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Lesson#42
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PLANNING AN AUDIT OF FINANCIAL STATEMENTS
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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 noncurrent
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,
page
135
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 cutoff
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.
page
136
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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