An audit is planning details particular guidelines that auditors are required to adhere to when participating in an external audit process. The external public accountancy requires that an external audit be conducted in a company to ensure that the financial statements are organized in line with GAAP or IFRS regulations as well as to assist company stakeholders in evaluating the financial position of the company. An audit planning process is iterative are often is conducted by an external auditor, and an audit committee examines the report in every audit cycle of a company. General Motors, commonly known as GM, is a company based in Detroit, Michigan, United States. It is a large multinational automobile corporation with a chain of services. Therefore, it is pivotal for the company to have an established audit process for the finance department. As a senior partner in an audit company, I will be central in guiding audit planning and control for GM.
Critical Steps in Planning an Audit
The following steps will form the basis for conducting an audit assessment of General Motors. The initial step in audit planning is considering the duties and responsibilities outlined in the GM terms of engagement between General Motors and the audit firm as well as obtaining an understanding with the GM staff. Secondly, the audit firm should familiarize with GM business and industry as a whole because it is pivotal to design an effective audit program for General Motors. Having a detailed knowledge of the industry and business is essential for the audit firm, considering the external, operations, objectives, and performance of GM. Thirdly, the audit firm will obtain an initial understanding of the GM business risk by assessing accounting and internal control procedures. Fourth, an initial analytical process will be conducted that primarily involves a comparison of the financial ratios of General Motors with the industry standard. This is done to have a preview of GM with the industry performance and any changes in the previous fiscal years. Fifth, the auditors records and establishes the audit strategy used during the audit visit. Lastly, the auditor evaluates the internal controls and control risk of General Motors. It involves the gathering of data to assess fraud risks and ultimately develop an audit plan, scheduled for a first meeting, draft a report containing the findings and set up a closing meeting (Stefaniak, Houston & Cornell, 2012).
Performance Ratios & Analytical Procedures
The performance ratios to be utilized are the profitability ratios and risk ratios. The profitability ratios will be critical in providing the gross profit percentage, net profit percentage as well as the asset turnover, which are pivotal to ascertain the amount the company makes from different perspectives. Subsequently, the risk ratios will yield an interest cover and ratio. These ratios are critical in informing the client of the capability of GM to pay back its loans as well as the loan interests. The analytical procedures used to evaluate the financial information are applicable for General Motors since it has multiple accounts to test. The procedures include the risk analysis, trend analysis, and model-based processes that will allow the auditor to acquire all the required data and adequately inform on the internal controls. When material misstatements exist in GM financial statements, the risk ratios will be pivotal. Moreover, the model-based approach uses client information as well as external industry data to create account balance for General Motors (Stefaniak, Houston & Cornell, 2012). Finally, the trend analysis provides an evaluation of the current account balance or trend balances. The three analytical procedures will be essential for the auditor to make appropriate conclusions.
Collection of Evidence
The main factor when evaluating General Motors' balance sheet and income statement is observing any exaggerated assets, revenues, and unpaid invoices. Frequently, when the inventories of GM are dented, or rendered absolute, the management of General Motors should note the value of the inventory in the balance sheet. Appropriate commendations for the issue is directed to the management to manage employee to ensure that employees are accounted for appropriately for. The administration should further ensure that invoices are settled within 60 days' timeframe to avoid unpaid invoices appearing on the invoice detail reports.
The sources required for evidence collected by the auditor to achieve the desired assurance level primarily depends on the decision of the auditor. Materiality, reliability, and relevance are the main influences as well as the available time and cost. The auditor will use an analytical approach where the real data on DM financial books are compared to the expected information. The relevant documents will be consulted to countercheck observations. Moreover, inspections and recalculations to ascertain mathematical accuracies will provide more information about job performance at GM. Auditor's decision on information sufficiency, data relevancy, and consistency primarily depend on the auditor's understanding of General motor's industry and business (Knechel et al., 2012). Moreover, the extent of the risk of a misstatement by errors and irregularities is a significant factor.
Audit Risk Model & Audit Materiality
Audit risk is when an incongruous opinion of an auditor regarding the financial statements (Johnstone, Gramling & Rittenberg, 2013). The model comprises of the inherent risk, control, and detection, which assists an auditor to define the appropriate auditing procedures for the transactions of General Motors financial statement. Quantitative and qualitative materiality measures. The quantitative materiality approach will primarily depend on the size of the business and the probability that GM will incur financial problems as well as the examination of the General motor's management integrity. A qualitative measure will involve using available evidence coupled with professional judgment to establish an initial decision concerning materiality. Hence, the stress in materiality planning is dependent on quantitative concerns.
Unqualified Audit Report
A standard Audit Report intends to give a view of the fairness that a financial statement of a company presents its financial position in all material aspects and conformity with accepted accounting principles. In instances of an Unqualified Audit Report, the firm auditing General Motors has to assure the public as well as stakeholders that the auditor thoroughly evaluated financial reports of GM and established that they fairly conformed to GAAP standards (Knechel et al., 2012). Moreover, it should state that the financial statement complies with the relevant regulatory standards as well as statutory requirements. The firm should also confirm that there was sufficient release of all the required materials for the proper presentation of the financial data concerning regulatory requirements. Lastly, the audit firm should specify that further alterations in the accounting principles and the impact thereof have appropriately been determined and unveiled in the financial statements (Johnstone, Gramling & Rittenberg, 2013).
Johnstone, K., Gramling, A., & Rittenberg, L. E. (2013). Auditing: a risk-based approach to conducting a quality audit. Cengage Learning.
Knechel, W. R., Krishnan, G. V., Pevzner, M., Shefchik, L. B., & Velury, U. K. (2012). Audit Quality: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 32(sp1), 385-421. https://doi.org/10.2308/ajpt-50350
Stefaniak, C. M., Houston, R. W., & Cornell, R. M. (2012). The effects of employer and client identification on internal and external auditors' evaluations of internal control deficiencies. Auditing: A Journal of Practice & Theory, 31(1), 39-56.
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