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Audit strategy equal to audit planning? (Mort Dittenhofer, 1994) found that the concept of strategy entails more than planning as consequences, audit planning should rely on audit strategy. Researcher also found that there were some considerations for audit strategy such as company objectives, basic plan to achieve the objectives, consideration of normal aspects of the audit, potential problems may arise, alternative solutions and limitation of audit strategy.
The audit risk model (AR = IR x CR x DR) plays an important role in audit process (SAS300). There is a positive relationship between each of the components of audit risk and the overall audit risk of arriving at an incorrect judgement as to the truth and fairness of the financial statements.
Failure to control inherent and control risk by auditors follows by higher assessed levels of inherent and control risk and lower level of detection risk if the desired overall level of audit risk is to be attained.
Graham Cosserat (1999) stated that auditors must identify and understand entity's internal controls by performing risk assessment before choosing a strategy. By having performing risk assessment, auditors can gather information and evaluate design of control such as auditors can choose only updating the understanding of the entitiy's internal control and determine whether they have been implemented.
Substantive strategy will implement when the auditors choose not to rely on the company's control however reliance strategy will implement when the auditor choose to rely on the company's control. Which strategy will fit the company best? If the result show that the company's internal controls had implement effectively, auditor will implement reliance strategy to acquire more information (Messier, Glover, Prawit et. al 2007).
Reliance strategy is auditors want start to filling the assurance buckets for each assertion. Since auditors want to rely on these controls, test of control need to implement to get audit evidence to prove that it operate effectively.
However, if the audit's risk assessment procedures show that the internal controls implemented by company not fit to it that means the company does not operate effectively. Test of control need not to implement because control risk will be set at the maximum level. In order to reduce the audit risk to acceptable level, auditors need to perform substantive procedures. Auditors will increase the level of substantive procedures to reduce the level of detection risk.
There are few factors that will affect the effectiveness of audit strategy. Firstly, experience has significant effect on effectiveness of audit strategy (William, Roselyn and Jerry 1996). Through experience, auditors able to recall important event, critical analysis and able to identify important information and use it in the planning and developing strategy.
Besides that competence and work performed by internal audit. Company policy makers should also focus on competence and work performed by internal especially during development of precise, operational criteria during internal auditors' selection and type of the work they need to perform. (Hasna, Andrew, Rozaldy and Ishak 2004)
Audit strategy also highly depends on the way fraud may have been committed (Evelyn and James 2001). Company can commit fraud in different ways such as defalcation, fraudulent financial reporting or defalcation with fraudulent financial reporting affect by company's relative rewards and penalties from each type of fraud, cost of effort and industry condition.
(Hasna, Andrew, Rozaldy and Ishak 2004) states:
"External auditors often rely on other professional evaluations in examining clients' financial statements. Much of the work of internal auditors may be useful to external auditors in assisting them in determining the nature, timing and extent of their audit work"
Researchers also found that, substantive strategy is more costly than reliance strategy because auditors need to implement substantive procedure to reduce the risk example, early detection and prevention of financial reporting errors will be less costly than fixing them when they become material problems ( Louis, Jr, Trent and et. al).