PLANNING AN AUDIT OF FINANCIAL STATEMENTS

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Fundamentals of Auditing ACC 311

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

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

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

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;

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.

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

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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