Ch-2 Audit strategy, planning and programme Flashcards
Why Planning an audit is necessary?
Adequate planning benefits the audit of financial statements in several ways, including the following: -
1. Helping the auditor to devote appropriate attention to important areas of the audit.
2. Helping the auditor identify and resolve potential problems on a timely basis.
3. Helping the auditor properly organize and manage the audit engagement so that it is performed in an effective and efficient manner.
4. 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.
5. Facilitating the direction and supervision of engagement team members and the review of their work.
6. Assisting, where applicable, in coordination of work done by others such as experts
What are preliminary engagements activities?
The auditor considers whether relationship with client should be continued and whether ethical requirements including independence continue to be complied with. It includes: -
A Performing procedures regarding the continuance of the client relationship
B Evaluating compliance with ethical requirements, including independence
C Establishing an understanding of terms of engagement
What does planning activities involve?
Planning activities involve: -
[A] Establishing the overall audit strategy
[B] Developing an audit plan
What is strategy and how does it help in management of key resources to be employed to conduct audit?
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.
The process of establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditor’s risk assessment procedures, such matters as: -
(i) 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) The amount of resources to allocate to specific audit areas, such as the number of team members assigned to 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) When these resources are to be deployed, such as whether at an interim audit stage or at key cut-off dates
(iv) 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
Factors to be taken into consideration by auditor for establishing audit strategy
(a) Identify the characteristics of the engagement that define its scope.
(b) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required.
(c) Consider the factors that are significant in directing the engagement team’s efforts as per the auditor’s professional judgment.
(d) 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
(e) Ascertain the nature, timing and extent of resources necessary to perform the engagement.
Development of audit plan -
Audit plan that shall include description of
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.
SA-300 states that 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.
The audit plan is more detailed than the overall audit strategy that includes the nature, timing and extent of audit procedures to be performed by engagement team members.
The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. Explain such factors.
The nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors, including: -
1. The size and complexity of the entity.
2. The area of the audit.
3. The assessed risks of material misstatement
4. The capabilities and competence of the individual team members performing the audit work.
What is 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.
Points to keep in mind when constructing an 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) Prepare a written audit programme setting forth the procedures that are needed to implement the audit plan.
(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) 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.
(6) Consider all possibilities of error.
(7) Co-ordinate the procedures to be applied to related items.
Advantages of programme
The advantages of an audit programme are: -
(a) It provides the assistant carrying out the audit with total and clear set of instructions of the work generally to be done.
(b) It is essential, particularly for major audits, to provide a total perspective of the work to be performed.
(c) Selection of assistants for the jobs on the basis of capability becomes easier when the work is rationally planned, defined and segregated.
(d) 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.
(e) The assistants, by putting their signature on 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.
(f) 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.
(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 professional auditor.
Disadvantage of 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.
Discuss how an engagement partner ensures that firm complies with relevant ethical requirements including independence in relation to client.
(i) Obtain relevant information and evaluate circumstances and relationships that create threats to independence
(ii) Evaluate information on identified breaches, if any, and determine whether they create a threat to independence for the audit engagement and
(iii) Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal is permitted by law or regulation.
