INTRODUCTION Auditing Help

ISA-300 requires that the audit should be adequately planned. Planning is therefore mandatory and not discretionary. Generally the planning starts quite a few months before the end of accounting period to be audited.

Audit firms do not have anything to sell except the time of their staff. Effective time management is therefore necessary so that costs can be minimized commensurate with audit risk to be maintained at an acceptably low level.

The auditor has to determine general strategy at the planning stage i.e., the degree of emphasis to be placed on internal controls and substantive tests.

The two alternative audit strategies to verify financial statement assertions relating to an account balance or class of transactions are:

  1. Expanded substantive tests, where control risk is assessed as high and therefore the auditor does not plan to carry out test of controls.
  2. Restricted substantive tests, where the control risk assessment is medium or low.

General strategy also involves:

  1. Obtaining knowledge of the business.
  2. Performing analytical procedures.
  3. Setting preliminary level of materiality.
  4. Assessing audit risk.
  5. Obtaining understanding of internal control structure.

OBJECTIVES OF PLANNING

  1. To ensure that appropriate attention is devoted to important  areas of the audit, and potential problems are identified.
  2. Work is completed expeditiously.
  3. Proper assignment of work to assistants.
  4. Co – ordination of work performed by other auditors or experts.
  5. Proper organization and management to perform the audit in an effective and efficient manner
  6. Assists in direction, supervision and review.

How does the planning help to ensure that appropriate attention is directed to important areas of audit and potential problems are identified?

The objective of identifying potential problem areas is to reduce the risk of missing some problems in financial statements which may be significant. Prior identification or problems avoids surprises.

The auditor will have to carry out following steps:

  1. Review matters raised with the management in last year’s audit.
  2. Determine audit risks and materiality.
  3. Obtain knowledge of the business.
  4. Identify complex accounting areas and matters involving substantial judgements.
  5. In case of continuing audits, review last year’s working papers and recommendations made to the management to improve controls.
  6. In new engagements, arrange meetings with the previous auditor and obtain from the client copies of reports of the previous auditor on control weaknesses.
  7. Consider impact on client’s accounts arising from changes in International Accounting Standards.
  8. Carry out analytical procedures to identify unexpected fluctuations in data that may indicate areas of greater misstatement.

For example: significant increase in collection period may indicate inadequate allowance for doubtful accounts. The auditor would plan a more extensive evaluation of adequacy of doubtful accounts.

A substantial decrease in inventory turnover may indicate inadequate allowance for obsolete and damaged inventories. The auditor will direct more attention to identify obsolete inventories.

The objective of analytical procedures at planning stage is not to obtain evidence as regards amounts in financial statements but to discover aspects of the business of which the auditor is unaware and will assist in determining audit procedures.

How does the planning help in completing the work expeditiously?

  1. Select cost effective and time saving procedures.
  2. Ascertain client’s time table for issuance of accounts.

Where internal controls are strong, some substantive tests may also be planned in advance of year-end, in order to finalize the audit at an early date. Such procedures may include verification work on inventories, accounts receivable, payable, sales and operating expenses.

     3. Determine extent of reliance to be placed on internal auditor’s work.

At the planning stage the auditor should assess independence and technical competence of the internal auditor. The external auditor may find it useful to rely on certain aspects of audit procedures.

How does the planning assist in proper assignment of work to
assistants?

  1. Consider availability of staff.
  2. Ascertain skills and knowledge required to carry out the audit.
  3. Allocate work to staff.
  4. Advise audit staff of objectives of various audit procedures.

How does the planning assist in coordination of work done by
other auditors and experts?

Coordination with other auditors and experts involves integration with the work performed by them within the stipulated time to complete the audit and attain audit objectives. The necessary steps are:

  1. Determine the need to use the services of other auditor or expert.
  2. Advise the other auditor or expert of the intended use of the other auditor’s work and report.
  3. Advise the other auditor of areas requiring special consideration.

“Other auditor” means an auditor other than the principal auditor, with responsibility for reporting on components of financial statements, such as branch, subsidiary, joint venture, associated company.

“Expert” means a person or firm possessing special skill, knowledge, and experience in particular field other than accounting and auditing. The auditor may need the services of an expert in certain areas, for example :

  1. Revaluation of fixed assets (appraisers).
  2. Determining quantities or physical condition of underground minerals or petroleum or gas (geologists).
  3. Actuarial valuations for pensions (actuaries).

How does the planning assist in effective and efficient audit?

Planning includes consideration of audit risk and materiality.

Consideration of audit risk involves obtaining adequate evidence to reduce audit risk to an acceptably low level. The result is an effective audit.

Consideration of materiality level involves deciding what items to examine to avoid over auditing. The result is an efficient audit.

How does the planning assist in direction, supervision and review of the work of engagement team?

Planning involves preparation of audit program, based on assessed risk of material misstatement.

Audit program is an excellent tool for direction.

Planning also assists in supervision and review. The engagement partner supervises and reviews the performance of engagement teams to evaluate that the work is being performed in accordance with audit program.

Posted on November 3, 2015 in Planning an Audit of Financial Statements

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