Question

Determining an Audit’s scope is determining what controls or control areas should be audited. Put another way, this is determining what to audit. Briefly describe two inputs used in determining and audit’s scope and why they are important.

Answer 1

Inputs used in Determining Audit Scope

The primary objective of an audit mechanism is to assess whether the business is being conducted in the intended way and are the financial figures represent a true and fair state of the actual business environment.

In order to achieve this primary objective, an auditor is required to have a definite scope in hand and should strictly adhere to the same. But the next concern what make up this scope.

The two inputs used in determining scope is Assessment of Risk and Assessment of Controls which reduces Risk.

Risk Assessment

Each business face a numerous risk factors in conducting business. First you need to identify such risks.

For example:

• Risk of non-compliance of statutory requirements
• Accepting sub standard supplies
• Production of under quality goods
• Defalcation of assets
• Chances for teeming and lading etc..

are various risk factors in the conduct of a business.

An auditor before deciding his scope is bound to identify, analyze and evaluate each risk and should include necessary audit procedure in the scope to treat such risk and bring down the risk to an acceptable level.

Assessment of Controls which reduces Risk

Most of the business organizations will have their own control mechanism to reduce the risk levels. However with the designed internal control mechanism in place the intended risk may or may not be mitigated or such control mechanism may not be properly functioning in the Organization.

Few of the examples are:

• Appointing authorized quality inspectors at each level.
• Having suitable checklists to comply all required statutory compliances.
• Having proper receipt mechanism and monitoring of the same to avoid teeming and lading.
• Proper control and supervision over utilization of business assets.

So its the duty of the auditor to check whether the control mechanism in the Organization is functioning properly and is efficient in minimizing the intended risk.

So these are the two important inputs which should go into the mind of auditor while preparing audit scope.