CHAPTER 6 PLANNING

→ The objective of the auditor Is to plan the audit so it will be performed in an effective manner.
→ It also ensures that risk of poor quality audit is reduced to acceptably low level.
→ BENEFITS OF AN AUDIT [planning enables the auditor to:-]
• Devote appropriate attention to important areas of audit.
• Identify and resolve potential problems on timely basis.
• Organise and manage the audit.
• Select team members with appropriate capabilities and competence.
• Direct and supervise and review their work.
• Effectively coordinate the work of others ( Experts and internal audit).
→ Audit should be conducted in accordance with the ISAs to achieve overall objectives of auditor it will :-
• Ensure the auditor is fulfilling its requirements • Allow user to have confidence in auditor and audited FS.
• Ensure the quality of audit is maintained on a high standard internationally.
• Provide a measure to assess the standard of auditors work.
→ Professional judgement:- is the application of relevant training knowledge and experience in making
informed decisions about the courses of action that are appropriate in the circumstances of the engagement.
→ THE PLANNING PROCESS
→ Preliminary engagement activities:-
• Performing procedures regarding the acceptance and continuance of the client relationship and engagem
• Evaluating compliance with Ethical requirements
• Ensuring there are no misunderstandings with the client related to terms of engagement.
→ Planning activities:-
• Developing the audit strategy and plan.(these must be documented in audit working papers.)
→ AUDIT STRATEGY
• The audit strategy sets scope, timing, and direction of audit.
• Matters to be considered are:-
- Characteristics of engagement
- Reporting objectives, timing of audit , and nature of communication
- Significant factors, preliminary engagement activities, and knowledge gained on other engagements.
- Nature, timing and extent of resources.
→ AUDIT PLAN
• The strategy set an overall approach towards audit, Audit plan fills operational details of how audit strategy
is to be achieved.
• Audit plan should include specific descriptions of :-
- The nature, time, extent of the planned direction and supervision of members and review of their work.
- The nature, timing and extent of risk assessment procedures.
- The nature, timing and extent of further audit procedures, including:-
 what procedures are to be carried out.
2. who should do them
3. how much work should be done (sample sizes)
4. when the work should be done (interim vs final)
- Any other procedures to be performed to conform to ISA.
→ INTERIM AND FINAL AUDIT
• Interim audit fill improve the risk assessment and make final procedures more efficient.
• Interim audit and final audit are two stages of the same audit
→ Interim Audit → Final Audit
• Completed part way through a clients accounting year. • Done after year end at a time agreed by client.
• Early enough to give Adequate warnings of specific • Year end audits are disruptive for clients year end
problems. procedures.
 • Allows the auditor to spread out procedures and • The auditor report will be issued after final audit
enables more effective planning for final stage of audit • Audit of SOFP, balances which will only be known
• Useful when there is tight deadline schedule and due at the year end.
to which detection risk is increased • Testing of the transactions since interim audit
• WORK PERFORMED:- • Testing year end Journal which may include
- Documenting systems adjustments since interim audit.
- Evaluating controls • Obtaining evidence that controls tested in interim
• Assessing risks that will affect work at the final stage. audit have continued to operate.
→ FRAUD
• The distinguishing factor is whether the underlying action that resulted the misstatement was intentional
or unintentional.
• “Fraud Is an intentional act by one or more individuals among management, TCWG, Employees, third
parties, involving the use of deception to obtain unjust or illegal advantage.”
• Two types of fraud:- 1. Fraudulent financial reporting:- Deliberately misstating the FS to make company’s
position look better or worse. 2. Misappropriation:- Theft of company’s assets such as cash or inventory.
→ ERROR
• An error can be defined as an unintentional misstatement in FS including Omission.
• Some errors are :- A mistake in gathering and processing data from which FS are prepared.
• Incorrect accounting estimate.
• A mistake in the application of accounting principles.
→ PRIMARY RESPONSIBILITY FOR PREVENTING AND DETECTING FRAUD IS ON TCWG.
• Implementing effective system of internal controls • Creating a culture of honesty, ethical behaviour and
active oversight by TCWG
→ INTERNAL AUDITORS ( they can help management fulfil their responsibilities in respect of fraud, error)
• By testing the effectiveness of the internal controls at preventing and detecting frauds and recommending
for improvements to the controls.
• Performing fraud investigations :- Identify how the fraud was committed. 3.identify extent of fraud
4. Provide recommendations how to prevent fraud from happening again 5.Perform surprise asset counts.
• Internal audit department acts as a deterrent to fraud
→ EXTERNAL AUDITORS ( their role is 2 fold:- )
1 Assess the risk of material misstatement due to fraud.
• Obtain reasonable assurance that the financial statements are free from material misstatement due to F,E
• Apply professional scepticism and remain alert. • Consider management override of controls, Recognise
the audit procedures effective in detecting errors but not in detecting fraud.
→ This could be achieved by following procedures:-
• Discuss the susceptibility of clients financial statements to material misstatement due to fraud with team.
−DISCUSSION SHOULD INCLUDE :- • Incentives to commit fraud • Opportunities to commit fraud •
Managements Attitude eg. Disputes with auditor over auditing matters etc.
• Enquire of management about their processes towards identifying and responding to risks of fraud.
• Enquire of Management, TCWG, Internal auditor if they suspect any fraudulent activity.
• Consideration of relationships identified during Analytical prodcedures.
2. Responding to the assessed risks ( Procedures to be performed )
• Review journal entries made to identify manipulation of figures or unauthorised journal adjustments.
- inquire of those involved in financial reporting about unusual activity
- Selecting journal entries and adjustments made at the end of the reporting date.
- Consider the need to test the journal entries.
• Review management estimates for evidence of bias:
- Evaluate the reasonableness of judgements
- Perform retrospective review of management judgements reflected in the prior year.
• Review transactions outside the normal course of business which appear unusual and assess whether they
are indicative of fraudulent reporting.
• Obtain written representations from management and TCWG that they :-
- Acknowledge their responsibility for internal controls to prevent and detect fraud.
- Have disclosed to the auditor about the managements fraud risk assessment , any suspected fraud, any
allegations of fraud which affect the entity’s FS.
→ REPORTING OF FRAUD OR ERROR. ( Very imp in respect to all chapters)
1. If the auditor identifies a fraud they must communicate the matter on a TIMELY BASIS to APPROPRIATE
level of management.( Those with primary responsibility for prevention and detection of fraud).
2. if the suspected fraud involves management, The auditor must communicate the matter to TCWG.
3. If the auditor has doubts on the integrity of TCWG they should seek legal advice .
4. In addition to these responsibilities, the auditor must also consider whether they have a responsibility
to report the occurrence of a suspicion to a party outside the entity.
5. If the fraud has material impact on the statements then audit opinion will be modified.
→ LAWS AND REGULATIONS
• Non compliance :- Acts of omission and commission, either intentional or unintentional, Committed by the
entity which are contrary to prevailing laws or regulations. Non compliance does not include personal
misconduct unrelated
• Responsibilities of management, with the oversight of TCWG to ensure that entity’s operations are
conducted in accordance with relevant laws and regulations.
• Responsibilities of auditor, the auditor must perform audit procedures to help identify non compliance
with laws and regulation, that may have material impact on FS. The auditor must obtain sufficient
appropriate evidence regarding compliance with laws and regulations generally recognised to have direct
effect on the determination of material amounts and disclosures in FS.
→ AUDIT PROCEDURES TO IDENTIFY INSTANCES OF NON-COMPLIANCE
• Obtaining a general understanding of the legal and regulatory framework applicable to the entity and the
industry, and how the entity is complying with the framework.
• Enquiring of management and TCWG as to whether, the entity is in compliance with such laws and Reg.
• Inspecting correspondence with relevant licensing or regulatory authorities.
• Remaining Alert to the possibility that other audit procedures applied may bring instances of non -
compliance to the auditor’s attention.
• Obtaining written representations from the directors that they have disclosed to the auditor all those
events of which they are aware which involve possible non-compliance.
→ INVESTIGATIONS OF POSSIBLE NON COMPLIANCE
• Understand the nature of the act and circumstances in which it has occurred.
• Obtain further information to evaluate the possible effect on the FS.
→ AUDIT PROCEDURES WHEN NON-COMPLIANCE IS IDENTIFIED
• Enquire with management of the penalties to be imposed.
• Inspect the correspondence with the regulatory authorities to identify consequences.
• Inspect boards minutes for managements discussion on actions to be taken regarding the non-compliance.
• Enquire the company’s legal department as to the possible impact of the non-compliance.
→ REPORTING NON COMPLIANCE
• The auditor must report non-compliance to management and TCWG unless prohibited by law
• if the Auditor believes the non-compliance is intentional, material the matter should be reported to TCWG.
• if auditor suspects management and TCWG are involved in non-compliance,then report to Audit
committee( or a supervisory board)
• If non-compliance has a material effect on FS a qualified or adverse opinion should be issued.
• Auditor should consider whether they have a legal duty or ethical responsibility to report non-compliance
to third parties.
→ QUALITY MANAGEMENT (ISA 220)
• Policies and procedures should be established :- • Relevant ethical requirements • Engagement resources
• Engagement performance • monitoring and remediation
→ Relevant Ethical requirements
• The auditor must identify evaluate and address ethical threats. • Remain alert throughout the audit • Take
appropriate actions where ethical requirements have not been fulfilled • Prior to dating Auditors report take
responsibility for determining whether ethical requirements have been fulfilled.
→ Engagement Resources
• The engagement partner must ensure sufficient appropriate resources are assigned or made available to
the team.
• Engagement resources include :- • Human resources • Technological resources • Intellectual resources.
→ AUDIT DOCUMENTATION
→ Purposes :- • Provides evidence of the auditors basis for their report. • Provides evidence that the audit
was planned and performed in accordance with the ISAs and applicable legal and regulatory requirements.
In addition, Audit documentation:- 1. Assists the engagement team to plan and perform the audit.
2. Assists members of the engagement team responsible for supervision to direct, supervise and review the
audit work. 3. Enables the engagement team members to be accountable for its work. 4. Retains record of
matters of continuing significance to future audits. 4. Enables EQR and other monitoring activities under
firms system of quality management to be performed. 5. Enables the external quality reviews to be
performed.
→ CONTENT OF AUDIT :- document should be sufficient to enable an experienced auditor, with no
previous connection to the audit, to understand :- 1. The nature,timing and extent of the audit procedures
performed. 2. The results of the procedures performed and evidence obtained. 3. The significant matters
arising in the course of audit and the conclusion reached thereon, and significant professional judgements
made in reaching those connections.
• Retention of working papers:- must be retained in an audit file ( within 60 days after the date of auditors
report ) and retained for 5 years(230) ACCA recommends 7years from the date of auditors report.
→ Types of audit documentation:- 1. Planning documentation ( - overall audit strategy – Audit plan)
2. Audit programmes ( procedures) 3. Summary of significant matters 4. Written representations from
management 5. Checklists 6. Correspondence 7. Copies of client records
→ Contents of permanent audit file:- • Names of mnangement and TCWG , • Systems information •
Background to the industry and clients business • Title deeds • Directors service agreements • Copies of
contract and agreements.
• Sections of current audit file:- 1. Planning 2. Performance 3. Completion.
• Audit planning memorandum is the written audit plan it is read by all members before the work starts.
• It is auditors duty to keep the working papers secure the access to working papers is controlled by auditor,
if files are lost auditors duty of confidentiality will be compromised.

→ Interim Audit ( Procedures to be performed) → Final Audit ( procedures to be performed )

• Inherent risk assessment and gaining and
understanding of the entity.
• Recording the entity’s system of internal control
• Evaluating the design of internal controls
• Carrying out tests of control on the company’s
internal controls.
• Performing substantive testing of
transactions/balances to gain evidence that the books
and records are reliable basis for preparation of FS.
• identification of issues that may have a impact on
work to take place in final audit.
• Substantive procedures involving verification of
SOFP balances and amounts in the P&L.
• Obtaining third party confirmations
• Analytical procedures relating to figures in the FS.
• Subsequent events review
• Agreeing the FS to the Accounting records
• Obtaining written representations
• Examining adjustments made during the process
of preparing The FS.
• Considering the entities going concern status.
• Performing tests to ensure conclusions formed at
interim audit are still valid.
→ TYPES OF AUDIT WORKING PAPERS INCLUDE:
• Systems documentation (flowcharts, systems manuals, narrative notes, checklists and questionnaires)
• Constitutional documents
• Agreements with banks and other providers of finance
• Details of other advisors used by the entity such as lawyers
• Regulatory documentation relating to the stock exchange listing
• Audit planning documentation
• Audit work programs
• Working papers showing the work performed
• External confirmations from third parties such as the bank and customers confirming balances at the
year-end
• Lead schedules showing summaries of work performed and conclusions on individual account areas and
the amounts to be included in the financial statements
• Trial balance, management accounts and financial statements
Schedule of unadjusted differences
• Schedule of review points
• Report to management
• Written representation letter.
→ FEATURES OF AUDIT WORKING PAPERS
• All working papers should show the name of the preparer and the date prepared, and the name of the
reviewer and the date reviewed, by means of signatures and dates. These may be electronic in the case of
electronic working papers.
• Audit planning documentation should include the risk assessment cross-referenced to the audit program,
and the audit program should cross-reference to the audit working papers.
• Working papers showing the work performed should be cross-referenced to the audit program and the
lead schedule on that particular section of the audit file, and should describe the nature of the work
performed, the evidence obtained, and the conclusions reached.
• Each section of the audit file should have a lead schedule cross-referenced to the relevant working
papers.
• The trial balance should be cross-referenced to the relevant sections of the audit file where the audit
work is documented, and to the financial statements.
• The schedule of unadiusted differences should be cross-referenced to the sections of the file to which
they relate.
• A schedule of review points should be 'cleared’ to show that all outstanding matters have
been dealt with.