Audit Planning Control at Home Depot

The American Institute of CPAs (AICPA) has published guidelines for preparing an audit plan. The first step is the preliminary engagement activities, which is focused on establishing an understanding of the terms of engagement for the audit. The steps in the planning process are to identify the scope of the audit; to determine the reporting objectives; to consider the results of the preliminary engagement and to determine the resources that are going to be required to conduct the audit -- and the timing of when those resources will be needed (AICPA, 2015).

To audit Home Depot, it is important first to determine what the scope will be, as this will help to determine the resource requirements. A preliminary meeting with the company will help to determine this -- for example is it necessary to visit stores? Conduct inventory? Talk to Canadian HQ? Or is a visit to the main corporate HQ sufficient? Getting the contact information of the key people within the company will be key to this part of the process. Once the scope is determined, then the company can start thinking about the internal resources it will need to conduct this audit -- how many people, how much time, and how much money? The person leading the audit will have to make determinations about these things in order to plan the audit. A company like Home Depot runs a fairly straightforward retail business, but it is also a very large company, and those are factors that need to be taken into account by the auditors when determining what an appropriate scope for the audit should be. It is important that this part of the process takes into account a proper identification of the risk factors, because those will in part determine the scope and the resources required (Knechel & Willekens, 2004).

There are several important performance ratios in a retail business. To determine which ones should be the focus of an audit means taking into consideration where risk lies. Inventory is one of those areas, in particular at a company with operations all over the country like Home Depot. The company has an incredible amount of inventory on the books, and the state of the inventory levels is material to the financial health of the company. A company like Home Depot will utilize automated inventory systems, and many industry leaders like Amazon actually have robots that do work at their warehouses, so Home Depot might, too. What this means is that the accuracy of the inventory tracking systems is important. There are few ways to establish that, such as running tests. But one of the ratios then is the inventory turnover -- making sure that this is accurate is important because if the inventory is turning over too slowly some of it might need to be written down, or simply that it is not being recorded properly if the number are off. So looking at the different factors that could influence the inventory turnover ratio are important (Kang & Gershwin, 2004).

Another ratio that is worth investigating is the quick ratio. This is material because it directly reflects the solvency of the business, and because it does not include the inventories. The quick ratio should be tested on the basis of ensuring that the accounts receivable is accurate, that the cash is recorded properly- that things that are cash equivalents actually are, for example. By understanding the quick ratio, the audit will be better able to establish the solvency of the company.

So at this point, we are testing the accounts receivable, the cash and the inventories. As noted there are a few ways to audit the inventories. It is not necessarily possible to do a physical count -- though this can be done for smaller companies, or if a specific location is identified as having irregular numbers. So testing the software that manages the inventory is the most important way to look at this -- if the software is working as it should then the inventory counts should be fairly accurate. This can be combined, of course, with spot physical testing to verify that the software test did not yield a false negative.

Cash is easier, because the company should have financial statements outlining the value of its various accounts. It will have some physical cash on hand (i.e. in its tills) and there could be a physical spot count, but most of the company's cash assets will be in financial accounts, and these should be verified to test to ensure that cash holdings are what they say they are.

Testing accounts receivable is different. This is revenue earned that has not been paid -- typically be credit card companies. So it can be audited on both ends. Accounts receivable has to be reconciled between revenue and the amounts that have been paid -- electronic records should be available for all of this data (Accounting Tools, 2016). Accounts receivable can also be tested in terms of ensuring that the credit card companies are in agreement with Home Depot as to what they owe the company. If that agreement exists, then the number is probably accurate. Any tests done on the veracity of the revenue figures will also contribute to proper and adequate testing of the accounts receivable as well.

The methods for auditing prescribed require actually conducting an audit. You cannot audit Home Depot from the comfort of your own home. In order to perform an audit on Home Depot, the income statement and balance sheet are merely a starting point. On the income statement, the receipts are important to determine of the revenues are correct. Testing the point of sale software is critical to this process. Home Depot probably uses a system that delivers sales to ledgers in real time, or overnight at worst. An audit would make sure that this system works as intended, that there are backups against which the data can be verified, and that any downtime the company might have experienced will also be subject to examination to ensure that revenues earned during that time were recorded accurately.

On the income statement, the costs are also important, and a reconciliation of the company's outflows for COGS and the inventory on its books is important here. All COGS outflows should be accounted for in the inventory, so this approach will help to verify both of those accounts. Procedures for cash and accounts receivable were already elaborated above.