The Audit Strategy Memorandum (ASM)

One of the key summary documents produced as an output of the crucial planning phase is the Audit Strategy Memorandum (ASM).

Often referred to as the 'roadmap' for the audit, the ASM is an internal document that lays the foundation for how the audit will be conducted.

It's a vital tool for the audit team, summarizing the key decisions made during planning and ensuring everyone is aligned on the approach.

Importantly, the ASM is an internal document and is not shared with the audit client.

So, what exactly goes into a typical ASM?

Inside the Auditor's Toolkit: Typical Content of an ASM

The ASM is structured to provide a comprehensive overview of the audit strategy.

Here's a breakdown of the common sections:

Background client information:

This section provides a concise overview of the key aspects of the client that are relevant to the audit. This will likely include:

• The client's industry and the specific nuances of that sector.
• The financial year-end date.
• The applicable financial reporting framework (e.g., IFRS).
• Any significant changes within the client's business or industry since the prior year that might impact the audit.

Systems and control information:

Here, the ASM outlines the auditor's understanding of the key processes, systems, and the overall control framework in place at the client.

This section would typically detail:

• The main accounting system used by the client to prepare their financial information.
• An overview of key internal controls relevant to financial reporting, such as controls over sales, purchases, and payroll.
• Any significant changes or weaknesses identified in the client's systems and controls during the planning phase.

Staffing and key client contacts:

This section is crucial for the smooth execution of the audit.

It includes:

• A list of all members of the audit team assigned to the engagement, along with their roles and responsibilities.
• The names and contact details of key individuals at the client with whom the audit team will need to liaise, such as the finance director, financial controller, payroll manager, and other relevant personnel.

Materiality:

Materiality is a fundamental concept in auditing, representing the threshold at which a misstatement in the financial statements could influence the economic decisions of users.

This section of the ASM will clearly state:

• The overall materiality figure used for the financial statements as a whole.
• The performance materiality figure, which is set lower than overall materiality to reduce the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.  
• Any specific items materiality figures that may be applied to particular account balances or disclosures where misstatements of a lesser amount than overall materiality could influence the decisions of users.
• A clear explanation of the methodology used to calculate these materiality figures, including the benchmarks used (e.g., profit before tax, revenue, total assets) and any professional judgements made in setting the levels. This may also cross-reference to a more detailed working paper on the audit file.

Analytical procedure results:

As part of the risk assessment procedures, auditors perform a planning analytical review. This involves analyzing financial data to identify significant trends, ratios, and relationships that could indicate potential risks of material misstatement. This section of the ASM will include:

• An explanation of the analytical procedures performed.
• A summary of the key findings and any significant or unexpected numbers identified.
• Explanations provided by the client for any unusual or unexpected results.

Risk assessment findings and procedures planned in response:

This is a core section of the ASM, summarizing the auditor's understanding of the Risks of Material Misstatement (ROMM) identified during the planning phase. It will detail:

• The key areas where the auditor believes there is a higher risk of material misstatement.
• The auditor's intended testing strategy for each identified risk. This will outline whether the auditor plans to primarily rely on testing the operating effectiveness of controls (a controls-based approach) or performing detailed substantive procedures (a substantive approach), or a combination of both.
• A clear link between the identified risks and the specific audit procedures that will be performed to obtain sufficient and appropriate audit evidence to address those risks.

Timetable:

A well-defined timetable is essential for managing the audit engagement effectively. This section of the ASM will include key dates such as:

• The date of the audit planning meeting.
• The client's financial year-end date.
• Dates of any key meetings scheduled with the client, including those charged with governance (e.g., the audit committee).
• The planned dates when the audit team will be on-site at the client's premises.
• The agreed reporting deadlines for the audit engagement, including the date for issuing the audit report.

Why is the ASM Important?

The Audit Strategy Memorandum serves several crucial purposes for the audit team:

• Provides a Clear Overview: It offers a concise summary of the key decisions and the overall audit approach.
• Facilitates Communication: It ensures all members of the audit team have a shared understanding of the audit strategy.
• Aids in Resource Allocation: It helps in planning the allocation of audit team members and resources to different areas of the audit.
• Supports Effective Supervision: It provides a framework for senior members of the audit team to supervise and review the work of junior team members.
• Ensures Consistency: It promotes a consistent approach to the audit across all team members.

Conclusion

The Audit Strategy Memorandum is a vital internal document that acts as the auditor's roadmap for the engagement.

By summarizing the key planning decisions, risk assessments, and planned procedures, the ASM ensures a well-organized and effective audit process, ultimately contributing to the quality and reliability of the audit opinion.