Audit Planning 46 Pages

AUDIT PLANNING
Dr. Mwiga Wiljonsi Mbesi

Learning Objectives
At the end of this module you should be able to:
 Describe the audit procedures.
 Understand the meaning and purpose of audit planning.
 Describe the procedure for audit planning.
 Differentiate between audit planning, and audit program.
 Understand the objectives and advantages of audit programme
 Describe the contents of audit programme

Dr. Mwiga Wiljonsi Mbesi 2
Stages in the audit
In summery, auditing consist of three stages:
Phase one: The planning phase:
 Know your client
 Internal control system review
 Planning the audit
 Evaluation of audit risk
 Develop the audit program

Cont…..
Phase two: The operational phase:
 Audit testing
 Analytical review techniques
 Analytical review of Financial statement

Cont…..
Phase three: The reporting phase:
 Preparation and signing of audit report
 The management letter or letter of weaknesses

Important to be noted
International Standard on Auditing (ISA) 300, “Planning an Audit of

Financial Statements” should be read in conjunction with ISA 200,
“Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with International Standards on Auditing.”
The requirement of the ISA is clear, that “The auditor should plan the
audit so that the engagement will be performed in an effective
manner”.

What is audit planning?
 Audit planning involves establishing the overall audit strategy for the
engagement and developing an audit plan.
 A plan is basically a device for the achievement of intended goals
 Planning is a two-ways function: Setting the right goals and selecting

the right means to achieve those goals
 Adequate audit planning enable the auditor to cover the different

aspects of audit work systematically and methodically manner.

Advantages of audit planning
(Kumar and Sharma (2011), Millichamp and Taylor (2008)
Audit planning is necessary for effective, efficient, and timely audit. A

proper audit plan has the following advantages:
 The work can be completed economically and to timescale required
 It establishes the right means to achieve the objectives of the audit
 It ensures that appropriate attention is devoted to important areas of the

audit.
 The audit can be controlled and directed

Cont…..
 It helps in identify and resolve potential problems on a timely basis.
 Attention can be focused on to critical and high risk areas
 It ensure that the work is completed expeditiously.
 It assist to coordinate, organize and manage the audit engagement so

that it is performed in an effective and efficient manner.
 It helps in enhancing the quality of audit work

Cont…..
 It assists in the selection of engagement team members with

appropriate levels of capabilities and competence to respond to
anticipated risks, and the proper assignment of work to them.
 Facilitating the direction and supervision of engagement team

members and the review of their work.
 It brings overall promptness and perfection in performance of audit

work

Consideration in audit planning
It is important for auditors to consider the following factor while planning:
1. Complexity of audit i.e. size of the company and complexity of its
operations
2. Environment in which the entity operates, specifically commercial

environment
3. Previous experience with the client
4. Knowledge of the client’s business: (such knowledge can be derived from: client’s
annual reports, minutes of the meeting, previous audit working papers, enquiring personnel
responsible, discussion with the client, clients policies and procedures, relevant publications of the
institutions or professional bodies, journals, magazine, news papers etc.
Know your client
ISA 315 requires the auditors to obtain an understanding of the entity and its environment
and assess the risk of material misstatement before commencing the auditing planning
process.
It require the auditor to:

 Obtain sufficient knowledge of the business to enable them to identify and understand
events, transactions and practices that may significantly affect the financial statement
and audit
 Use the knowledge gained to :

 Assess the risk of fraud and error
 Plan the nature, timing and extent of audit procedures and
 Consider the consistency and reliability of financial statements

Why knowing the client?
Help to understand:
 the present condition and future prospect of the industry including
competition
 the past history, the present, and the future prospect of the client
(including products, services, important customers, key suppliers, and details of
significant contracts)
 the management and key personnel
 the location of all clients operations
 the client’s manufacturing and trading process

Cont…..
 any difficulty encounter by the client
 any problem in accounting or internal control system
 Any problem in accounting measurement e.g. in stock valuation or

income recognition
 Any problem likely to increase audit risk e.g.. The difficulty in

assessing the value of long term contract in a civil engendering
business
 Any change in law or accounting practices which may affect the client
The means to understanding the client
A background research need to be undertaken, which will include reading:
 Previous years audit files
 Published materials concerning the client company and industry
 Internet search
 The companies interims, internal and management accounts
 Holding a discussion of the enterprise management
 Holding discussions with previous audit staff

Stages that auditors undergoes before commencing the
audit
Before commencing an audit an auditor ought to undergo several stages:
1. Agreement with the client
2. Ascertain (determine) the scope of the audit work
3. Knowledge of the client’s business
4. Knowledge of the client's accounting system in use
5. Information about client’s staff
6. Ascertain technical details
7. Instruction to and information from client

1. Agreement with the client
Auditor should agree with the client and communicate with the outgoing auditor
on issues regarding:
 Nature of audit
 Period by which the audit report is to be finalized and submitted to the

client
 Remuneration
 Extent of duties and responsibilities

2. Ascertain the scope of the work
 The scope of audit work is usually provided in the engagement letter
 Engagement letter provides both the responsibility of the auditors

and that of the management.

3. Knowledge of the client’s business
See a slides on “consideration in audit planning ” and know your

client.

4. Knowledge of the accounting system in
use
 Auditor should examine the accounting system of the company
 Should obtain a complete list of books maintained and in use
 Should examine those who maintain the books and their specimen
signature
 Auditor should ask for a written statement in regard to internal control

and evaluate its efficiency

5. Information about client’s staff
 Auditors should collect a list of different principal officials of the

company for reliable information
 Should asses the particular of their work, the scope of their authorities
and specimen of their signature

6. Ascertain technical details
 Auditors should develop familiarity with the nature of the client’s
business operation
 In case the client business is of a technical nature with which the

auditor is unfamiliar, the auditor should visit the workplace and
acquire some technical knowledge
 Auditors are not expected to be technical expert, but they must

acquaintance as far as possible with the technical aspects of the client’s
business

7. Instructions to and information from client
Information from the client includes:

 Nature of business (Historical background, location, details of product
manufacturing or service delivery procedures, details of raw materials)
 Organization and personnel (Organization structure, list of

directors/partners and their specimen signatures, various departments/functions
and their activities, and extent of authorities)
 Books of account, records etc. (list of books of account, copy of audited

balance sheet, auditors reports of previous years, copies of minutes of
resolution by the board)
 Instructions to client: The auditor is expected to instruct the client to keep all
the books of account ready for audit
Internal control system
Before Planning auditor need to:
 Ascertain the eternal control system
 Record it
 Confirm the records with the client
 Review the overall system for reliability
 Test the system with some sample checks
 Evaluate its reliability
 Form a conclusion on the adequacy of the client ‘s system of internal

control
Objectives of examining and recording the accounting
and internal control systems
It is for the auditor to have evidence that:
 The client maintains adequate books and records (secondary objective of the
audit)
 The client has a system of internal control over processing and recording of
transaction such all transactions are recorded correctly and numerically in
principle.
 The books of accounts can be relied on to form a reliable bases for the
preparation of the financial statements.
 All transaction are recorded correctly and in the right accounting period

Method of documenting the clients systems
There are basic techniques used when documenting clients systems:
 Use of internal Control Questionnaires (ICQs)
 Flow chart and documenting the system – a method of recording internal

control system from the auditors standpoint: charting process and charting
document
 Use of internal control Evaluation Questionnaire (ICEQs)

Developing an effective audit plan (planning
process)
 Before planning, audit planning process should be documented in the

document known as audit planning memorandum.
 Audit planning memorandum is a document necessary for

documenting the planning process
 The memorandum is the evidence of the audit planning process

process)
The following Matters should be considered while developing the overall
audit plan:
 The terms of engagement and any statutory responsibilities
 Reviewing last years working papers for key issues and problem areas
 The relevant legal or statutory requirements and the impact of any

changes in legislation (e.g. companies act 2006) or standards
 The background of the client and the nature of any changes in the
industry or issues which may affect the audit work
process)
 the impact of changes in the business itself or its management or
ownership
 The nature and timing of reports or other communication
 The accounting policies adopted by the client and change therein
 The effect of new accounting or auditing pronouncements on audit
 The identification of significant audit areas

Cont….
 The condition requiring special attention e.g. possibility of material

error or fraud, or transaction with the outsider in whom directors are
interested
 Decide Audit strategy, for instance, the degree of reliance of

accounting and internal control system, and which areas may need
detailed substantive tests or a risk based audit strategy
 The nature and extent of audit evidence to be obtained
 The work of internal auditor and the extent of their involvement, if any
in the audit

Cont…..
 The involvement of other auditors in the audit of subsidiary or

branches of the client
 The allocation of work between joint auditors and the procedures for
its control an review
 Establishing and coordinating staffing requirements

Cont…..
 Reviewing the effect on the audit of change in systems or accounting

procedures
 Carrying out an analytical review of management accounts
 Consulting with the management on any key issues which may risen in
the financial period
 Agreeing the timing of the audit work- is there a need of having an

interim audit followed by the final visit?

Cont…..
 Agreeing the extent of preparation by the client of analyses and

summaries
 Deciding on the degree of reliance to be placed on internal audit report

and whether this will reduce amount of work carried out by the
external auditor
 the use of any expert, e.g. computer audit specialists or third party
expert e.g. valuers of stock or property

Cont…..
 Liaising with joint auditors, if any, and in the case of group audit,
liaising with any auditor of subsidiary company
 Planning the rotational test where there are multiple locations or

branches so the one to be visited this year can be agreed and visit s
scheduled.
 Working out the time budget
 Planning and arranging staff requirements

 Considering the audit fee
 Organizing liaison with the companies Audit committee, if any.

ISA 300 on Audit Planning Activities
1. The auditor shall establish an overall audit strategy that sets the
scope, timing and direction of the audit, and that guides the
development of the audit plan.
2. In establishing the overall audit strategy, the auditor shall:

a. Identify the characteristics of the engagement that define its scope;
b. Ascertain the reporting objectives of the engagement to plan the

timing of the audit and the nature of the communications
required;
c. Consider the factors that, in the auditor’s professional judgment, are

significant in directing the engagement team’s efforts;
Cont…..
d. 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; and
e. Ascertain the nature, timing and extent of resources necessary to

perform the engagement. (Ref: Para. A8–A11)
3. The auditor shall develop an audit plan that shall include a description
of:
a. The nature, timing and extent of planned risk assessment
procedures, as determined under ISA 315.4

Cont…..
b. The nature, timing and extent of planned further audit procedures at
the assertion level, as determined under ISA 330.5
c. Other planned audit procedures that are required to be carried out so

that the engagement complies with ISAs. (Ref: Para. A12)
4. The auditor shall update and change the overall audit strategy and the
audit plan as necessary during the course of the audit. (Ref: Para.
A13)
5. The auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their
work. (Ref: Para. A14– A15)
Audit programme
 An audit programme is auditor’s plan of action
 An audit programme is an outline of procedures to be followed in

order to arrive at an audit opinion.
 Auditors should prepare a written audit programme containing the

procedures that are needed to implement the audit plan.
 Usually, one audit programme is prepared for a particular audit.

Distinctive features of audit programme
1. Audit programme is a set of procedures to be followed to support

auditor’s opinion
2. It is auditor’s plan of action
3. It is a scheme according to which the audit work will be distributed

among audit staff

Cont………
4. It enables the auditor to delegate the work to the audit staff as per their
capabilities
5. It enable the auditor to specify the work to be done and the manner in
which it should be completed within the estimated time
6. It determine the various audit techniques to be adopted and applied for

conducting the audit in efficient and effective manner.

Objectives of audit programme
1. To integrate and coordinate the different part of the audit
2. To ensure the uniformity in the performance of audit work and to avoid

duplication
3. To have fair allocation of audit job amongst audit staff
4. To ensure the completion of audit work within a time frame
5. To fix the responsibilities of each member of the audit staff
6. To provide a proof of completion of particular audit work, the date on which

it was completed, who performed and how was it done.

Advantages of audit programme
1. Progress of the work can be examined periodically
2. The auditor can divide the work properly amongst staff according to their
qualifications and experience
3. Uniformity in the performance of audit work is ensured
4. It serves as a legal proof for the work done as initials of those who have
performed a particular job are to be appended to it
Cont…..
5. The responsibility for negligence can be fixed
6. It is helpful in supervising the work of the staff
7. It results in a proper audit routine. It not only saves time but also assures
adherence to principles of auditing and accountancy

Contents of Audit Programme
1. Name of the company
2. Nature of operation of the company
3. A review of a system of internal control
4. Date of commencement of an audit
5. Tentative period of an audit exercise

Cont…..
6. Accounting system followed by the company
7. Preparation of the audit repots
8. Instructions, or points of caution by the previous year’s audit report
9. Schedule of checking of various subsidiary books including journals
10. Schedule of checking of ledger accounts including profit and loss

account items and balance sheet items

END OF PRESENTATION
THANK YOU FOR LISTENING

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AUDIT PLANNING

Dr. Mwiga Wiljonsi Mbesi

At the end of this module you should be able to:

 Describe the audit procedures.

 Understand the meaning and purpose of audit planning.

 Describe the procedure for audit planning.

 Differentiate between audit planning, and audit program.

 Understand the objectives and advantages of audit programme

 Describe the contents of audit programme

In summery, auditing consist of three stages:

Phase one: The planning phase:

 Know your client

 Internal control system review

 Planning the audit

 Evaluation of audit risk

 Develop the audit program

Phase two: The operational phase:

 Analytical review techniques

 Analytical review of Financial statement

Dr. Mwiga Wiljonsi Mbesi 4

Phase three: The reporting phase:

 Preparation and signing of audit report

 The management letter or letter of weaknesses

Dr. Mwiga Wiljonsi Mbesi 5

International Standard on Auditing (ISA) 300, “Planning an Audit of

Dr. Mwiga Wiljonsi Mbesi 6

 A plan is basically a device for the achievement of intended goals

 Planning is a two-ways function: Setting the right goals and selecting

 Adequate audit planning enable the auditor to cover the different

Dr. Mwiga Wiljonsi Mbesi 7

Audit planning is necessary for effective, efficient, and timely audit. A

 The work can be completed economically and to timescale required

 It establishes the right means to achieve the objectives of the audit

 It ensures that appropriate attention is devoted to important areas of the

 The audit can be controlled and directed

Dr. Mwiga Wiljonsi Mbesi 8

 It helps in identify and resolve potential problems on a timely basis.

 Attention can be focused on to critical and high risk areas

 It ensure that the work is completed expeditiously.

 It assist to coordinate, organize and manage the audit engagement so

 It helps in enhancing the quality of audit work

Dr. Mwiga Wiljonsi Mbesi 9

 It assists in the selection of engagement team members with

 Facilitating the direction and supervision of engagement team

 It brings overall promptness and perfection in performance of audit

Dr. Mwiga Wiljonsi Mbesi 10

2. Environment in which the entity operates, specifically commercial

3. Previous experience with the client

It require the auditor to:

 Use the knowledge gained to :

 Plan the nature, timing and extent of audit procedures and

 Consider the consistency and reliability of financial statements

Dr. Mwiga Wiljonsi Mbesi 12

 the management and key personnel

 the location of all clients operations

 the client’s manufacturing and trading process

 any difficulty encounter by the client

 any problem in accounting or internal control system

 Any problem in accounting measurement e.g. in stock valuation or

 Any problem likely to increase audit risk e.g.. The difficulty in

A background research need to be undertaken, which will include reading:

 Previous years audit files

 Published materials concerning the client company and industry

 The companies interims, internal and management accounts