Principles of Auditing Lecture 5

 Planning an audit
 ISA 300 Planning an audit of financial statements
 The auditor should plant the audit so that the engagement is performed in an effective manner
 Effective in terms of what?
 Planning is a means of directing and controlling the audit
 It ensures that appropriate attention is devoted to critical audit risk areas
 It assists in the proper assignment of work to assistants and in the co-ordination of work
 It helps the auditor in conducting the audit in an efficient and timely manner
 Planning an audit involves establishing:
 An overall audit strategy
 An audit plan

Planning gives direction, it is the way in which the auditor identifies risks and those areas which
really matter and how to address those areas. Risk based auditing = focusing on the areas with a
greater risk of material misstatement.

Audit strategy vs Audit Plan

Audit Strategy

 The audit plan will contain the detail whilst the audit strategy is giving the direction
 Audit strategy - sets the scope, timing and direction of the audit. It guides the development of
the more detailed audit plan. Matters to consider as part of audit strategy include:

 Characteristics of the engagement

 Financial reporting framework, availability of internal audit dept, industry specific erporting
requirements etc..
 Reporting objectives and timing of the audit
 Significant factors and preliminary engagement actuvutues
 Nature, timing and xtent of resources

The audit plan

 More detailed than the audit strategy. It builds on the audit strategy and includes information
explaining what will be audited, who will be doing that work, when, etc. (converts the strategy
into an audit plan).
 The audit plan will set out the nature, timing and extent of audit procedures to be performed to
be able to collect the sufficient appropriate audit evidence needed to reduced audit risk to an
acceptably low level.

Examples
 audit procedures to be performed for each major area such as inventory, receivables, cash, etc.
 Allocation of work between audit team members
 How much work should be done (samples sizes)
Audit strategy and audit plan
 In summary whilst the strategy sets the overall approach to the audit, the plan fills in the
operational details of how the strategy is to be achieved
 Both are not fixed documents – to be revised as necessary during the course of the audit
 In practice, these two documents are inter-related – basically , the auditor formulates the overall
audit strategy which is translated into a detailed audit plan for the audit staff to follow

 Planning is a continual and iterative process throughout the whole audit engagement

Documentation – to documents:

 Overall audit strategy/ audit plan

 Any significant changes made during the audit engagement

There was a question in the exam asking the students to describe the difference between the audit
plan and the audit strategy. Make sure not to mix up the plan with the strategy.

Audit Documentation
ISA 230 Audit documentation
 The record of audit procedures performed, relevant audit evidence obtained, and conclusions
that the auditor reached
 The auditor should document audit evidence which supports the audit opinion and which
evidences that the audit was carried out in accordance with ISAs

 Working papers belong to the auditor; they are NOT part of the entity’s accounting records

 Confidentiality and safe custody

 Working papers would be sufficiently complete and detailed for others to understand and other
auditors to perform re-performances (re-audits).

Audit documentation? Why?

 Why are working papers so important? It gives tangible evidence of work that has been done.
 Evidence that the audit was planned and conducted in accordance with ISAs
 Provides details of work done for future reference
 Assists in planning and controlling future audits
 Enable the reporting partner to ensure that all planned work has been completed adequately
 Enables the conduct of quality control reviews and inspections (both internal and external).

Form and Content

Working papers typically include the following:
 General details (name of client, year end, subject, reference, prepared by and date, reviewed by
and date)
 The nature of the audit procedures to be performed
 Objective of the audit test
 Work done – sample selected, source of information, description of test
 Results – results obtained, analysis of errors or other significant obserations
 Conclusion of the test

Audit documentation is to be completed on a timely basis

After the date of the audit report > administrative process of assembling the final audit file
After the assembly of the final audit file, the auditor shall not discard or delete audit documentation
before the expiration of its retention period.

Audit files
Working papers are usually split between:

Permanent audit file vs Current audit file

 The permanent audit file is the section of the documentation which provides a continuous
interest year in year out. Information that will probably be relevant from one year to another.
Ex. Details on the history of the business, memorandum, lease agreements, accounting system
notes, etc. They may possibly change but are likely to remain the same

 The current audit file will include information about that current year’s audit. Ex. Financial
statements, audit plan, audit strategy, risk assessment, Sampling plans, Audit programmed, etc.

 Conclusion: It is the basis on which we are issuing our opinion. Our opinion needs to be
supported by high quality working papers.

ISA 500 Audit evidence

Objective – to provide guidance on the quantity and quality of audit evidence to be obtained in an
audit of financial statements
Audit evidence – the information gathered or used by the auditor to support audit opinion
The need for evidence – why?
To enable us to form and express an opinion on the truth and fairness of the financial statements
Sufficient and appropriate evidence = Quantity and Quality evidence

The audit evidence

The auditor’s judgement is required to assess what is sufficient appropriate audit evidence.
This judgement is likely to be influenced by factors such as: the materiality of the iterm
being investigated
Reliability of the information available – this is influenced by its source (internal or external),
and by its nature (visual, documentary, and oral)

Quality of audit evidence:

Obtained from external independent sources (external is of higher quality than internal)#
However, Internally generated audit evidence is more reliable when the related accounting
and internal control systems are effective;
Audit evidence obtained directly by the auditor is more reliable than that obtained by the
entity

Obtaining audit evidence:

 Inspection: examination of records and documents
 Observation: looking at a procedure being performed
 Inquiry: ranging from formal written inquiries addressed to third parties to informal oral
inquiries with the entity’s personnel
 Confirmation: Ex. The auditor ordinarily seeks direct confirmation of debtors through a debtors
circularization.
 Computation: Checking the arithmetical accuracy of source documents and accounting records.
Ex. Adding up bank reconciliation
 Analytical procedures: The analysis of significant ratios and trends so as to identify those figures
which are not in line with expectations, and which require further investigation
 Scanning: searching for large or unusual items in accounting records

An auditor should be thorough in searching for evidence and unbiased in its evaluation.

Inconsistencies/doubts on audit evidence

What happens if we have doubts on the reliability of the evidence (professionally skeptic)? We need
to do more work and obtain more evidence to resolve the procedure. We need to perform more
procedures to mitigate these inconsistencies. Who is right? What was the reason for the
inconsistencies?

Audit evidence – challenges

Obtaining sufficient appropriate audit evidence can be a challenging task:
examples:
 Lack of internal Controls
 Unavailability of evidence
 Fraud
 Lack of interest/Knowldge

Impact of Covid-19
Enabling new ways of auditing remotely

Internal Auditing