AUDIT PLANNING 1

Audit Planning Overview

  • What is Audit Planning?

    • Strategic approach to conducting an audit efficiently.

    • Involves assessing objectives, scope, and methods to ensure thoroughness.

Importance of Audit Planning

  • Establishes a clear framework for the audit process, which provides several benefits including:

    • Conducting audits in an efficient and timely manner.

    • Obtaining sufficient and appropriate evidence.

    • Ensuring critical aspects are addressed adequately.

    • Keeping audit costs reasonable and minimizing legal liabilities.

    • Preventing misunderstandings between the auditor and client.

Steps in Audit Planning

  • **The Seven Steps:

    1. Pre-plan

    2. Obtain background information

    3. Obtain legal obligations information

    4. Perform preliminary analytical procedures

    5. Set materiality and acceptable audit risk

    6. Understand internal control and assess control risk

    7. Develop the overall audit plan and audit program.**

  • This content covers steps up to Step 3 exclusively for this lecture.

Step 1: Pre-plan

Preconditions for an Audit

  • Assess the following:

    • Acceptance of the financial reporting framework.

    • Management's acknowledgment of its responsibilities for accurate FS preparation.

    • Agreements on providing relevant information to the auditor.

Initial Audit Considerations

  1. Ethical Clearance

    • Review integrity and make inquiries regarding management disagreements.

  2. Client’s Reasons for Audit

    • Specific audits like loan applications or business acquisitions.

  3. Staff Requirements

    • Assess engagement size, complexity, risk levels, and necessary expertise.

  4. Engagement Letter Preparation

    • Document the agreement and scope of the audit.

Step 2: Obtain Client's Background Information

  • Understand the client more effectively by researching:

    • Client history, organizational structure, and management integrity.

    • Major activities and reliability of internal auditors.

    • Conduct tours of the client's facilities to gain firsthand knowledge.

    • Identify industry-specific risks and unique accounting requirements.

    • Know related party information and any expert consultation needs.

Step 3: Obtain Client's Legal Information

  • Gather information from:

    • Client’s constitutional documents, contracts, and agreements.

    • Minutes from meetings of shareholders and Board of Directors.

    • Analyze how the gathered legal obligations can impact the audit process.

Conclusion

  • Importance of Engagement Letter: Essential in confirming the auditor's responsibilities, the audit's objectives, and ensuring mutual clarity, reducing the risk of misunderstandings.

  • To prepare for future audit steps and requirements effectively, engagement letters and comprehensive understanding of previous steps are crucial.