- To apply certain steps in the audit planning process, with emphasis on risk identification and audit response (strategy) thereto.
- To provide you with the experience of working as a member of an audit team.
- To acquaint you with the annual report filed on Form 10-K of a publicly-held company audited by a public accounting firm. Interim financial statements are filed quarterly on Form 10Q.
A preliminary analytical review of the company's most recent balance sheet and income statement using one or more prior years as a basis of comparison. Focus on these factors:
- Current year (i.e., the year you are auditing) financial results.
- The company's financial viability and earnings trend.
- Any unusual fluctuation of current year amounts from expected amounts.
- Significant and/or unusual transactions in the current year.
- Account balances significantly influenced by management estimates or judgment.
- Selection of accounting principles and practices by management in those instances where alternative principles are acceptable.
- Critical cut-offs and accruals.
For each material balance sheet and income statement line item, state your assessment of the level of inherent risk. You may use subjective terms such as "high," "moderate," or "low;" or alternately you may use percentages.
A convenient way to do this is by using a matrix comprising two columns: (1) balance sheet and income statement line item name, and (2) inherent risk.