Top-down approach to auditing
/What is the Top-Down Approach to Auditing?
The top-down approach is used to select the controls to be tested in an audit of internal control over financial reporting. Under this approach, the auditor obtains an understanding of the overall risks to internal control over financial reporting. Following this activity, the auditor then examines entity-level controls, focusing on significant accounts and disclosures, as well as their relevant assertions. By taking this approach, the auditor's attention is directed towards those accounts, disclosures and assertions that have a reasonable possibility of being materially misstated within the financial statement package.
The auditor then goes on to verify his or her understanding of the risks inherent in the organization's processes. Based on this information, the auditor then selects those controls for testing that address the assessed risk of misstatement. This approach to auditing does not necessarily show the exact work sequence used by an auditor. An auditor might find it more efficient to perform auditing procedures in a different order.
Related AccountingTools Courses
How to Conduct a Compilation Engagement
How to Conduct a Review Engagement
How to Conduct an Audit Engagement
Examples of Entity-Level Controls
Entity-level controls include the following:
Controls related to the control environment
Controls over management override
The entity's risk assessment process
Centralized processing and controls
Controls to monitor the results of operations
Controls to monitor other controls (such as the activities of the internal audit staff)
Controls over the period-end financial reporting process
Policies that address significant business control and risk management practices
Advantages of the Top-Down Approach to Auditing
There are several advantages to using the top-down approach. First, it is an effective way to plan auditing activities, because it focuses auditor attention on those areas that are most likely to yield a material misstatement. Second, it enhances auditor efficiency, since they can skip testing in areas where controls have already proven to be robust. In short, the top-down approach is a good way to direct auditor labor into those areas of any audit that are more likely to contain problems that could trigger a material misstatement.