Audit Strategy Planning Foundation
📌 Planning is the foundation of the audit, crucial for ensuring effectiveness and efficiency from the start.
📈 This module covers recapping Risks of Material Misstatement (ROM), the Audit Risk Model, identifying significant risks, and planning the audit strategy.
📑 The output of this planning phase links to designing and executing the audit program in the subsequent module (Module 4).

Risk Assessment and Inherent Risk
🔍 To determine audit strategy, auditors must understand the client, industry, and environment, referencing ASA 315 for required knowledge.
⚠️ Inherent risks relate to the firm's structure or nature of business, increasing the risk of error or fraud in accounting information, such as foreign currency translation risk for international firms.
⚖️ Inherent risk assessment (Low, Medium, High) is based on professional judgment; auditors should err on the side of caution and generally overstate the level of risk if uncertain.

Control Risk Evaluation and Weaknesses
⚙️ Control risk assessment involves documenting control processes, identifying control activities (e.g., login passwords), and pinpointing control weaknesses.
📉 Low control risk suggests 1-2 minor weaknesses, while high control risk implies 6+ weaknesses or a few weaknesses of a massive nature (e.g., lack of ATM PIN requirement).
🧐 After identifying a weakness, the auditor must determine the potential misstatement concerning both the account and the specific assertion affected (e.g., Occurrence or Accuracy).

Identifying Significant Risks
📝 A significant risk is an identified ROM where the assessment is near the upper end of the spectrum due to the combined effect of the likelihood and potential magnitude of misstatement.
📊 Significant risks are typically plotted on a matrix; the upper quadrant (high likelihood, high dollar impact) is usually prioritized, though professional judgment adjusts this, especially in uncertain times like the COVID-19 environment.
❓ It is very unlikely an audit will have no significant risks; auditors must document discussions and the logic used to justify which risks are deemed significant.

Responding to Assessed Risks (Audit Strategy)
🛡️ Responses to assessed ROMs, guided by ASA 330, involve designing procedures to check if risks resulted in misstatements, focusing audit effort where risk is highest.
🔄 The audit strategy is essentially the response, which dictates the nature, timing, and extent of audit procedures; higher risk demands more effort and evidence.
📊 The Audit Risk Model ($DR = AR / (IR \times CR)$) dictates strategy: Low ROMs lead to high Detection Risk (DR) and a strategy focused on testing internal controls, while High ROMs lead to low DR and a strategy focused heavily on substantive testing.

Contextual Audit Considerations
🏦 Current economic conditions (like COVID-19) increase risks related to going concern, particularly for industries like hospitality.
💰 Auditors must watch for management manipulation of accounts to meet debt covenants (e.g., manipulating ratios) or, conversely, potentially understating revenues to qualify for government assistance programs.
🛠️ Major tasks from this module include understanding the client, evaluating inherent and control risks (Low/Medium/High), applying the ROM, and determining if the audit strategy will be controls-focused or substantive-focused.

Key Points & Insights
➡️ Audit strategies and programs must be custom-designed for the client, industry, and current economic environment, and can change year-to-year.
➡️ Always link identified risks back to a specific account and assertion to define the potential misstatement, unless dealing with going concern.
➡️ If in doubt regarding risk level, overstate the risk (conservatism principle) to ensure more thorough audit procedures are applied.

📸 Video summarized with SummaryTube.com on Nov 26, 2025, 03:07 UTC