THE AUDIT PROCESS- PLANNING AND QUALITY CONTROL

3.1 The Stages of a Modern Audit

The main features of an audit are as follows, with a brief note on the procedures to use:
i. Ascertainment of the nature and constitution of the client's business and how it is
carried on. Procedures would include visits to the client's premises, discussions with
officers, study of documents such as past accounts, prospectuses, audit files, etc.
ii. Planning and subsequently controlling the audit. Procedures would include
preparation of an "audit memorandum" setting out work to be done and timing and staff
requirements. A preliminary review of the client's management accounts and previous
audit files would also have been required.
iii. Ascertaining, evaluating and testing the client's accounting systems and internal
controls. There are several ways of dealing with this. A modern way is to ascertain by
asking `grass roots' staff; recording the facts by means of flow charts etc. and evaluating
by the use of the `key' questions and criteria questions using a hypothetical or normative
model of the appropriate systems.
iv. Carrying out tests on the systems to determine if they are effective and are
consistently applied at all relevant times. This is done by means of "compliance" tests
preferably operated on a statistically valid basis.
v. Verifying the existence, title and amounts included in the balance sheet in respect
of assets, liabilities and capital. This is done by a variety of means including
assessment of internal control procedures and by means of "substantive" tests which give
direct evidence of the items to the auditor, e.g. bank letter, and debtors circularisation.
vi. Checking the financial statement with the accounting records. This is a requirement
of the 7th Schedule of the Companies Act and is achieved by simply making such a
comparison.
vii. Examining the income statement to confirm that it reflects the results of the
operations of the enterprise. This is achieved by assessment of internal control
procedures and the quality of the records, by seeking direct evidence, and by seeking out
and probing anomalies or differences from expectations.

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 viii. Examining the financial statements for conformity with acceptable accounting
practices and for compliance with legal and other disclosure requirements. This is
achieved by the use of check lists.
ix. Considering the financial statements as a whole and reviewing the audit work and
conclusions drawn there from in order to determine whether such statements give
a true and fair view. This is achieved by a review conducted by experienced personnel
considering the audit working papers, any revealed anomalies and any uncertainties and
any disagreements with directors or other parties responsible for the preparation of the
accounts.
x. The drafting of an auditor's report giving the auditor's opinion on the truth and
fairness and compliance with statute of the accounts. The wording of the report will
depend on the conclusion drawn by the auditor from his audit, and the report may be
qualified or unqualified.
3.2 Introduction to Planning

The primary objective of an audit is the expression of an expert and independent opinion on the truth
and fairness of the information contained in the annual financial statements expressed in the audit
report and the ascertainment and evaluation of the accounting systems as the basis for the preparation
of financial statements. It is for the auditor to decide the extent of audit work he considers necessary
in order to support his opinion.
ISA 200 Objectives and General Principles governing an audit of financial statements states that the
auditor should carry out an audit in accordance with ISAs and ethical principles to provide reasonable
assurance that the financial statements are free from material misstatement.

The auditor should plan the audit work so that the audit will be performed in an effective
manner.
“Planning” means developing a general strategy and a detailed approach for the expected nature,
timing and extent of the audit. The auditor plans to perform the audit in an efficient and timely
manner.
International Standard on Auditing (ISA) 300 Planning establishes standards and provides
guidance on planning an audit of financial statements.

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An audit is an assignment. To complete the assignment efficiently and effectively in an
economical and cost effective manner then it must be planned for in some detail before
commencement and the strategy constantly reviewed as the audit progresses. Planning consists
of determining what is to be done, determining when it is to be done, determining who is to do
it; and determining what it will cost in terms of hours and money.
Audit Planning Memorandum

Planning must be formalised in a written document ordinarily called an Audit Planning

Memorandum (APM).
In practice, such a plan includes the following information:
1. Section 1 can be a summary of the terms of engagement, basically summarizing
the expected scope of the assignment and the reports or other communications
called for under the terms of engagement.
2. Section 2 would consist of the history or a brief background of the client and any
major changes that have taken place since the previous audit visit. Accordingly,
this paragraph will cover such matters as the kind of business the client is in, the
products, the spread of the company’s products, the location from which the client
operates, changes in key personnel, accounting policies and procedures, legislation
and even changes in the industry structure. If the company is a part of a group, then
a summary of the relationship with other companies in the group may also be
provided.
3. Section 3 would summarize those areas with high inherent risk. These are those
areas whereby because of the nature of the business environment, in which the
client operates, there is a high chance of misstatement or misreporting those are
areas where the auditor could reach a wrong conclusion unless special audit
procedures are adopted.
4. Section 4 could summarize the financial position and results. This normally
involves summarizing the balance sheet and the profit and loss account for the last
audited year and having alongside those figures the latest a management accounts
figures as well as the budgeted figures. The auditor then carries out a ratio analysis
on the financial information to identify other audit risk areas or areas where
apparently there have been new developments or significant changes that require

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 investigation and explanations.
5. Section 5 could consist of a listing of incomes, expenses, assets and liabilities i.e.
the significant components of the financial statements and a brief description of the
methods to be adapted to verify them.\
6. Section 6 is materiality levels, which would be set for every material component
of the financial statements and the related audit approach.
7. An outline of the proposed audit approach. The aspects that would be covered
here include:
 The expected client staff assistance in the preparation of supporting
schedules
 The expected reliance on the Internal Control Systems (ICS)
 The intended use of internal auditor’s work
 The intended use of experts or specialists
This section would also highlight the expected levels of assurance to be derived from:
- tests of control
- analytical review procedures
- substantive procedures of details
8. Section 8 could consist of a timetable on timing of key events or activities such as
the proposed date of the AGM, the date of audit clearance, the date of the stock take
and the date of the various audit units.
9. Section 9 could deal with the staffing arrangements, identifying the partner
responsible for the audit, the manger, the accountant in charge and the audit
assistants.
10. Section 10 could be for the budget and a fee quotation. This would show for every
staff member, the number of man hour as well as the cost of those hours.
Note that the plan must be approved by the partner in writing before the audit
commences.
3.3 Importance of Audit Planning
Adequate planning of the audit work helps to ensure:
 That appropriate attention is devoted to important areas of the audit,
 That potential problems are identified

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  That work is completed expeditiously.
 Proper assignment of work to assistants
 Coordination of work done by other auditors and experts.
The extent of planning will vary according to the size of the entity, the complexity of the audit and
the auditor’s experience with the entity and knowledge of the business.
Obtaining knowledge of the business is an important part of planning the work. The auditor’s
knowledge of the business assists in the identification of events, transactions and practices which
may have a material effect on the financial statements. The auditor may wish to discuss elements
of the overall audit plan and certain audit procedures with the entity’s audit committee,
management and staff to improve the effectiveness and efficiency of the audit and to coordinate
audit procedures with work of the entity’s personnel. The overall audit plan and the audit program;
however, remain the auditor’s responsibility.
Controlling

The auditor carries out his work using different levels of staff. To achieve the plan requires control
at all stages. The elements of control are:
(a) Directing or Direction: Staff must have the instructions to follow. This could be
formalised audit programmes clearly setting out what the staff
must do.
(b) Supervision: Every member of the audit team should be subject to supervision
by his superior to ensure that the plan is being carried out as
expected and all necessary work is being done.
(c) Reviewing: The work done would be reviewed at all levels and evidence of
this review should be available.
(d) Recording: The entire audit process must be properly documented in the form
of working papers.
3.4 The Overall Audit Plan

The auditor should develop and document an overall audit plan describing the expected scope
and conduct of the audit. While the record of the overall audit plan will need to be sufficiently
detailed to guide the development of the audit program, its precise form and content will vary
depending on the size of the entity, the complexity of the audit and the specific methodology and

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technology used by the auditor. Matters to be considered by the auditor in developing the overall
audit plan include the following:
Knowledge of the Business
• General economic factors and industry conditions affecting the entity’s business.
• Important characteristics of the entity, its business, its financial performance and its
reporting requirements including changes since the date of the prior audit.
• The general level of competence of management.
Understanding the Accounting and Internal Control Systems

• The accounting policies adopted by the entity and changes in those policies.
• The effect of new accounting or auditing pronouncements.
• The auditor’s cumulative knowledge of the accounting and internal control systems and
the relative emphasis expected to be placed on tests of control and substantive
procedures.
Risk and Materiality

• The expected assessments of inherent and control risks and the identification of
significant audit areas.
• The setting of materiality levels for audit purposes.
• The possibility of material misstatement, including the experience of past periods, or
fraud.
• The identification of complex accounting areas including those involving accounting
estimates.
Nature, Timing and Extent of Procedures
• Possible change of emphasis on specific audit areas.
• The effect of information technology on the audit.
• The work of internal auditing and its expected effect on external audit procedures.
Coordination, Direction, Supervision and Review
• The involvement of other auditors in the audit of components, for example, subsidiaries,
branches and divisions.
• The involvement of experts.
• The number of locations.
• Staffing requirements.
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 Other Matters
• The possibility that the going concern assumption may be subject to question.
• Conditions requiring special attention, such as the existence of related parties.
• The terms of the engagement and any statutory responsibilities.
• The nature and timing of reports or other communication with the entity that are
expected under the engagement.

3.5 The Audit Program

The auditor should develop and document an audit program setting out the nature, timing
and extent of planned audit procedures required to implement the overall audit plan.
The audit program serves as a set of instructions to assistants involved in the audit and as a means
to control and record the proper execution of the work. The audit program may also contain the
audit objectives for each area and a time budget in which hours are budgeted for the various audit
areas or procedures.
In preparing the audit program, the auditor would consider the specific assessments of inherent
and control risks and the required level of assurance to be provided by substantive procedures. The
auditor would also consider the timing of tests of controls and substantive procedures, the
coordination of any assistance expected from the entity, the availability of assistants and the
involvement of other auditors or experts.
Changes to the Overall Audit Plan and Audit Program
The overall audit plan and the audit program should be revised as necessary during the course of
the audit. Planning is continuous throughout the engagement because of changes in conditions or
unexpected results of audit procedures. The reasons for significant changes would be recorded.
3.6 Audit Approaches
1. Substantive procedures
2. Balance sheet Approach
3. Audit Risk Approach
4. Business Risk Approach
5. Systems Based Audit approach
6. Directional Testing
7. Analytical Procedures

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