their workload. Therefore, it can help auditors save time and focus on more critical areas. This approach can also reveal deficiencies with the client’s financial reporting systems.

However, the system-based audit approach has some limitations as well. One of the most crucial of these is not focusing on risks. When it comes to audit engagements that auditors consider risky, the risk-based audit approach is more suitable.

Conclusion

Auditors can use one of many audit approaches for their audit engagements. One of these includes the system-based audit approach, which focuses on a client’s internal control systems. With this approach, auditors can reduce the time it takes to complete audits. However, system-based audits may not be relevant to risky audits.

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