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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 42
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
Purpose of Planning
The auditor should plan the audit so that the engagement will be performed in an effective manner.
Planning an audit involves:
1. Establishing the overall audit strategy for the engagement and
2. Developing an audit plan, in order to reduce audit risk to an acceptably low level.
Planning involves the Engagement Partner (auditor) and other key members of the engagement
team to benefit from their experience and insight and to enhance the effectiveness and efficiency of
the planning process.
Adequate planning helps in achieving the following:
 Ensure that appropriate attention is devoted to important areas of the audit, like; related parties
transactions, outsourced activities (debt/revenue collection), payroll, sales, acquisition of non-
current assets.
 Potential problems, like; slow availability of information, application of new regulations etc. are
identified and resolved on a timely basis
 Audit engagement is properly organized and managed in order to be performed in an effective
and efficient manner.
 Proper assignment of work to engagement team members,
 Facilitation of direction and supervision of engagement team members and the review of their
work
 Coordination of work done by auditors of components and experts.
The nature and extent of planning activities will vary according to the
 Size and complexity of the entity
 Auditor's previous experience with the entity
 Changes in circumstances that occur during the audit engagement.
Planning is a continual process that often begins shortly after the completion of the previous audit
and continues until the completion of the current audit engagement.
Planning Activities
I
The Overall Audit Strategy
The auditor should establish the overall audit strategy for the audit.
The overall audit strategy
 sets the scope, timing and direction of the audit, and
 guides the development of the more detailed audit plan
The establishment of the overall audit strategy involves:
(a)
Determining the characteristics of the engagement that define its scope, such as the
financial reporting framework used, industry-specific reporting requirements and the locations of the
components of the entity;
(b)
Ascertaining the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required, such as:
deadlines for interim and final reporting, and
key dates for expected communications with management
(c) Considering the important factors that will determine the focus of the engagement team's
efforts, such as:
a.  Determination of appropriate materiality levels,
b. Preliminary identification of areas where there may be higher risks of material
misstatement,
c.  Preliminary identification of material components and account balances,
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Fundamentals of Auditing ­ACC 311
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d. Evaluation of whether the auditor may plan to obtain evidence regarding the
effectiveness of internal control, and
e.  Identification of recent significant entity-specific, industry, financial reporting or other
relevant developments.
The overall audit strategy sets out clearly,
(a) 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;
(b) 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 incase of group audits, or the audit budget in hours to allocate to
high risk areas;
(c) When to deploy these resources?, such as whether at an interim audit stage or at key cut-
off dates; and
(d) 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.
II
The Audit Plan
Once the overall audit strategy has been established the auditor should develop an audit plan for the
audit in order to reduce audit risk to an acceptably low level. Although the auditor ordinarily
establishes the overall audit strategy before developing the detailed audit plan, the two planning
activities are not necessarily discrete or sequential processes but are closely inter-related since changes in
one may result in consequential changes to the other.
The audit plan is more detailed than the overall audit strategy and includes:
 The nature, timing and extent of audit procedures to be performed by engagement team
members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level.
Documentation of the audit plan also serves as a record of the proper planning and performance of
the audit procedures that can be reviewed and approved prior to the performance of further audit
procedures.
The audit plan includes:
 A description of the nature, timing and extent of planned risk assessment procedures
sufficient to assess the risks of material misstatement,
 A description of the nature, timing and extent of planned further audit procedures at the
assertion level for each material class of transactions, account balance, and disclosure. (The
plan for further audit procedures reflects the auditor's decision whether to test the operating
effectiveness of controls, and the nature, timing and extent of planned substantive
procedures); and
 Such other audit procedures required to be carried out for the engagement in order to
comply with ISAs (for example, seeking direct communication with the entity's lawyers).
Planning for these audit procedures takes place over the course of the audit as the audit plan for the
engagement develops. For example, planning of the auditor's risk assessment procedures ordinarily
occurs early in the audit process. However, planning of the nature, timing and extent of specific
further audit procedures depends on the outcome of those risk assessment procedures. In addition,
the auditor may begin the execution of further audit procedures for some classes of transactions,
account balances and disclosures before completing the more detailed audit plan of all remaining
further audit procedures.
Changes to Planning Decisions during the Course of the Audit
The overall audit strategy and the audit plan should be updated and changed as necessary during the
course of the audit.
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Fundamentals of Auditing ­ACC 311
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Planning an audit is a continual process throughout the audit engagement. As a result of unexpected
events, changes in conditions, or the audit evidence obtained from the results of audit procedures, the
auditor may need to modify the overall audit strategy and audit plan, and thereby the resulting
planned nature, timing and extent of further audit procedures.
Information may come to the auditor's attention that differs significantly from the information
available when the auditor planned the audit procedures. For example, the auditor may obtain audit
evidence through the performance of substantive procedures that contradicts the audit evidence
obtained with respect to the testing of the operating effectiveness of controls. In such circumstances,
the auditor re-evaluates the planned audit procedures, based on the revised consideration of assessed
risks at the assertion level for all or some of the classes of transactions, account balances or
disclosures.
Direction, Supervision and Review (Audit Program)
The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review of their work.
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:
the size and complexity of the entity,
the area of audit,
the risks of material misstatement, and
the capabilities and competence of personnel performing the audit work
As the assessed risk of material misstatement increases, a given area of the audit, the auditor ordinarily
increases the extent and timeliness of direction and supervision of engagement team members and
performs a more detailed review of their work.
Documentation
The auditor should document the overall audit strategy and the audit plan, including any significant
changes made during the audit engagement.
The auditor's documentation of the overall audit strategy records the key decisions considered
necessary to properly plan the audit and to communicate significant matters to the engagement team.
For example, the auditor may summarize the overall audit strategy in the form of a memorandum that
contains key decisions regarding the overall scope, timing and conduct of the audit.
The auditor's documentation of the audit plan is sufficient to demonstrate the planned nature, timing
and extent of risk assessment procedures, and further audit procedures at the assertion level for each
material class of transaction, account balance, and disclosure in response to the assessed risks.
The auditor may use standard audit programs or audit completion checklists. However, when such standard
programs or checklists are used, the auditor appropriately tailors them to reflect the particular
engagement circumstances.
The auditor's documentation of any significant changes to the originally planned overall audit strategy
and to the detailed audit plan includes the reasons for the significant changes and the auditor's
response to the events, conditions, or results of audit procedures that resulted in such changes.
For example, the auditor may significantly change the planned overall audit strategy and the audit plan
as a result of a material business combination or the identification of a material misstatement of the
financial statements. 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 the
overall strategy and audit plan finally adopted for the audit and demonstrates the appropriate response
to significant changes occurring during the audit.
The form and extent of documentation depend on such matters as the size and complexity of the
entity, materiality, the extent of other documentation, and the circumstances of the specific audit
engagement.
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT