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AUDIT PLANNING

Edited By: Salim Saifullah-Al-Ahsan

Planning (ISA 300)


The primary objective of audit planning is to reduce audit risk to an acceptable level. Planning entails developing a general strategy and a detailed approach for the expected nature, timing and extent of the audit. The objectives of planning are to: Ensure that appropriate attention is devoted to the different areas of the audit; Ensure that potential problems are identified; and facilitate review. The audit firm should consider materiality and its relationship with audit risk during the planning phase. This will assist with meeting the first two objectives above.

Audit Strategy
There is more than one way to audit a company's financial statements. For each client, an appropriate strategy needs to be considered, which covers the scope, timing and direction of the process: brief summary of the company's activities (and any changes during the last year) what is the reporting framework (e.g. What accounting standards does the company follow, and what audit standards will be followed) understanding key dates for reporting Deciding audit approach should time be spent testing internal controls, or is a full substantive approach more effective. preliminary assessment of materiality Timing of audit work (e.g. is an interim audit necessary, what work should be done at the client's year end, which locations of the client will be visited and when etc.) Identification of higher risk areas in the financial statements.

Detailed Audit Planning


This is a more detailed document, and follows from the strategy. It is likely to include: A more detailed description of the client, including o financial performance o key changes in the business in the last year Key accounting policies used Materiality assessment Results of Preliminary Analytical Procedures on the draft Financial Statements. Likely audit approach for each area of the Financial Statements (which may change once the results of controls testing are known) Detailed description of the high risk areas of the Financial Statements Specific audit testing issues, e.g.: o whether any experts will be used, o how much IT will be used in the audit Timing of specific procedures (e.g. Stocktakes) Staffing and a time budget.

THE AUDIT RISK MODEL AUDIT RISK = the risk of giving the wrong audit opinion = the risk of material errors in the FS, which the auditor fails to detect

Financial Statement Risk FS Risk is the risk of material errors in the Financial Statements, and comprises 2 parts: INHERENT RISK the risk of material errors in the FS due to the nature of the business and its transactions

CONTROL RISK the risk that a company's own checking procedures (internal controls) fail to prevent or detect these material errors from happening. Detection Risk - Detection Risk is the risk that the auditor's substantive tests fail to find material errors in the FS so...

AUDIT RISK = FS RISK x DETECTION RISK. = INHERENT RISK x CONTROL RISK RISK

x DETECTION

The auditors response to assessed risks (ISA 330) Once audit risks have been identified, the auditor needs to respond to these risks in an appropriate way. This will include taking steps such as: Designing tests of control and substantive tests to address the risk areas Emphasising to the audit team the need to maintain professional scepticism. Assigning more experienced staff or those with special skills or using experts. Providing more supervision. Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed.

Analytical procedures (ISA 520)


The auditor should apply analytical procedures at the planning stage, throughout the audit and at the overall review stage of the audit. The auditors should apply analytical procedures at the planning stage to assist in understanding the entitys business and in identifying areas of potential risk. When intending to apply analytical review as a substantive procedure, the auditor needs to consider the following factors: Objectives of the analytical review procedures The nature of the information and the degree to which the information can be sub-divided e.g. apply procedures to divisions or products rather than the overall results. The comparability, availability, reliability and source of information The auditors should apply analytical procedures at or near the end of the audit when forming an overall conclusion as to whether

the financial statements as a whole are consistent with the auditors knowledge of the entitys business.

Materiality (ISA 320)


A misstatement or omission can be considered material if, individually or in aggregate, it would reasonably be expected to influence the economic decisions of users of the financial statements. Materiality is concerned not just with size / value but also with the nature of the matter and the circumstances of the entity Judgments about materiality are made in the light of the surrounding circumstances and are affected by the size and nature of a misstatement, or a combination of both Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group The audit firm must be concerned with identifying material errors, inclusions, omissions and misstatements.

UNDERSTANDING THE AUDIT CLIENT (ISA 315)


In accordance with ISA 315, auditors must ensure they understand the business that they are auditing ... otherwise it would be very difficult to understand whether the company's control systems are appropriate, or its Financial Statements So ... what information is needed? EVERYTHING!! Examples: Who are the key stakeholders shareholders directors and key management customers suppliers Financial Performance Operations what the company does The Industry in which it operates Future plans