Auditing is the independent examination and expression of an opinion on the financial information of any entity by an independent auditor in order to express a professional opinion as to whether the financial statement shows a true and fair view of the nature of the business.
In line with ISA 200, overall objectives of an independent auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, the overall objectives of the independent auditor are:
- To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. This enables the auditor to give an opinion on whether the financial statements have been prepared in accordance with the applicable financial reporting framework.
- To report on the financial statements and communicate as required by the ISAs, in accordance with the auditor’s findings.
ISA 200 requires the auditor to:
- comply with all ISAs relevant to the audit.
- comply with relevant ethical requirements.
- plan and perform an audit with professional skepticism.
- exercise professional judgment in planning and performing an audit.
- obtain sufficient and appropriate audit evidence to allow him to obtain reasonable assurance.
Audit Planning
Audit planning refers to all those activities carried out in connection with an audit assignment that enable an auditor to clarify his audit objectives and establish the strategies that will be applied in order to attain them.
The audit plan is a detailed programme giving instructions as to how each area of the audit will be conducted. In other words, the audit plan details the specific procedures to be carried out to implement the strategy and complete the audit. It involves a study of the client’s enterprise, its business, and its operating environments (internal and external). The study will enable the auditor to clarify the objectives of the audit exercise, the strategies to be adopted, and any areas that will require special audit attention.
In line with ISA 300, once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking into account the need to achieve the audit objectives through the efficient use of the auditor’s resources.
Aims of Audit Planning
The purposes of planning an audit assignment can be summarized as follows:
- To determine the scope and objectives of the audit
- To determine the audit approach
- To determine the audit procedures (tests) to be performed and accordingly, prepare the audit programs
- To determine the staffing requirements for the audit, including the number of audit staff that will be required and the skills, knowledge, and experience they ought to possess.
- To determine the timing (dates) of the audit work to be performed
- To determine the extent, if any, of expert’s involvement in the audit
- To identify those areas requiring special audit attention or emphasis
- To provide a basis for the control, direction, and coordination of the audit work
- To ensure that all material aspects of the audit are covered
- To ensure that the audit is carried out in an economical and expeditious manner.
Matters to Consider When Planning an Audit
The specific information to be obtained and the decisions to be taken when planning an audit will vary from one audit assignment to another and, in respect of the audit of a client, from one audit period to another. The auditor must therefore consider the peculiar circumstances of each audit assignment.
- First Audit Assignment
- Subsequent (recurring) Audit Assignment
Matters to consider when planning the first audit assignment
The matters to consider when planning first audit assignments fall into two broad categories:
- Background Information that will assist the auditor in gaining a proper understanding of the enterprise’s business and its operating environment. It relates to the information and documentation required to gain an adequate understanding of the entity’s business and the internal, economic, social, political, and technological environments in which it operates. Matters to be considered by the auditor will include:
- The historical background of the client, including any significant events occurring since it was established
- The nature of the client’s business, including the products sold and services rendered
- The organizational structure
- The significant accounting policies adopted by the client in preparing its financial statements
- The external environment in which the business is conducted, including any significant economic, political, social, and technological factors impacting the business
- The industry to which the client belongs, its market size, level and nature of competition, major competitors and their respective market shares, the strengths and weaknesses of the industry, and the market trend
- The overall policies and procedures of the client (internal control, inventory, production, marketing etc).
- The branches, offices, and factories of the client, including their locations and the nature and scale of their activities
- The Articles and Memorandum of Association or other similar documents, including agreements, trust deeds, and enabling statutes
- Minutes of meetings of directors, shareholders, or other executive committees in respect of any significant decisions likely to impact the client’s business or financial statement
- Any agreement, such as a loan agreement, management service agreement or technical service agreement.
- Any government legislation likely to impact the business or its financial statement
- Any professional pronouncement, including accounting and auditing standards, is likely to impact the financial statement.
- Details of related parties, including holding companies, subsidiaries, fellow subsidiaries, associated companies, and particulars of significant shareholders.
2. Information and decisions impacting the audit strategies that will be adopted during the period under review. Matters and decisions impacting the audit strategy for the review period include:
- The client’s financial timetable for the period under review.
- The timing (dates) of the audit visits (interim, year-end, and final) to be carried out by the auditor.
- Schedule and analyses to be specially prepared by the client’s staff for the purposes of the audit.
- The staffing requirements for the audit.
- The extent, if any, of intended reliance on the work of the internal audit function.
- The extent, if any, of the involvement of an expert in the audit.
- In the case of joint audits, a consideration of how the audit work will be allocated among the joint auditors and the procedures to be followed.
- The audit tests to be performed and the audit programs to be used.
- The audit budgets.
Matters to consider when planning subsequent or recurring audit assignments
1 . Determine any matters brought forward from prior audits that require follow-up.
Any matters arising during the prior period’s audit that require follow-up during the current audit. By reviewing the prior period’s audit working papers, the auditor is able to ascertain any such matters.
2. Determine any changes in the background information since the last audit visit.
- Any changes in the terms of the audit engagement
- Any changes since the last audit visit in the nature and trend of the client’s business
- Changes in the organizational and management structure of the business
- Any changes since the last audit in significant accounting policies
- Any changes since the last audit in the client’s accounting and internal control procedures
- Changes in government legislation impacting the client’s business and financial statement
- Any changes since the last audit in professional accounting and auditing standards impacting the entity’s financial statement
- Consider the information and decisions concerning the audit strategies to be adopted during the period under review.
- The client’s financial timetable for the period under review
- The timing (dates) of the audit visits (interim, year-end, and final) to be carried out by the auditor
- Schedules and analyses to be specially prepared by the client’s staff for the purposes of the audit
- The staffing requirements for the audit
- The extent, if any, of intended reliance on the work of the internal audit function
- The extent, if any, of the involvement of an expert in the audit.
- In the case of joint audits, a consideration of how the audit work will be allocated among the joint auditors and the procedures to be followed.
- The audit tests to be performed and the audit programs to be used.
- The audit budgets.
Audit Plan Documentation
Documentation of Audit Plans
The essence of audit plan documentation under ISA 300 is to create a comprehensive roadmap for conducting the audit, aligning with the risk profile of the entity, and ensuring that the audit is conducted in a consistent and well-organized manner that complies with professional standards.
Reasons for Documenting Audit Plans
- To provide a disciplined framework for ensuring that all relevant matters are considered during the audit planning
- To aid the auditor in crystalizing his ideas during the audit planning exercise
- To provide a record of the audit plan for future reference
- To provide evidence of the circumstances resulting in the auditor’s audit approach decision
- To provide a medium for communicating the audit plan to other members of the audit team
- To provide a basis for the direction and control of the audit
- To minimize any disagreements among members of the audit staff as regards their respective responsibilities
- To provide a basis for the coordination of the various sections of the audit work
- To ensure that the audit work carried out is based on the knowledge and experience of the most senior members of the audit team (Manager and partner)
- To provide a basis for the review of the completed audit work
- To provide a basis for planning recurring audits.
The Audit Planning Memorandum (APM)
The Audit Planning Memorandum (APM) refers to the audit plan documentation. The APM contains background and other information obtained and the decisions taken as a result of the audit planning effort.
Contents of the APM: These fall into four broad categories:
- Background Information
- A brief historical background of the client
- The nature and trend of the enterprise’s business
- Any recent significant economic and other events impacting the entity’s business
- The organizational and management structure of the client
- Significant accounting policies adopted by the client in the preparation of its financial statement
- The client’s financial history
- The client’s accounting system and records
- The client’s internal control procedures
- The terms of reference of the audit assignment
- Audit Strategy
- The audit objectives
- The overall audit approaches
- Audit risk analyses for the various sections of the financial statement and the approaches to be adopted with respect to each section
- Areas requiring special audit attention and the procedures to be applied
- Job or Assignment Administration
- The partner in charge of the audit assignment
- The manager in charge of the audit
- The senior in charge of the audit
- Dates of audit visits, including any interim visits, year-end visits, and final audit visits
- Dates of audit events such as manager’s field review, manager’s final review, circularization of debtors and creditors, confirmation of bank balances, the observation of stock and cash counts, obtaining the management representation letter, partner’s final review, and the reporting deadline
- The audit time budget
- The audit budgets
- Audit Programs
This section of the APM will usually contain audit programs for the various sections of the audit work.