It is of
great importance that an audit is planed in advance because:
great importance that an audit is planed in advance because:
·
The
intended means of achieving the audit objectives must be established.
The
intended means of achieving the audit objectives must be established.
·
The audit
can be controlled and directed.
The audit
can be controlled and directed.
·
Attention
can be focused on to critical and high-risk areas.
Attention
can be focused on to critical and high-risk areas.
·
Any
potential problem areas can be identified as early as possible
Any
potential problem areas can be identified as early as possible
·
The work
can then be completed economically and to timescale requirements.
The work
can then be completed economically and to timescale requirements.
The
relevant ISAs are ISA 300 planning an audit of financial statements and ISA 315
obtaining an understanding of the entity and its environment and assessing the
risks of a material misstatement.
relevant ISAs are ISA 300 planning an audit of financial statements and ISA 315
obtaining an understanding of the entity and its environment and assessing the
risks of a material misstatement.
The planning process
Before the audit is commenced an audit plan must be
drawn up. This will normally be contained in a document known as an audit
planning memorandum.
drawn up. This will normally be contained in a document known as an audit
planning memorandum.
It is important that auditors document the planning
process as they have included in their audit report a confirmation that they
have done so, and this memorandum is evidence for that process.
process as they have included in their audit report a confirmation that they
have done so, and this memorandum is evidence for that process.
The planning process will normally involve:
·
Reviewing
last year’s working papers for key issues and problem areas.
Reviewing
last year’s working papers for key issues and problem areas.
·
Considering
the impact of any changes in legislation (e.g. companies act 2006) or auditing
or accounting standards.
Considering
the impact of any changes in legislation (e.g. companies act 2006) or auditing
or accounting standards.
·
Considering
the background of the client and the nature of any changes in the industry or
issues which may affect the audit work.
Considering
the background of the client and the nature of any changes in the industry or
issues which may affect the audit work.
·
Considering
the impact of changes in the business itself or its management or ownership
Considering
the impact of changes in the business itself or its management or ownership
·
Reviewing
the effect on the audit of changes in systems or accounting procedures.
Reviewing
the effect on the audit of changes in systems or accounting procedures.
·
Carrying
out an analytical review of management accounts.
Carrying
out an analytical review of management accounts.
·
Counsulting
with management on any key issues which have arisen in the financial period.
Counsulting
with management on any key issues which have arisen in the financial period.
·
Deciding
on the audit strategy, for example, how much reliance could be placed on the
client’s own internal controls so a systems-based approach could be adopted,
which areas may need detailed substantive testing or whether a risk-based
strategy could be used.
Deciding
on the audit strategy, for example, how much reliance could be placed on the
client’s own internal controls so a systems-based approach could be adopted,
which areas may need detailed substantive testing or whether a risk-based
strategy could be used.
·
Agreeing
the timing of the audit work-is there to be an interim audit followed by a
final visit?
Agreeing
the timing of the audit work-is there to be an interim audit followed by a
final visit?
·
Agreeing
the extent of preparation by the client of analyses and summaries.
Agreeing
the extent of preparation by the client of analyses and summaries.
·
Deciding
on the degree of reliance to be placed on internal audit reports and whether
this will reduce the amount of audit work carried out by the external auditors.
Deciding
on the degree of reliance to be placed on internal audit reports and whether
this will reduce the amount of audit work carried out by the external auditors.
·
Considering
the use of any experts, e.g. computer audit specialists or third party experts
such as values of stock or property.
Considering
the use of any experts, e.g. computer audit specialists or third party experts
such as values of stock or property.
·
Liaising
with joint auditors, if any, and, in the case of group audits, liaison with any
auditors of subsidiary companies.
Liaising
with joint auditors, if any, and, in the case of group audits, liaison with any
auditors of subsidiary companies.
·
Planning
the rotational testing where there are multiple locations or branches so the
one to be visits scheduled.
Planning
the rotational testing where there are multiple locations or branches so the
one to be visits scheduled.
·
Working
out the time budget.
Working
out the time budget.
·
Planning
and arranging staffing requirements.
Planning
and arranging staffing requirements.
·
Considering
the budget in the light of the likely fee to be charged.
Considering
the budget in the light of the likely fee to be charged.
·
Organizing
liaison with the company’s audit committee, if any.
Organizing
liaison with the company’s audit committee, if any.
Case study 3
Steps in planning the audit
Metalbash
In order to illustrate the process of audit
planning we will use an example in order to illustrate the process.
planning we will use an example in order to illustrate the process.
Let us consider the case of metalbash again, and
the auditors who are Tickitt & Run. The December 20-8 audit plan is to be
prepared by audit manager Jane. She has to consider all the matters mentioned
above and finds the following matters require attention:
the auditors who are Tickitt & Run. The December 20-8 audit plan is to be
prepared by audit manager Jane. She has to consider all the matters mentioned
above and finds the following matters require attention:
·
A special
report has to be prepared for the lorry part manufacturer’s association on the
cost structures in the company.
A special
report has to be prepared for the lorry part manufacturer’s association on the
cost structures in the company.
·
As jane
is new to the audit she needs to read previous year’s papers especially carefully
as her predecessor has left Tickitt & Run and the audit partner, to whom
she reports, has also changed as old Mr tick has retired and gone to live in
the Bahamas.
As jane
is new to the audit she needs to read previous year’s papers especially carefully
as her predecessor has left Tickitt & Run and the audit partner, to whom
she reports, has also changed as old Mr tick has retired and gone to live in
the Bahamas.
·
The 20-7
audit was completed in May 20-7 and the time is now July-20-8.
The 20-7
audit was completed in May 20-7 and the time is now July-20-8.
·
There are
several new ISAs and some new relevant legislation. Happily all these are
summarized in Tickitt & Run’s internal updating and jane is sent on course
regularly.
There are
several new ISAs and some new relevant legislation. Happily all these are
summarized in Tickitt & Run’s internal updating and jane is sent on course
regularly.
·
The
client produces monthly accounts internally and jane finds that turnover
increased substantially after March as a new branch was opened in Wigan and two
major new products began manufacture. These two products are new technology and
the company have taken a risk in introducing them at this time. Substantial
capital expenditure throughout the first part of the year has already led to
liquidity problem and this has been added to by increase in stock and debtors
and the acquisition of the new company.
The
client produces monthly accounts internally and jane finds that turnover
increased substantially after March as a new branch was opened in Wigan and two
major new products began manufacture. These two products are new technology and
the company have taken a risk in introducing them at this time. Substantial
capital expenditure throughout the first part of the year has already led to
liquidity problem and this has been added to by increase in stock and debtors
and the acquisition of the new company.
·
A
structural review of the company consequent on the items mentioned above has
led to three senior directors and managers being retired early and new sales
and production directors.
A
structural review of the company consequent on the items mentioned above has
led to three senior directors and managers being retired early and new sales
and production directors.
·
A
completely new networked computer system was installed in april and is working
well.
A
completely new networked computer system was installed in april and is working
well.
·
The
directors have expressed a wish for the audit to be completed by the end of
March 20×9 and they promise to have the accounts ready by mid February.
The
directors have expressed a wish for the audit to be completed by the end of
March 20×9 and they promise to have the accounts ready by mid February.
·
Every
conceivably schedule is available from the computer system. Jane feels she
should think up analyses which will help her prepare her analytical review
procedures.
Every
conceivably schedule is available from the computer system. Jane feels she
should think up analyses which will help her prepare her analytical review
procedures.
·
The
company has no internal audit function.
The
company has no internal audit function.
·
The
company relies heavily on internal controls to control its day-to-day
transaction processing. Jane thinks that once the controls have been properly
documented it may well be possible to rely on them to a significant extent.
The
company relies heavily on internal controls to control its day-to-day
transaction processing. Jane thinks that once the controls have been properly
documented it may well be possible to rely on them to a significant extent.
·
There are
no joint auditors.
There are
no joint auditors.
·
Metalbash
is based in one location except for the branch in Wigan and the new company
which is based in Essex.
Metalbash
is based in one location except for the branch in Wigan and the new company
which is based in Essex.
Deciding an audit strategy
ISA 210 states that there should be an overall
audit plan, ste out in the audit planning memorandum, which outlines the
general strategy and a detailed approach specified in the audit programme.
audit plan, ste out in the audit planning memorandum, which outlines the
general strategy and a detailed approach specified in the audit programme.
As stated above, before the detailed audit planning
work commences jane must ensure that she has a good understanding of the
client, the industry in which it operates and its products and processes.
work commences jane must ensure that she has a good understanding of the
client, the industry in which it operates and its products and processes.
Before deciding on an audit strategy she must go
through the following steps:
through the following steps:
1 understand the client and its background-history,
products, locations, especially noting factors like the new directors and chief
accountant, a new computer system, new products and the new subsidiary. In
particular she must review and update the records on:
products, locations, especially noting factors like the new directors and chief
accountant, a new computer system, new products and the new subsidiary. In
particular she must review and update the records on:
·
The
management structure;
The
management structure;
·
The
products and processes;
The
products and processes;
·
The
financial accounting system;
The
financial accounting system;
·
The
abilities of the management to control the business;
The
abilities of the management to control the business;
·
The
operating style (e.g. direction from the top or disseminated decision-making);
The
operating style (e.g. direction from the top or disseminated decision-making);
·
The
attitude of directors and management towards internal control.
The
attitude of directors and management towards internal control.
2 select an audit strategy
The audit strategy will be taking into account the
following:
following:
·
The terms
of the engagement with the client, i.e. what work is to be done? This will
obviously include the audit but will also include any accounting work to be
done for the client (i.e. drafting the final accounts, tax computations, etc.)
and preparing any reports to third parties, e.g. the lorry parts manufacturers
association.
The terms
of the engagement with the client, i.e. what work is to be done? This will
obviously include the audit but will also include any accounting work to be
done for the client (i.e. drafting the final accounts, tax computations, etc.)
and preparing any reports to third parties, e.g. the lorry parts manufacturers
association.
·
Important
figures and rations-from previous years and, if available, from relevant
management and draft accounts. This will form the basis of a preliminary
analytical review which may highlight audit problem areas.
Important
figures and rations-from previous years and, if available, from relevant
management and draft accounts. This will form the basis of a preliminary
analytical review which may highlight audit problem areas.
·
Identification
and consideration of key risk areas to the financial statements as a
whole-these might include stock and asset valuations, work in progress, or
liquidity.
Identification
and consideration of key risk areas to the financial statements as a
whole-these might include stock and asset valuations, work in progress, or
liquidity.
·
Going
concern issues
Going
concern issues
·
The
effect of information technology on the audit, in particular the new systems.
The
effect of information technology on the audit, in particular the new systems.
·
There is
no internal audit so no holp there!
There is
no internal audit so no holp there!
·
Any
requirement for involvement of specialists. These may be from within the audit
firm, e.g. computer audit or external specialists such as valuers.
Any
requirement for involvement of specialists. These may be from within the audit
firm, e.g. computer audit or external specialists such as valuers.
·
Setting
of preliminary materiality levels.
Setting
of preliminary materiality levels.
·
Agreeing
the timing and extent of client responsibilities. The responsibilities of the
client to provide computer tome, arranging visits to branches, etc. if the
deadline is to be met the client has to fulfill its part of the arrangement.
Agreeing
the timing and extent of client responsibilities. The responsibilities of the
client to provide computer tome, arranging visits to branches, etc. if the
deadline is to be met the client has to fulfill its part of the arrangement.
·
Deciding
the overall audit approach. The extent of reliance on internal control, the use
of substantive tests and analytical review procedures. We will discuss these in
more detail in later chapters.
Deciding
the overall audit approach. The extent of reliance on internal control, the use
of substantive tests and analytical review procedures. We will discuss these in
more detail in later chapters.
·
Timetable-dates
of interim, year end and final audits and of deadlines to meet, e.g. AGM of
company.
Timetable-dates
of interim, year end and final audits and of deadlines to meet, e.g. AGM of
company.
·
Staffing
requirements.
Staffing
requirements.
·
Budget
and fee.
Budget
and fee.
·
Possibilities
of material error or fraud.
Possibilities
of material error or fraud.
·
Any
specific regulatory requirements (especially important in some types of
company, e.g. those in financial services).
Any
specific regulatory requirements (especially important in some types of
company, e.g. those in financial services).
Once all theses factors have been evaluated the
general audit strategy will have to be decided upon.
general audit strategy will have to be decided upon.
