What is an Audit Approach?

An audit approach is the strategy used by an auditor to conduct an audit. The approach taken varies by client, and depends on a number of factors, including the following:

The nature of the client and the industry in which it operates
The scope of the engagement
The adequacy of the client's system of controls
The level of cooperation received from the client

The approach chosen should be both effective and efficient, based on the preceding factors. The following general audit approaches are most commonly used, depending on the circumstances:

When the financial reporting system is weak. The emphasis is on vouching significant transactions. There is little or no attempt to verify the robustness of the client's system of controls. This approach requires significant labor to test a sufficient number of transactions. This is also much more expensive for the client, who will be charged a higher fee for the extra work. The increased expense can be an incentive for clients to bolster their systems of internal control.
When the internal control system is strong. The emphasis is on testing and validating the client's system of internal controls. If the controls are proven to be strong, then substantive testing can be significantly reduced. This is a more efficient audit approach, since the alternative audit tasks are fairly labor-intensive.
When the focus is on client risk. The auditor spends time reviewing where there is risk in a client's systems, and then designs an audit approach that focuses primarily on high-risk areas. Conversely, low-risk areas receive little auditor attention. This can dramatically skew the audit hours toward a small set of areas that are perceived to be high-risk.
When the focus is on the balance sheet. The audit focus is on testing the balances in the accounts comprising the balance sheet. By proving the balance sheet, the assumption is that all other transactions will flush out through the income statement, which will therefore require little testing. This is a common auditing approach, since it targets a relatively small number of accounts.

Audit Approach FAQs

What factors influence the choice of audit approach?

The choice of audit approach depends on assessed risk of material misstatement, materiality, control design and operating effectiveness, transaction complexity, IT dependence, fraud risk, prior audit results, estimate uncertainty, location structure, evidence availability, reporting deadlines, staffing expertise, and the expected efficiency of controls testing versus substantive procedures.

How should the audit approach address multiple locations?

For multiple locations, the audit approach should consider each site’s financial significance, risk profile, control consistency, transaction volume, prior findings, and degree of centralization. Material or high-risk locations may require direct testing, while lower-risk sites may be addressed through analytics, centralized control testing, remote procedures, or rotational coverage.