AUDIT PLANNING, CONTROL & RECORDING (iSA 300) NOTES

FIND ALSO AUDIT EVIDENCE (ISA 500) Notes

WHAT IS AUDIT PLANNING?

ISA 300 Planning an Audit of Financial Statements:

planning refers to developing a general strategy and a detailed approach for expected nature, timing and extent of the audit. The auditor should plan his work to enable him conduct an effective audit in an efficient and timely manner. The form and nature of the planning required from audit will be affected by the size and complexity of the organization, the commercial environment in which it operates and the methods of processing transactions and reporting requirements to which the organization is subject.

Advantages of Good Audit Planning

Establishes the intended means of achieving the objective of the audit.
assist in the direction and control of the audit work.
a good plan assists in the proper utilization of audit assistants and in coordination of work done by other auditors and specialists.
helps ensure that attention is devoted to important areas of the audit. The planning process identifies potential problematic areas e.g. areas with weak internal controls where more detailed substantive testing should be carried out.
Helps ensure that work is completed expeditiously through more efficient use of time and proper allocation of work to audit staff.
Ensures proper division of work between the interim and the final audit avoiding repetition of work already done.
Takes into consideration times when information needed for audit proposes is available and when the client is not very busy. This encourages cooperation by ensuring less disruptions of client’s work.

INTRODUCTION

audit planning is a vital stage of the audit process covered under iSa 300. Every audit should be planned so that the engagement will be performed in an effective manner. The main aim is to reduce audit risk to an acceptably low level.

DEFINITION OF KEY TERMS

Audit planning covers the development of an overall plan for the expected coverage and conduct of the audit.

Quality control refers to the various policies and procedures put in place by the auditor to ensure that all audits conducted by the audit firm meet the quality standards set out by the accounting profession and the firm’s own quality standards.

Peer review – described as an independent review of a firm’s accounting and auditing practices.

Working papers -evidence is recorded in the form working papers of which are prepared by the auditor or obtained during the audit. The working papers are retained by the auditors in connection with the performance of an audit.

INDUSTRY CONTEXT

Audit planning is essential for every audit to direct the work of the auditor for him to allocate resources. it is therefore inevitable to conduct an audit effectively without an audit plan.

Scope of Audit Planning

Audit planning covers the development of an overall plan for the expected coverage and conduct of the audit. The audit plan is recorded in a planning memorandum.

An audit programme is then developed which shows the nature, timing and extent of audit procedures to be applied at every level of audit testing. In order to plan his work adequately, the auditor needs to understand the nature of client’s business, its organization, its methods of operation and the industry in which it operates. This is to enable the auditor appreciate which events and transactions are likely to have significant effect on the financial statements.

Sources of information on client’s nature of business

iSa 315 states that the auditor should obtain an understanding of the information system, including the related business processes, relevant to financial reporting.

In performing an audit on financial statements, the auditor should have or obtain knowledge of client’s business sufficient to enable him identify and understand events, transactions and practices that in the auditor’s judgment may have significant effect on the financial statements or the audit report. prior to accepting an engagement, the auditor should obtain a preliminary knowledge of the industry and of ownership, management and operations of the entity to be audited. after accepting to act as the company’s auditor, further and more detailed information would be obtained. obtaining the required knowledge of the business is a continuous and cumulative process. The following may be used as sources for that information.

Previous experience with the entity and the industry.
Discussions with people within the entity.
Discussion with internal audit personnel and review of internal audit reports.
Discussion with other auditors and with legal and other advisors who have provided services to the entity.
Journals and publications of the industry.
Visits to the entity’s place of business and plant facilities.
Documents such as minutes of meetings, annual financial reports, operations and system manuals and budgets.

The auditor should ensure that audit assistants in an engagement also obtain sufficient knowledge of clients business to enable them carry out delegated work.

Audit planning memorandum

The planning memorandum sets out the audit approach, how, whom and when each item in financial statements will be audited timing requirements of the audit and staff usage with time budget for each set of audit work. it generally contains the following.

a summary of terms of engagement required to set out the nature of the audit work.
a job timetable giving provisional dates of the timing of the audit.
records of any changes about the client since last audit e.g. changes in management structure.
background information about the client.
Details of key client contacts.
Extent of reliance expected on internal control system.

Audit Programme

An audit programme describes how the audit approach is to be implemented. Auditors develop an audit programme for each material accounts balance or account balance assertions. It is prepared in line with the planning memorandum and generally documents the audit objectives and procedures that will be carried out at the specific areas the auditor is interested in.

The following is an example of an audit programme designed to gather evidence in the control testing stage as to the effectiveness of operation of a client’s bank reconciliation procedures.

Client: mugutho ltd.

Year end: 31 / 12/2020 Control testing: bank reconciliation

prepared by: ……………………

received by: …………………….

audit procedure	Timing	Extent	responsibility
Inquiry whether the bank reconciliations are prepared independent of maintenance of the cash book.	interim visit	July reconciliation	audit assistant
Inspect evidence of performance of bank reconciliations by client staff.
Ensure that the person performing the reconciliations signed and dated the reconciliations. Ensure the reconciliations were done by the person proposed at the appropriate time and the supervisor signed the reconciliation as evidence of his review.	Final visit	September and October reconciliations	Audit assistant.

Problems in Developing and Implementing Audit Plan.

a company may have many clients with similar year ends. This will make allocation of time and audit staff difficult.
abrupt changes in the client’s business will call for more audit time outside the planned time. This especially happens when the client converts from manual accounting system to a computerized system such changes weaken the internal control system in the short term and call for more audit time than was previously planned for.
lack of co-operation from client e.g. providing information and explanations in good time is normally difficult for the client. This will be the major challenge for the auditor especially with a client who does not have proper accounting and internal control system.
Staff turnover in an audit firm. This inevitably interferes with the audit plan because it gives rise to unplanned staff shortages.

Audit Planning Procedures

in planning the audit of a new client, the auditor should carry out the following procedures.

Carry out a preliminary review of the client. This will involve obtaining a good understanding of the nature of the client’s business.
Discuss with management to obtain an understanding of the management structure and a general feel of the current operating circumstances of the client and any factors that affect client’s accounting and internal control system.
Communicate with previous auditor of the client and obtain from him all the information that is relevant to the audit of the new client.
Seek to obtain a preliminary understanding of the nature of the clients accounting and internal control system. This assists determine the extent to which the auditor will rely on the client’s internal control system.
Consider any accounting standards and legislations that could have an impact on the audit of the new client.
The audit senior should check the nature and timing of reports and other communications of the client so that such timings can be accommodated in the audit plan. E.g. dates of the aGm, stock takes and when management reports are ready.
The audit senior should determine the number of audit staff required, their experience and any special skills required and the timing of the audit visit.
prepare an audit planning memorandum that summarizes the scope of the work under the engagement and the strategy to be followed to meet the client’s needs.