Audit Planning | Course Paper

AUDITING THEORY

AT.508-Audit Planning-An Overview

LECTURE NOTES

Audit Planning

The auditor plans the audit so that it will be performed in an effective

manner, i.e., to gain reasonable assurance that the FSs are free from material

misstatement.

Audit planning involves:

 establishing the overall audit strategy (a general strategy) for the

engagement; and

 developing an audit plan (a detailed approach for the expected nature,

timing and extent of the audit),

in order to reduce audit risk (i.e., the chance that audit opinion is

inappropriate) to an acceptably low level.

Main outputs of audit planning:

 The overall audit strategy or audit planning memorandum

 The audit plan or audit programs or audit completion checklists

Benefits of Audit Planning

 Appropriate attention to important areas of the audit.

 Identify and resolve potential problems on a timely basis.

 Organize and manage the audit engagement so that it is performed in an

effective and efficient manner.

 Assist in the proper selection of engagement team members and the

assignment of work to them.

 Facilitate the direction and supervision of engagement team members and

the review of their work.

 Assist, where applicable, in coordination of work done by auditors of

components and experts.

Audit Planning and Risks Assessment Activities

Planning is not a discrete phase of an audit, but rather a continual and

iterative process. Planning, however, includes consideration of the timing of

certain activities and audit procedures that need to be completed prior to the

performance of further audit procedures (i.e., tests of controls and

substantive procedures).

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The following are the planning activities or procedures:

 Determining of materiality;

 Performing risks audit procedures (RAP), including analytical procedures, to

understand the entity and its environment, including the entity’s internal

control;

 Identifying material classes of transactions, account balances and

disclosures;

 Identifying and assessing the risks of material misstatements of the

financial statements; and

 Finally, preparing the outputs of audit planning – overall audit strategy and

audit plan – containing the auditor’s responses to the identified risks.

The nature and extent of the above planning activities will vary according to:

 the size and complexity of the entity;

 the key engagement team members’ previous experience with the entity;

and

 the changes in circumstances that occur during the audit engagement.

Involvement of Key Engagement Team Members

The engagement partner and other key members of the engagement team

shall be involved in planning the audit, including planning and participating in

the discussion among engagement team members, to draw on their

experience and insight, thereby enhancing the effectiveness and efficiency of

the planning process.

Results of Preliminary Engagement Activities

Please refer to the previous topic “AT.503” for the list of preliminary

engagement activities.

The results of preliminary engagement activities:

 assist the auditor in identifying and evaluating events or circumstances that

may adversely affect the auditor’s ability to plan and perform the audit

engagement.

 enables the auditor to plan an audit engagement for which, for example:

o The auditor maintains the necessary independence and ability to perform

the engagement.

o There are no issues with management integrity that may affect the

auditor’s willingness to continue the engagement.

o There is no misunderstanding with the client as to the terms of the

engagement.

In an initial audit, the auditor may need to expand the planning activities

because the auditor does not ordinarily have the previous experience with the

entity than when planning recurring engagements. For an initial audit

engagement, additional matters the auditor may consider in establishing the

overall audit strategy and audit plan include the following:

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 Arrangements to review the predecessor auditor’s working papers.

 Any major issues (including the application of accounting principles or of

auditing and reporting standards).

 The audit procedures necessary to obtain sufficient appropriate audit

evidence regarding opening balances.

 Other procedures required by the firm’s system of quality control for initial

audit engagements.

Overall Audit Strategy

Overall audit strategy (formerly known as “Audit Planning Memorandum”)

sets the scope, timing, and direction of the audit, and guides the development

of the audit plan.

In establishing the overall audit strategy, the auditor is required to:

a. Identify the characteristics of the engagement that define its scope

b. Ascertain the reporting objectives of the engagement to plan the timing of

the audit and the nature of the communications required

c. Consider the factors that, in our professional judgment, are significant in

directing the engagement team’s efforts

d. Consider the results of preliminary engagement activities and, where

applicable, whether knowledge gained on other engagements performed by

the engagement partner for the entity is relevant

e. Ascertain the nature, timing and extent of resources necessary to perform

the engagement.

Characteristics that define the Scope of Engagement

 The applicable FRF

 Industry-specific reporting requirements

 The expected audit coverage

 The work of internal auditors

 The entity’s use of service organizations

 The effect of information technology

 The availability of client personnel and data.

Reporting Objectives, Timing of the Audit, and Nature of Communications

 The entity’s timetable for reporting

 Meetings with management and TCWG to discuss the nature, timing and

extent of the audit work.

 The discussion with management and TCWG regarding the expected type

and timing of reports to be issued and other communications, both written

and oral, including the auditor’s report, management letters and

communications to TCWG; and regarding the expected communications on

the status of audit work throughout the engagement.

 Communication with auditors of components.

 Communications among engagement team members, including the nature

and timing of team meetings and timing of the review of work performed.

 Any other expected communications with third parties, including any

statutory or contractual reporting responsibilities arising from the audit.

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Significant Factors, Preliminary Engagement Activities, and Knowledge Gained

on Other Engagements

 The determination of materiality and identification of material classes of

transactions, account balances and disclosures

 Preliminary identification of risk areas

 The impact of the assessed ROMM at the FSs level

 Exercise of professional skepticism

 Internal control of the entity

 Significant business developments and the industry

 Legal and regulatory development and framework

Nature, Timing and Extent of Necessary Resources

 The selection of the engagement team (including, where necessary, the

engagement quality control reviewer) and the assignment of audit.

 Engagement budgeting and timetable.

The auditor shall document the overall audit strategy commonly in the form of

a memorandum.

Audit Plan

Audit plan (a.k.a., “audit program or audit completion checklist”) is more

detailed than the overall audit strategy in that it includes the nature, timing

and extent of audit procedures to be performed by engagement team

members required to implement the overall audit strategy into a

comprehensive description of the work to be performed.

The auditor shall develop an audit plan that shall include a description of:

a. The nature, timing, and extent of planned risk assessment procedures

(RAP)

b. The nature, timing, and extent of planned further audit procedures (FAP),

which include tests of controls and substantive procedures, at the assertion

level

c. Other planned audit procedures that are required to be carried out

The auditor shall document audit plan recording the planned nature, timing

and extent of risk assessment procedures and further audit procedures (tests

of controls and substantive procedures) at the assertion level in response to

the assessed risks. The auditor may use standard (pre-printed) audit

programs, tailored as needed.

Audit program is a list of procedures used to gather sufficient appropriate

audit evidence. It serves as a set of instructions to staff involved in the audit

and as a means to control and record the proper execution of the work.

Traditionally, the two types of audit programs only pertain to further audit

procedures (RAP), i.e., for test of controls and substantive procedures, are:

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a. Compliance test audit programs – this is prepared when performing tests of

controls, i.e., when the auditor plans to rely on internal control that was

deemed to be preliminarily effective.

b. Substantive test audit program – this is prepared when the auditor will

perform substantive procedures for each material class of transactions,

account balance, and disclosure.

Thus, the timing of preparing audit programs depend on the following

circumstances:

 Initial audit – prepared until the completion of review and documentation of

the entity’s internal control.

 Continuing audit – can be prepared in advance of testing, since the auditor

has prior knowledge of the entity’s internal control and previous risks

assessment.

Audit program (audit plan) for risks assessment procedures is normally

prepared in a separate documentation.

Changes to Planning Decisions during the Course of the Audit

The auditor shall update and change the overall audit strategy and the audit

plan as necessary during the course of the audit.

The establishment of the overall audit strategy and the detailed audit plan are

not necessarily discrete or sequential processes, but are closely inter-related

since changes in one may result in consequential changes to the other.

Other Planning Considerations

Other planning considerations made by the auditor include the following:

 Seeking assistance from the entity

 Considering the work perform by others

 Ensuring direction, supervision and review throughout the audit.

Entity Assistance to the Auditor

The auditor may decide to discuss elements of planning with the entity’s

management to facilitate the conduct and management of the audit

engagement (for example, to coordinate some of the planned audit

procedures with the work of the entity’s personnel), but not so detailed to

compromise the effectiveness of the audit or making the audit procedures too

predictable.

Consideration of the Work Performed by Others

Considering work of others in an audit involved the following:

 Relevance of the work of internal auditors

 Need for the work of experts (specialist)

 Work of component auditors in a group financial statements audit

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Work of Internal Auditors

Internal auditing is an appraisal activity established within an entity as a

service to the entity. The work of internal auditors assists the external auditor

in planning and performing an effective audit.

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Considering the work of internal auditors involve the following two phases:

 Preliminary assessment of client’s internal auditing function

 Evaluation and testing the work of internal auditing function

Preliminary assessment of internal auditing function includes determining

whether or not internal audit function appears relevant to specific areas of

financial statements audit. When the internal audit function appears relevant,

external auditors shall consider the internal auditor’s:

 Competence – professional qualifications and experience

 Objectivity (organizational status) – line of reporting results of internal

audit normally directly to BOD’s audit committee

 Due professional care – planning, supervision and documentation of work

 Scope of function – nature and extent of work

The table below summarizes the external auditor’s responses depending in

the result of assessment:

Result

Response

Rely on the work of internal auditor

Evaluate and test the internal

auditor’s work to confirm its

adequacy for external audit

Not relying on the work of internal

auditor

Need not evaluate and test the

internal auditor’s work

The external auditor may request assistance from internal auditors in

performing routine or mechanical audit procedures provided the external

auditor supervises and reviews internal auditors work

The use of internal auditor’s work does not change the external auditor’s

responsibility for audit opinion; thus, no reference is made in audit report

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Work of Experts (Specialist)

Expert or specialist refers to a person or firm possessing special skill,

knowledge and experience in a particular field other than accounting and

auditing.

An expert may be

 Engaged by the entity;

 Engaged by the auditor;

 Employed by the entity; or

 Employed by the auditor.

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The auditor considers the following when using the work (assistance) of an

expert:

 Materiality of an item being considered

 Risk of misstatement (nature and complexity)

 Quality and quantity of other audit evidence available

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When using the work of an expert, the auditor should assess and evaluate the

expert’s

 Professional competence – Professional qualification, experience and

reputation

 Objectivity – expert’s relationship to the entity

 Scope of work – objective and source of data (inputs), methods, models

and assumptions used by the expert

After the above assessment and evaluation of the expert, the external auditor

shall test whether or not the result of work of expert is consistent with

auditor’s knowledge. The external auditor may rely on the work of the expert

if deemed consistent. Otherwise, the inconsistency must be resolved first

before reliance can be made.

Work of Component Auditors

Key definitions

 Group financial statements – Financial statements that include the financial