Audit methodologies : developing an integrated planning model incorporating audit materiality, risk and sampling

Abstract

Planning of the audit directs the auditor throughout the audit process and the objective of an auditor is to execute the audit in such a manner that the audit risk is reduced to an acceptable low level. Appling the appropriate audit methodology is of utmost importance for the auditor to complete a quality audit with the lowest risk of failure or litigation. However, various regulatory bodies such as IRBA, IFIAR and PCAOB report on the deficiencies in audits although new audit methodologies are implemented. Investigations into audit firms in South Africa during 2017 and 2018 on possible audit regularities may suggest that the effective application of the business risk audit (BRA) is questioned. The business risk auditing developed in 1990 did not prevent the Enron and WorldCom scandals due to the BRA being in its developmental stage. The BRA is still applied and concentrates on the high risk and understanding of the client on the financial statement level and to a lesser extent on transactional audits. Since the advent of the BRA, the auditors expanded their work to consulting and the distinction between audit and consulting services relevant to the auditor’s independence became distorted. The integrated planning model development spans over 5 phases. Phase 1 is the identification and accumulation of BRA elements that can assist in risk identification. Guidance regarding audit risk identification, assessment and response are lacking as indicated by IFAC (2016) and risk identification elements available in literature are included in the final model. Phase 2 is the development of the quantified sextant audit model from the business risk discipline and applied as a basis to quantify the audit risk at various levels. Phase 3 is the analysis and comparison of the financial information of the JSE-listed companies and the current materiality benchmarks correlate and benchmarks are therefore relevant. Benchmarks for cash flow and debt should be considered as new materiality benchmarks based on the current global economic conditions. Phase 4 is the research and suggestion for sample sizes and it is relevant as the PCAOB (2014) reports on the sample sizes and suggests that the audit sample sizes should be increased, which indicate that the risk assessment and transaction verification at assertion level should receive more attention. The results from literature and the questionnaire administered to the auditing firms differentiate between the sample size for test of controls and suggest ranges between 6 and sixty per annum. The most recent responses indicate that stratified sampling is an acceptable method for sampling. The principle of stratified sampling is to select high value items and randomly select non-material items. The results of stratified sampling therefore convert to percentage coverage for Statement of financial performance (SOPF) balances. Phase 5 of the integrated planning model consists of the integration of risk identification, sextant risk model, materiality and sampling. Research methodologies include mixed, inductive, deductive, grounded theory, documentary review and statistical analysis to obtain results to develop the integrated planning model. The difference between the integrated model as suggested by PCAOB and the current research is that the PCAOB requires for test of controls and substantive audit approach to be performed while the integrated audit planning model in this context is concerned with integrating planning concepts such as audit risk, materiality and sampling to enable the auditor to visually see the relationship as planning progresses. The integrated model incorporates best practices from elements of BRA, sextant risk model, materiality and audit sampling to ensure that all material balances are verified. The results from the model applied in public practice and assignment and questionnaire administered to students all indicate positive results and supports the applicability of the integrated audit planning model. The advantage of this integrated planning model is that supervision can be performed on the document and responses to audit risk are indicated through working paper references. This model also complies with ISA 230 and ISQC1 requirements for documentation and engagement performance. The document serves as a useful tool for review and quality control purposes.