1.0
INTRODUCTION
In management,
planning is defined as the process of deciding what objectives to pursue during a future time
period and what to do, so as to achieve
those objectives, and how the current decisions may limit the scope of future actions.
You may recall, that
the first standard of fieldwork, requires that the work must be adequately planned. Planning is
a technical area in auditing because it
demands competence and technical knowledge.
It is of great
importance that an audit is planned in advance because:
(a) the intended
means of achieving the audit objectives must be
established;
(b) the audit can be
controlled and directed;
(c) attention can be
focused on the critical and high risk areas;
(d) the work can then
be completed economically and to time scale
requirements.
In this note, you
will be dealing with some matters to be taken into account, and the preparation of an audit
plan.
2.0
OBJECTIVES
At the end of this note,
you should be able to:
· specify some matters
to be taken into account in planning audits
· list matters which
are relevant to the preparation of an overall
audit plan
· define an audit
programme and state what must be taken into
account in developing it
· describe ways in which
knowledge of the business may be
gained.
3.0
MAIN CONTENT
3.1
Audit Planning: Matters to Take into Account
Matters to be taken
into consideration in audit planning are as follows:
(a) The work to be
performed in addition to the audit;
(b) Reviewing previous
years’ working papers;
(c) Changes in
legislation or auditing or accounting practice;
(d) Analytical review
of management accounts, consulting with management;
(e) Changes in the
business or its management or ownership;
(f) Changes in
systems or accounting procedures;
(g) Timing
requirements;
(h) Extent of
preparation by the client of analyses and summaries;
(i) Use of internal
audit;
(j) Degree of
reliance on internal controls;
(k) Joint auditors,
if any;
(l) Rotational
testing;
(m) Liaison with the
audit committee.
3.2
Overall Audit Plan
The general strategy,
in the preparation of overall audit plan, will be directed towards the following matters:
(a) Terms of
engagement – work to be done (audit), precise
accounting work to be done for client, tax, etc., letters to be sent (letter of weakness, etc.), reports to third
parties (regulatory authorities);
(b) The clients and
their backgrounds – history, products, locations, especially noting factors like a new managing
director, a new product;
(c) Important figures
and ratios – from previous years and if available,
from management and draft accounts;
(d) Audit risk areas
– these might include stock, work-in-progress, or dealings with a company under common
ownership;
(e) The effect of
information technology on the audit;
(f) Extent of
involvement of internal audit;
(g) Requirement for involvement of
specialists;
(h) Setting of
materiality levels;
(i) Clients
assistance – may be required in providing documents and analyses, arranging visits to branches;
(j) The audit
approach – the extent of reliance on internal control, the use of substantive tests and analytical
review procedures;
(k) Time-table –
dates of interim, year end and final audits, and of deadlines to meet;
(l) Staffing
requirements – in terms of experience and special skills needed, and of availability;
(m) Budget and fee;
(n) The operating
style and control consciousness of directors and management;
(o) Possibilities of
error or fraud;
(p) Involvement with
subsidiaries and their auditors, branches,
divisions and other component of the audit assignment;
(q) Regulatory
requirements;
(r) Going concern
issues.
3.3
The Audit Programme
The audit programme
develops and documents the nature, timing and
extent of planned audit procedures required to implement the overall audit plan. Essentially, the audit programme
will consist of a very detailed list of
things to be done and will show all assets, liabilities, revenues and expenses and such things as
sample sizes, bases of selection of
samples and when and where the programme is to be carried out. It is a set of instructions to staff.
The audit programme
needs to take the following into account:
(a) Risks of error;
(b) Amount of audit
evidence required in each area;
(c) Coordination of
auditing with accounts preparation (if accounts
are prepared by the audit team);
(d) The coordination
of any assistance from client staff, for example, on schedule preparation, availability of
records, internal audit;
(e) Involvement of
other auditors (especially with groups) and
experts, if required.
3.4
Knowledge of the Client’s Industry, Business and
Organization
It is essential that
all members of the audit team fully understand the client’s industry, business and organization.
This is so because:
(a) only in that way
can they judge the risks associated with the
engagement;
(b) an economical and
effective audit can only be carried out with a
full knowledge of significant environmental, operational and organizational factors;
(c) knowledge of the
factors helps in communication with client’s
staff, in assessing the reliability of management representations and in judging the appropriateness of
accounting policies and
disclosures.
This knowledge can be
gained from:
(i) the client’s
annual report and accounts;
(ii) analytical
review of the client’s interim accounts, financial reports, variance analyses, etc.
(iii) internal audit
reports;
(iv) visits to the
client’s premises and discussions with management and staff;
(v) perusal of
minutes of shareholders, directors, audit committee, budget committee, etc;
(v) previous year’s audit
files including the permanent file;
(vi) consideration of the
state of the economy;
(vii) reports from within the
audit firm which may be relevant to the client,
for example, management consultancy and appropriate tax authorities;
(viii) perusal of relevant
literature from credit rating agencies, stockbrokers,
investment analysts;
(ix) perusal of relevant
trade magazines and journals.
4.0
CONCLUSION
You have learnt from
this note that the most effective and efficient audit can only be performed if it is well planned.
Planning includes getting the right mix
of evidence gathering, in terms of analytical review, systems testing and substantive testing.
However, much as
audit is planned, it is impossible to take into account every factor which will actually affect the
audit. To this end, identifying the
probable factors will at least enable the audit firm to take them into account in formulating the plan and the
staffing requirements.
5.0
SUMMARY
· In this note, you
have been able to acquaint yourself with the
followings.
· Importance of
planning an audit in advance;
· Matters to take into
account in audit planning;
· Overall audit plan;
· Knowledge of the
client’s industry, business and organization.
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