1.
Objective of Audit Planning
Audit planning is defined as the process in which the strategy is designed to conduct the expected
result which also defines the scope of audit inside the company. The size, nature and the time for
the audit plan may vary. It depends on the size of the business. If the business is spread to the large
scale, the strategy making and its implementation will take more time and also the overall scope of
Audit plan may also increase. It’s basically the step by step methodology where the audit in control
reviews the financial process and the internal environment along with the engagement preparation.
We can also say the audit plan as the designing of processes which will help to review the financial
events. The aim of doing audit planning primarily to make the financial statement error free and
secondly the time for reviewing or cross checking the financial events should be done in less time.
Planning in audit facilitates the overall business and the most hectic job for rectifying the accounts
will now be done in lesser time.
Preparing the audit plan for your company can be the most stressful or frustrated job especially
when there is no strategy been implemented previously. For making the audit planning, a common
auditor goes through these basic steps:
1. He has to conduct mock audits – the purpose of a mock audit is to determine how well prepared
an organization is for a full Stage.
2. Define the roles and responsibilities of the accountants – because basically the accountants, their
key role tends to focus on immediate financial issues and management. I mean, their function is to
substantiate financial transactions by auditing documents.
3. Should conduct risk assessment for the company – because nga there are risks that may arise in
the organization, conducting of risk assessment for the company is important for the purpose of
evaluating, identifying and prioritize potentials audits based on the level of risk to the organization.
As defined, risk is a possibility of an event occurring that will have an impact on the achievement of
objectives and is measured in terms of impact and likelihood.
4. Close out the audit findings. - When an audit is completed a closing meeting will follow to discuss
the audit findings and any outstanding issues. Usually, the lead auditor will lead this meeting. The
closing meeting is one of the last crucial steps in the auditing process.
These would help the company’s auditor to easily assess the business which their firm performs. The
Audit planning helps to notate major risk in audits inside the company. The protocols the company’s
internal financial events, another job for the auditors are to control and get the overall testing done
before and after the year’s end. These strategies are very much important for the company’s
efficiency.
2. Procedures in Planning
Audit planning is not a simple process. It involves consideration of client industry and regulatory
factors, client operations and administration, availability and assignment of firm resources,
engagement timing, and much more. Fortunately, the hard work of proper planning may not only
enable more efficient audit execution, but it also provides auditors with important risk management
techniques. Complying with all applicable professional standards when delivering services helps
reduce professional liability risk. Consider the professional liability lessons that can be gleaned from
these particular sections of the AICPA Statements on Auditing Standards:
Timing (AU-C §§300.02 and 300.A2): Planning can easily be misconstrued as a discrete phase of an
audit, taking place only when scheduled. Instead, it should be viewed as a continuous process that
begins upon completion of the prior audit and ends with completion of the current engagement.
The information learned during planning should be applied throughout the engagement to achieve
appropriate conclusions. In our scenario, planning for the current engagement should have started
with the control deficiency identified in the prior audit and addressed the issue throughout the audit
process.
Risk assessment (AU-C §315): Gaining an understanding of the client and its environment presents
an opportunity for the auditor to view the client's business and the engagement from a perspective
other than the debits and credits underlying the financial statements. A holistic view of the various
industry, regulatory, internal, and external factors may allow for linkages that might otherwise be
lost in the minutiae of performing the engagement. Identifying areas of greatest risk early in an
audit can allow for additional testing or analysis, reducing the likelihood of error that may result in a
professional liability claim. As exemplified in the claim scenario, accounts affected by the internal
control deficiency should have been deemed high-risk, and testing should have been tailored to
address the concern.
Team composition (AU-C §300.05): Assignment of the engagement team and scheduling of
resources may seem like simple logistical issues. Nevertheless, the level of experience on the team,
use of experts, and scheduling of who will review and when are all variables that can significantly
alter the engagement approach and affect its success. Assigning complex or difficult areas of an
audit to the appropriate level of expertise, depth of experience, or extent of review is an important
step in reducing the likelihood of an error.
Further, the resources should not be limited solely to the engagement team. Colleagues, peers,
professional associations, technical standards, prior-year audits, and other engagements can all
provide valuable insight. Utilizing all resources available to the engagement team may develop a
more informed audit approach. For example, in the scenario above, the current-year testing of
accounts affected by the significant deficiency could have been assigned to a more experienced
team member or subjected to additional review.
ADDITIONAL PLANNING CONSIDERATIONS
In addition to the professional liability risk management considerations that can be gleaned from
the professional standards, two additional suggestions should be kept in mind.
Invest the time: Proper planning is an investment in time that is intended to pay dividends in later
phases of the engagement. Identifying a potential issue or complex audit area at the start of the
planning process could save time later in the audit. That additional effort, while it may seem difficult
in the moment, could save time as deadlines approach. Errors are more likely to occur when timing
is compressed, causing work to be rushed. If planning can alleviate even a portion of the demand for
time during the busiest periods of the year, exponential gains in efficiency and reduction of
professional liability risk can be realized.
Be flexible: Planning is a guide for work to be performed, not a step-by-step instruction manual.
Flexibility creates a positive tone that can be established in planning and carried through to
issuance. The audit plan and strategy developed at the start of the engagement should be updated
and adjusted based upon information gathered throughout the engagement. Maintain a focus on
achieving the correct end result, rather than simply finishing the audit. Flexibility also allows the
audit plan to be quickly modified when unexpected risks arise, thus reducing professional liability
exposure that would exist if adjustments were not made.
Preliminary Engagement Activities
The auditor should perform the following activities at the beginning of the audit:
a. Perform procedures regarding the continuance of the client relationship and the specific audit
engagement,
b. Determine compliance with independence and ethics requirements, and
Note: The determination of compliance with independence and ethics requirements is not limited
to preliminary engagement activities and should be reevaluated with changes in circumstances.
c. Establish an understanding of the terms of the audit engagement with the audit committee in
accordance with AS 1301, Communications with Audit Committees.
These requirements are also contained in and ISA 220, Quality Control for an Audit of Financial
Statements and ISA 210, Agreeing the Terms of Audit Engagements and remind us that planning is a
wider activity than just obtaining understanding of the business and performing risk assessment.
Audit strategy and audit plan ISA 300 states that audit planning activities should:
A.establish the overall audit strategy for the engagement
b. develop an audit plan.
Audit strategy The audit strategy sets out in general terms how the audit is to be conducted and sets
the scope, timing and direction of the audit. The audit strategy then guides the development of the
audit plan, which contains the detailed responses to the auditor’s risk assessment. An underpinning
principle of audit planning under the Clarified ISAs is that the audit plan should contain detailed
responses to the specific risks identified from obtaining an understanding of the audited entity.
3. Audit Strategy
Audit strategy focuses on tests of controls and substantive procedures. Strategy is What you are
going to do. Substantive or analytical or both.
Audit strategy is a general strategy developed to plan the audit (number of audit team members,
timing of work, supervision required etc.), that is the “strategy” helps develops the plan, which is
then put into writing with the “plan”.
AUDIT STRATEGY is about implementing a strategy for tackling the audit.
Audit Plan
Audit plan sets parameters to obtain evidence to reduce audit risks to an acceptably low level.
Audit plan is a required written plan detailing the information.
AUDIT PLAN is about how you will use this strategy to tackle the audit.
Audit Program
implies a range of verification procedures, which are applied to the final accounts, to acquire audit
evidence, and thus helping auditor in providing an informed opinion.
4. Audit Strategy
5. Audit Planning Memorandum
The purposes of the audit plan are, first, to contribute to the effectiveness of the audit and,
second, to contribute to the audit efficiency. This memorandum should be completed and
approved as part of initial audit planning. In completing this document there may be occassions
when matters already documented in other work papers are relevant. There is no need to re-
write such material if a specific reference can be made.
This memorandum is structured so that planning documentation common to all projects is
presented. All items should be read and considered on every project. When a section is not
applicable, indicate "N/A", with a brief explanation why it is not applicable.
The planning memorandum is divided into four sections:
I. Introduction / Background
II. Management Concerns & Issues
III. Administration and job set up;
IV. Risk assessment; and
V. Nature and Scope of Audit
The final step in the audit process is the audit memorandum which summarizes each phase of the
audit and gives your reader recommendations for changes that will improve the accuracy of the
records and profitability of the company. Writing an audit memorandum requires in-depth
knowledge of the business and the attention to detail required to compare records with reality.
An audit planning memo, is a pre-audit memo outlining the following:
1. Who is the client
a. What sector are they in (manufacturing, real estate, mining, ect.)
b. Is the industry on an increasing or declining cycle currently?
c. Relevant important facts about the inner working of the company (changes in management, was
fraud discovered, are the owners considering a sale of the business, is there a lawsuit ongoing,
ect).
2. Risk Assessment
a. This outlines what the risk level is to the audit firm and risk increases with:
i. Are there lots of users to the financial statements? Is the company privately held or is it publicly
traded?
ii. Are there any bank covenants that the company needs to meet (Revenue to debt ratio for
example)
iii. Are there any creditors? If so, how many?
iv. Is the audit a first-year audit? Is this a new client to the firm?
v. Is the company in a highly specialized sector or industry?
vi. Is there new management? New CEO/CFO/CIO?
3. Materiality
a. Usually calculated by using one of the following:
i. 5% of income from continuing operations (normalized income)
ii. 5% of net income (before bonus’)
iii 0.5% - 2% of revenues or expenses
iv. 0.5% - 1% of net asset value
4. Performance Materiality
a. Take the number you get from your materiality calculation and re-calculate based on 50% - 75%
from your materiality figure.
5. Procedures
a. What procedures will be taken to ensure adequate work and testing are done to reduce the
chances of material misstatement on the audited financial statements.
