Chapter – 2 Audit strategy, Audit planning and Audit Programme

SA 300- Planning an audit of financial statements deals with the auditor’s responsibility to plan an audit of financial statements.

Why planning an audit is necessary? And what are its benefits?

Audit needs to be planned in order to perform audit effectively so that the objective as per SA 200 can be attained

Other Benefits

·         Appropriate attention to important areas

·         Efficient and Effective Audit

·         Selection of Team Members based on requirement and capabilities

·         Direction and Supervision of Team & Review of work

·         Coordination with other Auditors and Experts

Risk assessment

·         RA procedures are audit procedures

·         performed to obtain an understanding of the entity and its environment,

·         It includes the entity’s internal control,

·         Also to identify and assess the risks of material misstatement, whether due to fraud or error at the financial statement and assertion levels.

Planning of audit also includes (Which is prior to the auditor’s identification and assessment of the risks of material misstatement)  (AOEDI)

·         analytical procedures to be applied as risk assessment procedures.

·         Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.

·         Experts involvement

·         determination of materiality.

·         Identification of other risk assessment procedures          

Before planning of audit, the auditor needs to take care of preliminary engagement activities and these are defined in SA 210 & SA 220

SA 220 – (i) Performing procedures regarding the continuance of the client relationship

It should be ensured that appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed

·         in case of initial engagements, communication with predecessor auditor should be made, where there has been a change of auditors

·         Matters such as integrity of principal owners and key management,

·         competence of engagement team to perform the audit engagement

·         Implications of matters that have arisen during current and previous audit engagement may need to be considered.

SA 220 – (ii) - Evaluating compliance with ethical requirements including independence

The auditor shall continuously evaluate compliance with ethical requirements including independence

Other point – regarding independence

The engagement partner shall form a conclusion on compliance with independence requirements that apply to the audit engagement. In doing so, the engagement partner shall: -

(i)         Obtain relevant information from the firm to identify and evaluate circumstances and relationships that create threats to independence

(ii)       Evaluate information on identified breaches, if any, of the firm’s independence policies and procedures to determine whether they create a threat to independence for the audit engagement and

(iii)      Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards,

(iv)      If considered appropriate, to withdraw from the audit engagement, where withdrawal is permitted by law or regulation. The engagement partner shall promptly report to the firm any inability to resolve the matter for appropriate action.

Besides, consideration for client continuance and compliance with ethical requirements, preliminary engagements activities also include establishing an understanding of terms of engagement.    

SA 210 - Establishing an understanding of terms of engagement

It is in the interests of both the entity and the auditor that the auditor sends an audit engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the audit. It ensures that there is no confusion with the client regarding terms of the engagement.

Before starting the audit, the auditor have to establish strategy, based on that strategy the audit plan need to be developed. The overall audit strategy and the audit plan remain the auditor’s responsibility

Strategy vs Plan

·         Strategy deals with or gives direction to achieve overall objective of audit

·         Plan deals with how to execute audit in order to achieve overall objective of audit

Planning activities involve – Establishing the overall audit strategy and developing an audit plan.

Audit strategy

Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan

Why Audit strategy to be established – RA – When, who, how much & Their supervision

1.       Establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditor’s risk assessment procedures

2.       The resources to deploy for specific audit areas – Ex. Experienced member to high risk area

3.       The amount of resources to allocate to specific audit areas. Ex – Number of person to inventory audit

4.       When these resources are to be deployed – Yearly once, monthly once

5.       How such resources are managed, directed and supervised

Factors to be taken into consideration by auditor for establishing audit strategy

·         Identify the characteristics of the engagement that define its scope – Is it stat or internal audit, Applicable Financial reporting framework etc

·         Ascertain the reporting objectives of the engagement - to plan the timing of the audit and the nature of the communications required.

·         Consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement team’s efforts

·         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

·         Ascertain the nature, timing and extent of resources necessary - to perform the engagement.

Audit Plan

Once audit strategy is set, based on that an audit plan need to be developed. It deals with execution portion

SA-300 states that auditor shall develop an audit plan that shall include description of

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

       II.            The nature, timing and extent of planned further audit procedures at assertion level

     III.            Other planned audit procedures that are required to be carried out so that the engagement complies with SAs

The audit plan is more detailed than the overall audit strategy that includes the nature, timing and extent of audit procedures to be performed by engagement team members. Planning for these audit procedures takes place over the course of the audit as the audit plan for the engagement develops.

Is audit plan static or dynamic? – It is dynamic as it can be changed/updated when necessary

Elements of planning includes

·         Preliminary engagement activities

·         Planning activities

1.       Establishing overall audit strategy

2.       Developing audit plan

Documentation- The auditor shall document

·         the overall audit strategy

·         the audit plan and

·         any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes.

The documentation of the overall audit strategy is a record of the key decisions considered necessary to properly plan the audit and to communicate significant matters to the engagement team.

The documentation of the audit plan is a record of the planned nature, timing and extent of risk assessment procedures and further audit procedures at the assertion level in response to the assessed risks. It also serves as a record of the proper planning of the audit procedures that can be reviewed and approved prior to their performance. The auditor may use standard audit programs and/or audit completion checklists, tailored as needed to reflect the particular engagement circumstances.

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 why the significant changes were made, and the overall strategy and audit plan finally adopted for the audit. It also reflects the appropriate response to the significant changes occurring during the audit.

Audit Programme

A series of verification procedures -> to be applied to the financial statements and accounts of a given entity -> for the purpose of obtaining sufficient evidence -> to enable the auditor to express an informed opinion on financial statements.

Some basic information about audit programme

1.       Evolving one audit programme- Not Practicable for All businesses

2.       The Assistant to keep an open mind - The assistant engaged in the job should be encouraged to keep an open mind beyond the programme given to him

3.       Periodic review of the audit programme - to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions

For the purpose of programme construction, the following points should be kept in mind

1.       Stay within the scope and limitation of the assignment

2.       Prepare a written audit programme setting forth the procedures that are needed to implement the audit plan.

3.       Determine the evidence reasonably available and identify the best evidence for deriving the necessary satisfaction.

4.       Apply only those steps and procedures which are useful in accomplishing the verification purpose in the specific situation.

5.       Include the audit objectives for each area and sufficient details which serve as a set of instructions for the assistants involved in audit and help in controlling the proper execution of the work.

Advantages of an audit programme

It provides the assistant carrying out the audit with total and clear set of instructions of the work generally to be done.

It is essential, particularly for major audits, to provide a total perspective of the work to be performed.

Selection of assistants for the jobs on the basis of capability becomes easier when the work is rationally planned, defined and segregated

Without a written and pre-determined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records. Under a properly framed programme, such danger is significantly less and the audit can proceed systematically

A properly drawn up audit programme serves as evidence in the event of any charge of negligence being brought against the auditor. It may be of considerable value in establishing that he exercised reasonable skill and care that was expected of professional auditor.

Disadvantages of an audit programme

The work may become mechanical and particular parts of the programme may be carried out without any understanding of the object of such parts in the whole audit scheme

The programme often tends to become rigid and inflexible following set grooves

Inefficient assistants may take shelter behind the programme i.e., defend deficiencies in their work on the ground that no instruction in the matter is contained therein.

A hard and fast audit programme may kill the initiative of efficient and enterprising assistants