- 20 Marks
AA – L2 – Q16 – Planning an Audit
Question
ISA 300 Planning an Audit of Financial Statements requires the auditor to plan his audit work so that the audit will be performed in an effective manner.
Required:
(a) Explain why the need for planning exists and what benefits are to be derived from adopting such an approach.
(b) Set out the steps you would take prior to the commencement of an audit of a limited company which has been a client for a number of years.
(c) Planning is equally relevant to the work of the internal auditor. Explain how the internal auditor’s planning differs to that of the external auditor.
Answer
(a) As well as allowing the audit to be performed in an effective manner, the planning process allows the auditor to establish an overall strategy for the audit:
- defining the scope and reporting objectives of the audit,
- considering matters such as materiality thresholds and high risk areas
- setting out the nature, extent and timing of the resources needed to perform the audit.
The more detailed audit plan then sets out the nature, timing and extent of audit procedures to be performed by audit team members.
This documented plan allows the auditor to control the audit by ensuring that it is performed in accordance with the plan and that the work is of an acceptable standard. It will also provide a basis for drawing up audit programmes, which will be used to instruct the members of the audit team. Less senior members of the team will be supervised by those with more experience, and all work will be reviewed.
The benefits of such an approach are that the work will be performed in an orderly and efficient manner and that the audit opinion will be formed on a sound basis.
(b) The audit should be planned by a senior member of staff who is familiar with the company and the industry in which it operates. The purpose of the overall audit strategy and plan will be to outline the audit approach; hence the procedures should include the following:
- Review the previous year’s audit files for matters which will be relevant in the current year.
- Consider the effect of any changes in legislation or accounting practices.
- Meet with the client to discuss any significant changes in the client’s accounting system.
- Consider the effect of any systems changes on the audit approach and time needed for the audit.
- Obtain and review copies of management accounts.
- Discuss with the client the timing of both interim and year end visits.
- Decide on the audit approach and draft a memorandum outlining it to be approved by the audit partner.
- Decide on the number and grade of staff required for the audit and ensure that appropriate people will be available at the agreed time.
- Prepare detailed time and cost budgets.
- Inform the client in writing of the dates as agreed for audit visits and of the names of the staff involved.
- Brief the audit team on the client and their individual responsibilities.
(c) The benefits of planning and the importance of developing a sound up-to-date knowledge of the business also apply to the internal audit planning process. However, the timescale within which internal auditors may operate will tend to be different from that in which external auditors operate.
The external audit operates essentially on an annual cycle, geared to the entity financial reporting date.
Internal audit work is not linked precisely to the financial reporting date. As a result of this, internal audit functions have more flexibility in the timing of their work and have scope for operating in a longer time frame.
This may result in internal audit work plans being drawn up at three ‘levels’, strategic, periodic, and operational, with each one reflecting a different time scale.
- A strategic level plan may cover a period of up to five years. During this period, the internal auditors will aim to test all the major systems and controls operating on all aspects of the business activities.
- A periodic level plan will normally relate to the financial reporting period and will express key aspects of the strategic plan in terms of particular goals and targets for that period.
- An operational level plan will set out day-to-day audit objectives and procedures for each particular audit assignment to be performed.
- Tags: Audit Planning, Audit Procedures, Audit Team, Client Engagement, Longstanding Client
- Level: Level 2
- Topic: Planning an Audit
- Uploader: Samuel Duah