Microsoft Audit Planning - 8 Steps

Authors Avatar by shirlynnlerxueyigmailcom (student)


ACC 203



“The objective of an audit of financial statements is to enable the auditor to express opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework” (IFAC Handbook 1998) . These phrases are used as an expression of an opinion on the “true and fair view”, or “fairly presented” of financial statements. In order for us to form and give an opinion, we must perform audit procedures which are designed to obtain sufficient audit evidence to support the opinion. We must have an adequate audit plan; a plan which are properly executed according to professional standards, sufficient competent evidence collected and all questionable findings were pursued.

We will starts with the financial statements (Form 10K, Sec Filing) prepared by our client, Microsoft INC and submitted to SEC (Form 10-K Filing) as at fiscal year ended 30 June 2013. In these financial statements, management has made assertions about the classes of transactions and related accounts, completeness of an account and valuation of an account. We must obtain sufficient evidence that the assertion is materially true and gather evidence that accounts are classified correctly and proper disclosures have been made based on International standards.

Under Form 10-K, Part II, Item 7, STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS (Form 10K, Sec Filing); management states that the classes of transactions, accounts and disclosure have been present in conformity with accounting principles generally accepted by United States of America, internal controls are good and financial records are reliable. Once we have set the audit objectives based on the Management Assertions, we must obtain sufficient appropriate audit evidence to support all management assertions by accumulating evidence in support of some combination of transaction-related audit objectives and balance-related audit objectives. We will design the audit procedures to accomplish each specific audit objectives. After setting the audit objectives, we will proceed to plan an Audit and design an Audit approach.

There are 8 steps under an Audit approach as shown above. The main reasons is to help us to plan the engagement properly, enable us to obtain sufficient appropriate evidence for the circumstances, to keep audit costs reasonable, to maintain good working relationship with client and avoid misunderstanding with the client.


Assuming that Microsoft INC is our new client in our firm and continuing client in the industry, before we can decide whether to accept this engagement, we will have to investigate the company to determine its acceptability by examining Microsoft’s standing in the business community, financial stability and its relationship with its previous CPA firm. We also have to determine Microsoft has the competency such as industry knowledge and satisfy all independence requirements. This is because to avoid our firm to expose to any significant potential liability if the businesses fail financially.

Based on Form 10-K, Page 15-17, “CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM which was issued for the financial year ended 30 June 2013, the assertions which was made by the management has proven to satisfy all independence requirements. “IFAC Code of Ethics for Professional Accountants and United States’ SAS No. 7 (IFAC Ethics Committee, 1998)” requires us, as a new auditor to communicate directly with their previous auditor, DELOITTE & TOUCHE LLP, to help us to evaluate Microsoft’s integrity such as any disputes over accounting policies, accounting procedures or fees etc. We have to obtain permission from Microsoft as the predecessor auditors have no legal obligation to provide any information and do not normally allow access to their working papers as per United Kingdom SAS 450 (SAS 450).

We also have to consider the nature of this entity, the purpose and nature of the financial statements and whether it is compliance by laws or regulations prescribe a “particular financial reporting framework in order to determine if the financial reporting framework which is used by Microsoft is appropriate”. (AICPA, 2012)  Not only considering the nature of Microsoft’s entity, we also have to identify their reasons for audit and obtain an understanding with them. Identifying the reasons for Audit helps us to determine the level of the acceptable audit risk. “Acceptable audit risk refers to the amount of risk which an Auditor can accept that the financial statements may be materially misstated after completion of an Audit; such risk is affected by the statement users and the intended users of these statements. Example: if the statements are to be used extensively, we are likely to accumulate more evidences during the audit process” (Aren et al, 2006) 

After understanding the reasons for the audit, we should be able to develop an audit strategy that sets the scope, timing and the direction of the audit. Such strategy considers business and industry including areas where there is a chance to increase the risk of significant misstatements.

Obtain an Understanding with the Client should be made when comes to engagement terms such as objectives, responsibilities of auditor & management, schedules & fees must be understood between CPA and Client. “According to ISA 210 says that both auditor and client should agree on the terms of engagement, ISA 210 provide guidance on the preparation of an audit engagement letter. Client should be informed that auditor cannot guarantee all acts of fraud will be discovered such as petty frauds” (IFAC Handbook Technical Pronouncements, 1998).


In order to conduct an adequate audit, it is essential for us to understand Microsoft’s business and Industry. Without having a thoroughly understand towards the company’s businesses, it will be difficult for us to assess the level of Inherent risk, Control risk and determining the level of acceptable audit risk. ISA 310, International Standard on auditing stated that:

In performing an audit of financial statements, the auditor should have or obtain knowledge of the business sufficient to enable the auditor to identify and understand the events, transactions and practices that, in the auditor’s judgement, may gave significant effect on the financial statements or on the examination or audit report.

In terms of obtaining business knowledge from Microsoft, examples of documents that should be reviewed, material sent to shareholders or filed with regulatory authorities, promotional literature, prior years’ annual reports, management policy manual, manuals of accountings and internal control systems, chart of accounts, job description, marketing and sales plans.

United States Securities Exchange and Commission, Annual report of perusal on Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended 30 June 2013, Form 10-K, Microsoft Corporation, we understand that Microsoft was founded in 1975, they created technology in changing the way people work, live, play and communicate by developing and selling of market software (Cloud based computing and Microsoft 365), products and services (Microsoft Office 2013, Xbox), hardware and devices (Personal PCs, Servers) which delivers new opportunities, greater convenience, and enhancement to both business and individuals. They trade their business worldwide and generate their revenues from their research and development, as at 30 June 2013, they have almost more than 100 offices around the world. They have multiple sources of raw materials (integrated central processing unit/graphics processing unit from IBM), supplies (the supporting embedded dynamic random access memory chips are purchased from Taiwan Semiconductor Manufacturing Company), components (supplies providing key components of our Surface devices) and are often able to acquire component parts and materials on a volume discount basis. Example: Microsoft Xbox 360. We need to have a good understanding of the business and types of transactions involved, the relationship with the suppliers, and most importantly, the accuracy of the currency and exchange policy reported.  

In Audit point of view, a tour to Microsoft’s local facilities (Aren et al, 2006) is helpful to have a better understanding of their business operations to provide an opportunity for us to obtain first-hand operations and to meet their key personnel, since Microsoft has raw materials, we can assess physical safeguards over assets equipment so that we are able to identify inherent risks such as unused equipment or potentially unsalable inventory. Microsoft practises effective operation management by implementing life cycle policy so as to provide customers and up-to-date information or versions according to the period of agreement. We also need to be aware of the possible & pending lawsuits in order to give a proper opinion when performing audit.

ISA 550 defined “related parties” given in (International Accounting Standard) says:

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Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other part in making financial and operating decisions (Rick Hayes et all, 1999).

Similarity the US Statement of Auditing Standard No. 45 also says that:

Affiliated companies, principal owners of the company or any other party which company deals where one of the parties can influence management or operating policies of the other (AICPA, AU 334).

Related Party Transaction most commonly refers to the transfer of resources or obligations between related parties regardless of whether a price is ...

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