2. Audit Strategy, Planning And Programme Flashcards
What is audit planning?
The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business.
Plans should be made to cover, among other things:
a) Acquiring knowledge of the client’s accounting systems, policies and internal control procedures;
b) Establishing the expected degree of reliance to be placed on internal control;
c) Determining and programming nature, timing and extent of the audit procedures to be performed; and
d) Coordinating the work to be performed.
Plans should also be further developed and revised as necessary during the course of the audit.
SA 300, “Planning an Audit of Financial Statements” states planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.
Benefits of planning the audit
Adequate planning benefits the audit of financial statements in several ways, including the following:
- Helping the auditor to devote appropriate attention to important areas of the audit.
- Helping the auditor identify and resolve potential problems on a timely basis.
- Helping the auditor to properly organize and manage the audit engagement so that it is performed in an effective and efficient manner.
- Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks, and the proper assignment of work to them.
- Facilitating the direction and supervision of engagement team members and the review of their work.
- Assisting, where applicable, in coordination of work done by others such as experts.
Overall audit strategy - assistance to auditor
The process of establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditors risk assessment procedures, such matters as: -
i) Employment of Qualitative Resources:
The resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high-risk areas or the involvement of experts on complex matters
ii) Allocation of Quantity of Resources:
The amount of resources to allocate to specific audit areas, such as the number of team members assigned observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas.
iii) Timing of Deployment of Resources:
When these resources are to be deployed, such as whether at an interim audit stage or at key cut-off dates.
iv) Management of Resources:
How such resources are managed, directed and supervised, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place (for example, on-site or off-site), and whether to complete engagement quality control reviews.
Establishment of overall audit strategy
In establishing the overall audit strategy, the auditor shall
i) Determination of Characteristics of Audit:
Identify the characteristics of the engagement that define its scope.
ii) Reporting Objectives:
Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required.
iii) Team’s Efforts:
Consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement team’s efforts.
iv) Preliminary Work:
Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant.
v) Nature, timing and extent of Resources:
Ascertain the nature, timing and extent of resources necessary to perform the engagement.
Relationship between audit strategy and plan
a) Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking into account the need to achieve the audit objectives through the efficient use of the auditor’s resources.
b) The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely inter-related since changes in one may result in consequential changes to the other.
Description of audit plan
SA-300 states that the auditor shall develop an audit plan that shall include description of
i) The nature, timing and extent of planned risk assessment procedures.
ii) The nature, timing and extent of planned further audit procedures at assertion level.
iii) Other planned audit procedures that are required to be carried out so that the engagement complies with SAs.
Audit Strategy and audit plan - auditor’s responsibility
a) The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and management of the audit engagement.
b) Although these discussions often occur, the overall audit strategy and the audit plan remain the auditor’s responsibility.
c) When discussing matters included in the overall audit strategy or audit plan, care is required in order not to compromise the effectiveness of the audit.
Factors affecting direction, supervision and review of engagement team members
Nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors, including: -
- The size and complexity of the entity.
- The area of the audit.
- The assessed risks of material misstatement
- The capabilities and competence of the individual team members performing the audit work.
Documentation of audit plan
The auditor shall document: -
i) the overall audit strategy
ii) the audit plan and
iii) any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes.
a) Record of Key Decisions:
The documentation of the overall audit strategy is a record of the key decisions considered necessary to properly plan the audit and to communicate significant matters to the engagement team.
b) Record of Nature, timing and extent of Risk Assessment Procedures:
The documentation of the audit plan is a record of the planned nature, timing and extent of risk assessment procedures and further audit procedures at the assertion level in response to the assessed risks.
c) Record of reasons for change in audit plans:
A record of the significant changes to the overall audit strategy and the audit plan, and resulting changes to the planned nature, timing and extent of audit procedures, explains why the significant changes were made, and the overall strategy and audit plan finally adopted for the audit.
Define audit programme
An audit programme consists of a series of verification procedures to be applied to the financial statements and accounts of a given entity for the purpose of obtaining sufficient evidence to enable the auditor to express an informed opinion on financial statements.
Evolving one audit programme - not practicable for all business
Businesses vary in nature, size and composition;
work which is suitable to one business may not be suitable to others;
efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor are the other factors that vary from assignment to assignment.
On account of such variations, evolving one audit programme applicable to all business under all circumstances is not practicable.
Constructing audit programme
For the purpose of programme construction, the following points should be kept in mind:
1) Stay within the scope and limitation of the assignment.
2) Consider all possibilities of error.
3) Determine the evidence reasonably available and identify the best evidence for deriving the necessary satisfaction.
4) Apply only those steps and procedures which are useful in accomplishing the verification purpose in the specific situation.
5) Co-ordinate the procedures to be applied to related items.
6) Prepare a written audit programme setting forth the procedures that are needed to implement the audit plan.
7) Include the audit objectives for each area and sufficient details which serve as a set of instructions for the assistants involved in audit and help in controlling the proper execution of the work.
Advantages of audit programme
The advantages of an audit programme are:
a) It is essential, particularly for major audits, to provide a total perspective of the work to be performed.
b) It provides the assistant carrying out the audit with a total and clear set of instructions of the work generally to be done.
c) Selection of assistants for the jobs on the basis of capability becomes easier when the work is rationally planned, defined and segregated.
d) The assistants, by putting their signature on the programme, accept the responsibility for the work carried out by them individually and, if necessary, the work done may be traced back to the assistant.
e) The principal can control the progress of the various audits in hand by examination of audit programmes initiated by the assistants deputed to the jobs for completed work.
f) Without a written and pre-determined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records. Under a properly framed programme, such danger is significantly less and the audit can proceed systematically.
g) It serves as a guide for audits to be carried out in the succeeding year.
h) A properly drawn up audit programme serves as evidence in the event of any charge of negligence being brought against the auditor. It may be of considerable value in establishing that he exercised reasonable skill and care that was expected of a professional auditor.
Disadvantages is audit programme
The disadvantages are: -
a) The work may become mechanical and particular parts of the programme may be carried out without any understanding of the object of such parts in the whole audit scheme.
b) The programme often tends to become rigid and inflexible following set grooves; the business may change in its operation of conduct, but the old programme may still be carried on. Changes in staff or internal control may render precaution necessary at points different from those originally decided upon.
c) Inefficient assistants may take shelter behind the programme i.e., defend deficiencies in their work on the ground that no instruction in the matter is contained therein.
d) A hard and fast audit programme may kill the initiative of efficient and enterprising assistants.
What is materiality?
SA 320 “Materiality in Planning and Performing an Audit” states that misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole.
If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than the materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level levels to be applied to those particular classes of transactions, account balances or disclosures.
