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,
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
- 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. 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.
