An audit plan is a specific list of guidelines auditors, and accounting firms follow when conducting an audit. An audit plan is a vital tool because it helps auditors obtain reasonable evidence to write an audit report. An audit planning process entails establishing the general audit strategy for developing an effective audit plan. There are various critical steps inherent in audit planning that help auditors in designing an effective audit program. Public companies are required to conduct annual financial statement audits to assure stakeholders that the company's financial statements are prepared in accordance with the GAAP and IFRS guidelines. Nike, Inc is an American public corporation that conducts audits annually as required by the GAAP and IFRS guidelines. This paper uses Nike, Inc as a reference company for conducting auditing in publicly traded companies.
Critical Steps in Planning an Audit
Obtaining a Clear Understanding of the Client's Business and Industry
The most integral part of audit planning is to obtain a clear understanding of the client's business settings and the nature of the industry it operates. During the process, the key issues that an auditor must focus on include the management goals and objective, the company's regulatory forces, a firm's resources including asset-based, human resources, financial statement, and the firm's information systems ( Shtefan, 2019) . Information about investing and financing cycle are other vital factors to know by an auditor. For example, Nike, Inc. engages in designing, developing, manufacturing, and marketing footwear products. Therefore, an auditor must understand its business activities and how it operates in the industry to identify focus areas when performing an audit.
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Performing Analytical Procedures
An analytical process involves assessing the financial information done by studying a good relationship between financial and non-financial data. This analysis aims to detect a firm's financial issues and plan the timing and audit procedures appropriate for the company ( Shtefan, 2019) . When planning to audit Nike's financial statements, an auditor's primary focus should be its financial difficulties. An auditor should also pay more attention is the nature of Nike's industry and the significant factors that influence corporate performance.
Making Preliminary Judgements about Materiality Levels
When planning for an audit, auditors should make preliminary judgments about the possibility of financial statement misstatements. In the process, auditors need to consider situations about the firm and information about users of the audited financial statement ( Shtefan, 2019) . While planning an audit for Nike, Inc auditor should consider users of audited accounts to meet their expectations.
Audit Risk
The possibilities for an audit risk is another critical step that auditors should consider when planning an audit to ensure that opinions made about the firm's financial statements were materially misstated. When planning to audit Nike's financial statements, an auditor should pay attention to inherent risk, control risk, and analytical procedure risk.
Developing an audit strategy
Audit planning helps identify procedures followed during the actual audit process and the strategies used to obtain reasonable evidence ( Ibáñez, 2019) . Nike, Inc. requires auditors to have a substantive approach to test its financial statements. Auditors should also use a lowered evaluated level of control risk approach because it is not associated with financial risks.
Understanding Client's Control Structure
Control structures include a firm's internal control systems that determine how a company's activities are performed. Control structure includes policies and procedures used in the company to achieve its organizational goals and objectives. Nike, Inc has multiple internal control systems the guide production, marketing and sale, and financial reporting of accounting activities to help the company achieve its goals ( Ibáñez, 2019) . An auditor must consider these factors when preparing to audit Nike's financial and business information. Understanding Nike's internal controls will help determine its reliability of financial reporting, effectiveness and efficiency of operations, and compliance with mandatory regulations.
Performance Ratios
Performance ratios are used to assess how an entity uses its assets to generate revenues and how efficiently an entity converts its sales into cash to meet its short-term obligations. Efficiency ratios are the best parameters to use in auditing because they help assess the company's operations regarding financial performance and efficiency. In this case, assets turnover ratio and inventory turnover ratio is considered for audit purposes (Mahmoud, 2020 ) . Asset turnover ratio measures the times a firm's inventory is sold and replaced over a certain period. Inventory turnover ratio measures the times a firm can convert account receivables into cash over a specific period. When using the asset turnover ratio, auditors should test sales and assets accounts. On the other hand, auditors should use the costs of goods sold and inventory accounts when using inventory turnover ratios.
Analytical Procedures
An analytical procedure is the examination of processes used by auditors to ascertain that the financial statement's information reflects an accurate and fair value of the firm. In this case, the following are the most appropriate analytical procedures that should be used to assess the credulity and reliability of performance ratios selected:
Ratios analysis can help calculate asset turnover and inventory turnover ratios to know if the company's financial statements are correct (Mahmoud, 2020 ) . It involves calculating the individual ratios to confirm if the figures reported are accurate.
Trend analysis is another analytical procedure that can assess the credibility of the information reported in the company's financial statements (Mahmoud, 2020 ) . It involves comparing the company's current and previous performance ratios to know if there is consistency or connections.
A model-based procedure is another analytical procedure used to assess if the company made correct financial recording and reporting.
Analysis of Nike, Inc.' Balance Sheet and Income Statement
Nike, Inc. Corporation meets all professional rules and guidelines for recording and reporting of its transactions. The company's external auditors have not reported any significant financial misstatement activities or issues in the past decades.
Balance Sheet Analysis
Nike, Inc. annually prepares a balance sheet statement as required by regulatory authorities that all publicly traded companies must report their annual financial performance. Over the past decades, Nike has been correctly preparing its annual balance sheet statements. Both current and non-current assets are recorded correctly as in the individual general ledger accounts. The company's liabilities and shareholders' equity are also accurately recorded on the right side of the statement (Mahmoud, 2020 ) . As a result, the company's balance sheets have never failed to balance, as always reported in its consolidated annual balance sheets.
Income Statement Analysis
Nike, Inc. is one of the multination corporations that comply with professional rules and guidelines when preparing and reporting their financial operation. The company captures all particulars in its income statements as required by the GAAP and IFRS guidelines. Accounting officers record transactions, including revenues, costs, and expenses, as they are earned or incurred to meet professional recording and reporting guidelines. The company's excellent compliance with professional policies has enabled Nike to avoid regulatory actions that affect companies' business operations.
Audit Risk Model
An audit risk model is a technique used by auditors to understand the connection between various risks ascending from audit engagement. It assists auditors in managing the overall audit risk. The audit risk model asserts that the general audit risk of an engagement arises due to the combination of inherent, control, and detection risks.
Sampling and Non-Sampling Techniques
Audit sampling uses audit procedures to less than 100% of the total population of the audited items. It helps auditors to choose the best items appropriate for the auditing process. Auditors usually use different audit sampling techniques, depending on the client's business ( Ibáñez, 2019) . In this case, a statistic audit sampling is appropriate to establish preliminary judgment about the materiality of accounting activities of Nike, Inc. Statistic audit sampling enable audit to select items to audit randomly to test the materiality of the chosen items. The use of statistical audit sampling is vital because it allows auditors to manage and control all audit risks. In the case of Nike, Inc. random statistical technique is the best method to use. Conversely, non-statistical sampling can be used to audit Nike's financial statements and information. It does not involve random sampling, and it is based on a systematic selection of an item to audit from the aggregate population.
An Unqualified Audit Report and Roles of Auditors
An unqualified audit report means the firm's financial information reflects the company's fair and transparent financial position. It also infers that the company complies with the generally accepted accounting principles and international financial reporting standards while preparing and reporting its financial information.
An audit report is an unqualified report; an auditor should provide an opinion about what the company should do to maintain compliance with regulatory rules and guidelines. Also, an auditor is required to provide adequate audit evidence to ascertain that the information provided in the report is correct, reliable, and credible.
Conclusion
In summary, audit planning is an important activity that helps create venues for an effective audit process. It enables auditors to understand the client and know the nature of the business activities of the entity. Nike, Inc. is one of the publicly traded corporations that comply with professional and regulatory guidelines in recording and reporting its financial information.
References
Mahmoud D. (2020). Thermal impact on the performance ratio of photovoltaic systems: A case study of 8000 photovoltaic installations. Case Studies in Thermal Engineering, 21(100693-). https://doi.org/10.1016/j.csite.2020.100693
Ibáñez, P. C. (2019, December 9). Influences of internal control risk influence when planning an audit: An Em...: Start your research here . EBSCO Publishing Service Selection Page. https://eds.a.ebscohost.com/eds/detail/detail?vid=0&sid=735a44ac-8301-41b6-b945-b568920cf8fd%40sdc-v-sessmgr01&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=edsdoj.8ca24a01a2464b1ba7d6751e7d3739fc&db=edsdoj
Shtefan, M. A. (2019, December 9). Planning the audit of estimated liabilities in accordance with INTERNATIONA...: Start your research here . EBSCO Publishing Service Selection Page. https://eds.a.ebscohost.com/eds/detail/detail?vid=0&sid=59ec1ca4-9687-4e1e-9f58-b23feef03a3a%40sessionmgr4008&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=edsdoj.9cb73d52a7fe4d2eb8c9236d92893bf5&db=edsdo
