Audit Planning, Evidence & Documentation – Comprehensive Notes

Appointment and Initial Formalities

Upon receipt of the board/share-holder appointment letter the auditor must:
• Reply in writing, either accepting or declining.
• If it is not a statutory audit, clarify the exact nature and scope of the work (e.g., only audit versus audit + account-preparation).
• Request that the client close the books and make them available.
• Familiarise himself with the client’s business model, operating cycles and industry conditions.
• Perform a high-level study of the internal-control environment.
• Obtain the names, powers and duties of directors/“those charged with governance”.
• Secure a full list of accounting records, ledgers and supporting documents maintained.
• Obtain the predecessor’s audit report and management letter.
• Read governing documents—Memorandum and Articles of Association (MOA & AOA), prospectus, statutory regulations, key contracts, etc.

SA 300 – Audit Planning

Scope – Applies to planning of recurring audits; extra guidance is flagged for first-year engagements.
Objective – To plan the audit so that it is conducted effectively and efficiently.

Involvement of Key Engagement-Team Members

The engagement partner and other key members MUST participate in planning and in all internal team discussions. This ensures shared risk awareness, consistent direction and efficient allocation of work.

Preliminary Engagement Activities

At the very outset the auditor performs three compulsory SA 220/SA 210 activities:
(a) Evaluate the continuance of the client relationship and the specific engagement.
(b) Re-confirm ethical compliance and independence.
(c) Agree on, and document, the terms of engagement.

Overall Audit Strategy

The strategy is the high-level blueprint that sets scope, timing and direction and guides preparation of the detailed audit plan. The auditor must:

1. Identify engagement characteristics (reporting framework, group/solo, component auditors, etc.).

2. Ascertain the reporting objectives and decide key deadlines for internal and external communication.

3. Consider significant factors (e.g., complexity, locations, IT reliance, prior-year issues) that will focus team efforts.

4. Factor-in knowledge from preliminary work and from other services rendered to the same entity.

5. Determine the nature, timing and extent of resources (staff mix, specialists, budgets).

Detailed Audit Plan

The plan operationalises the strategy and MUST describe:
• Planned risk-assessment procedures (SA 315).
• Planned further audit procedures at assertion level (SA 330).
• Any other procedures required for compliance with all applicable SAs.

The plan is a living document—it is updated whenever conditions change. The engagement partner plans the nature, timing and extent of direction, supervision and review of the team (see SA 220).

Engagement Letter

An engagement letter avoids misunderstanding by documenting and confirming:
• Objective of the audit of financial statements.
• Management’s responsibilities—preparation, going-concern assessment, selection & consistent application of accounting policies, judgement and estimates, safeguarding assets, prevention/detection of fraud.
• Auditor’s responsibilities and inherent limitations (audit is persuasive, not conclusive; $100\%$ testing is ordinarily impossible).
• Scope references (Companies Act, ICAI pronouncements, other statutes).
• Unrestricted access to records and personnel.
• Possibility of peer review under the Chartered Accountants Act, 1949.

SA 230 – Audit Documentation / Working Papers

“Documentation” means any work papers prepared or obtained and retained by the auditor.

Objectives

1. Provide a sufficient and appropriate record of the basis for the auditor’s report.

2. Evidence that the audit was planned and performed in accordance with SAs and legal requirements.

Why Working Papers Matter

• Aid planning and execution.
• Facilitate supervision and review.
• Provide evidence supporting the opinion.

Content Guidelines

Working papers must record:
• The audit plan/programme.
• Nature, timing and extent of procedures performed.
• Results and conclusions.
• Review notes, resolutions of issues and significant judgements.

Form & Organisation Factors

• Nature of engagement, complexity, and client records.
• Reliance on internal controls.
• Need for direction/review of assistants.
Standardisation (check-lists, specimen letters, etc.) boosts quality and efficiency.

Permanent vs. Current Files

Permanent File (continuous relevance):
– Legal structure documents (MOA/AOA, Acts, regulations), key contracts, minutes.
– Prior-year FS, management letters, ratio analyses, accounting policies, significant observations.
– Communication with retiring auditor, if any.

Current File (specific period):
– Engagement acceptance correspondence.
– Planning evidence and audit programme.
– Analyses of transactions/balances, schedules prepared by client (after independent validation).
– Evidence of supervision/review, communications with experts and other auditors.
– Representation letters, conclusions, final FS and audit report.

Ownership & Retention

Working papers belong to the auditor. They are confidential; excerpts may be shared at the auditor’s discretion. Papers must be retained long enough to meet professional and legal record-retention obligations (SA 230 operative for periods beginning on/after 1 April 2009).

SA 320 – Materiality in Planning and Performing the Audit

Material information is that whose omission or misstatement could influence users’ economic decisions.
• Materiality relates to size and/or nature of items, judged in surrounding circumstances.
• Professional judgement is paramount; users are presumed to have reasonable knowledge and diligence.
• Materiality is applied:
– When planning (to design risk-assessment and further procedures).
– When evaluating identified and uncorrected misstatements, and when forming the opinion.
• Some items may be material by nature even if below the general quantitative threshold.

Requirements: determine planning materiality and performance materiality; revise if circumstances change; document basis and revisions.

SA 500 – Audit Evidence

Audit evidence comprises both accounting-record data and other information supporting those records.

Objective

Design and perform procedures to obtain sufficient and appropriate evidence to draw reasonable conclusions on which to base the opinion.

Types of Evidence

• Physical (inventory count, asset inspection).
• Third-party representations (lawyers’ letters, bank/receivable confirmations).
• Documentary (invoices, contracts).
• Computations (independent recalculations).
• Data inter-relationships (analytics).
• Client representations (written or oral).
• Accounting records themselves (ledgers, journals).

Evidence-Gathering Methods

Inspection – Observation – Inquiry – External confirmation – Re-calculation – Re-performance – Analytical review.

SA 530 – Audit Sampling

Sampling = performing audit procedures on less than $100\%$ of items such that every sampling unit has a chance of selection, providing a reasonable basis for conclusions about the entire population.

Objective – Provide a reasonable basis for conclusions on the population.

Key requirements:
• Sample design, size and selection.
• Performance of procedures.
• Investigation of deviations/misstatements and projection to the population.
• Evaluation of sample results in context of overall conclusions.

Four Phases of a Complete Audit

1. Proposal / Acceptance
   – Audit proposal, assessment and acceptance.
   – Letter of appointment and engagement letter.

2. Planning
   – Gather preliminary business information.
   – Evaluate accounting system & internal control.
   – Assess audit risk and design audit programme.

3. Execution
   – Compliance tests.
   – Substantive tests (detailed & analytical).
   – Continuous documentation and, if necessary, programme modifications.
   – Obtain explanations, confirmations & management representation.

4. Reporting
   – Formulate conclusions, draft report, discuss with management, issue final report (dated and signed).

Audit Programme

A detailed plan of procedures customised to each audit, containing instructions on nature, timing, extent and responsible personnel.
• Essential for large/complex audits; subject to periodic review.
• Cannot be one-size-fits-all; must be flexible.

Audit Procedures: Compliance vs. Substantive

• Compliance Procedures – Test whether internal controls, on which reliance is planned, are operating effectively.
• Substantive Procedures – Obtain evidence on completeness, accuracy and validity of amounts/data (includes tests of details and analytical review).

Tests of Details

– Transaction testing through vouching (cash receipts/payments, purchases, sales, etc.).
– Balance testing: opening balances, debtor/creditor ledgers, GL reconciliations.

Analytical Review

– Ratio analysis, trend studies, comparison with prior periods/budgets/industry.
– Identifies unusual fluctuations warranting further investigation.

Verification and Valuation of Assets & Liabilities

Verification = enquiry into existence, ownership, title, possession, valuation and charges over assets (Spicer & Pegler). Auditor must ensure assets exist on the balance-sheet date and are free from undisclosed charges; liabilities are complete and properly valued.

Evidence hierarchy:

1. Physical examination (existence).

2. Title deeds/contracts (ownership).

3. Possession logs or custody records.

4. Valuation techniques (NRV, fair value, amortised cost).

5. Proper accounting (classification & disclosure).

Liabilities – confirm that all obligations are recorded, valued per GAAP, classified and disclosed.

Verification vs. Valuation

• Verification is auditor’s responsibility; valuation may involve management/experts.
• Verification occurs at audit completion; valuation can happen anytime.
• Verification checks items; valuation checks amounts.

Vouching

“Vouching is not merely inspection of receipts but examination of transactions together with valid evidence to satisfy the auditor that they were properly authorised and correctly recorded” (De Paula).

Objectives of Vouching

• Ensure each entry is supported by documentary evidence.
• Detect frauds/errors and exclude unrelated transactions.
• Confirm proper authorisation, dating, classification (capital vs. revenue) and accuracy.

Types of Vouchers

1. Primary – Original source documents.

2. Collateral – Secondary evidence when primaries are lost/unavailable.

Voucher-Control Guidelines

• Addressed to client’s normal office and properly dated/numbered.
• Cross-match date on voucher with date in books.
• Signed/authorised by appropriate official; amount in words and figures.
• Mark each examined voucher; note explanations in audit notebook.
• Capital vs. revenue distinction; no unauthorised alterations.
• External vouchers must bear authentic seal/signature.
• Missing vouchers → obtain explanations; advance/accrual items → ensure correct adjustments.
• For partner/director vouchers, verify correct treatment (drawings, remuneration, loans).
• Petty-cash vouchers cross-checked with petty-cash book.

Differences: Verification vs. Vouching

Ethical, Legal and Practical Implications

• Independence must be continuously evaluated; breaches can invalidate the audit.
• Confidentiality of working papers is both an ethical and legal obligation.
• Materiality judgements affect users’ decisions; inappropriate thresholds may mislead stakeholders.
• Sampling risk – auditor must balance efficiency with risk of inappropriate conclusions.
• Engagement letter clarity prevents expectation gaps and potential litigation.

Effective Dates & Regulatory References

• SA 230 (documentation) operative for periods beginning on/after 1 April 2009.
• All other SAs referenced (220, 210, 300, 315, 330, 320, 500, 530) are effective as per ICAI pronouncements and must be complied with for statutory audits under the Companies Act, 2013 and allied regulations.