AUDIT PLANNING – ISA 300

Audit planning involves establishing the overall audit strategy for the engagement and developing an audit plan.

The audit strategy sets out the scope, direction, timing and conduct of the audit.

Importance/objectives of planning the audit

1. To ensure that appropriate attention is devoted to the most important areas of the
2. To ensure that potential problems are identified and resolved on a timely
3. To ensure that all areas are covered and the audit is completed
4. To facilitate co-ordination of work done by other auditors and
5. To facilitate allocation of audit duties to audit staff based on competence and
6. It facilitates direction and supervision of audit
7. It facilitates optimal timing of audit
8. It ensures that the auditor adopts a systematic approach to the
9. It facilitates control e. the plans and programmes act as a checklist against which the actual work done can be assessed.
10. It ensures that there is timely communication between the auditors and the client relating to aspects such as use of experts, use of other auditors work, use of internal auditors t.c.
11. It ensures that the audit is carried out in an economics, efficient and effective

Limitations

• High audit staff turnover
• Lack of co-operation from the client staff causing
• Several audit clients having similar year
• Changes in the clients business and situations which may disrupt the audit
• Abrupt assignments such as
• Audit plans may be rigid such that if a situation that had not been planned for the audit staff may not be able to address

Causes of failure in the audit planning process

• The auditor beginning detailed testing before the planning work is This may result into commissions and un-necessary work.
• Lack of proper understanding of the client and its
• In-adequate
• In-adequate
• Abrupt changes in the clients systems and
• Incompetence of the
• Abrupt assignments

Minimizing problems associated with audit planning

• Adopt continuous audit approach or ask the client to prepare interim financial statement so that a lot of audit effort can be put in the interim audit and in the continuous field visits so as to minimize the pressure at the end of the
• The auditor should work in close liaison with the client on a continuous basis to reduce delay in providing
• The audit firm should have standby audit staff to replace those who may
• The audit firm should establish a special department for dealing with abrupt assignment g. part time staff can be hired for this purpose.
• The audit firm should have long-term strategic plans regarding staff

Audit planning process

• Gathering and confirming background knowledge about the
• Performing preliminary risk
• Setting materiality
• Performing ARP’s.
• Determining the accounting systems and the related controls and recording the
• Performing compliance testing (test of controls)
• Developing the overall audit plan and
• Developing the audit
• Budgeting and staffing
• Preparing job

2)  Preliminary Risk Assessment

This enables the auditor to identify the areas of the financial statements where the risk of mis-statement is high.

The auditor will then plan to devote more audit attention to the areas where the risk highest.

3) Setting materiality levels

Materiality relates to the significance of an item.

An item is considered to be material if its omission or mis-statement can influence the decision of the users.

At the planning stage, the auditor considers materiality to determine:

1. The nature extent and timing of audit
2. To identify and assess risk of material mis-statements.
3. To determine the nature timing and extent of risk assessment

In laying out the audit plan the auditor should establish an acceptable level of significance in order to detect erroneous presentations.

Qualitative materiality should also be considered.

Consideration of materiality at the planning stage will also enable the auditor to plan for staffing requirements.

During the audit the materiality levels should be adjusted as new information becomes available.

During the audit the auditor should use performance materiality. Performance materiality is an amount(s) that is less than the materiality for financial statement as a whole.

At the Audit conclusion, the auditor also considers materiality.

Criteria for determining materiality

1. Value criteria

This involves judging materiality on the basis of the amount or quantity of an item.

In this case, materiality is expressed s a percentage of the major elements of an item.

In this case, materiality is expressed as a percentage of the major elements of the financial statements and materiality cut-off points established.

Item expressed as a % of:	Materiality cut-off point
Net profit before tax	≥ 5%
Net profit after tax	0.5 – 1%
Turnover (sales)	0.5 – 1%
Total assets	2 – 5%
Net assets	1 – 2%

2. Nature criteria

There are some items that are considered to be material by virtue of their characteristics or nature regardless of the amount involved e.g. any dealings between the company and its directors is material regardless of the amount involved.

3. Impact criteria

An item is considered to be material if it has the potential of covering a profit into a loss or a loss into a profit.

4. Comparing the magnitude of the item with the overall view given by the
5. Comparing the magnitude of the item with the total of which it forms a
6. Comparing the magnitude of the item with the same item in the previous product
7. Considering the cumulative effect of a mis-statement.
8. Considering whether there are any statutory
9. Considering ht effect of the item in the true and fair view of the financial

4.       Performing ARP’s

ARP’s include computation of significant accounting rates, trend analysis, cross-sectional analysis and reasonableness checks.

ARP’s are done at the planning stage.

1. To identify potentially problematic
2. To access

• To determine the amount of time that will be required in the

1. To determine the staffing requirements in terms of numbers and the levels of
2. To determine the nature, extent and timing of further risk assessments
3. To determine the nature, extent and timing of audit

Limitations of ARP’s at the planning stage of the audit

1. The final accounts have not been finalized and hence the figures used I the ARP’s are not the actual ones that will be appearing in the final accounts which the auditor will be auditing and expressing an opinion
2. The figures could be containing errors which are later corrected by the year
3. End of year adjustments have not yet been
4. Changes in accounting
5. Some firms do not maintain complete records, they will wait until the end of the year where they extract the final accounts from the available

5.       Determining the Accounting systems and the related controls Accounting system

This refers to all the accounting procedures that identifies and process financial transactions, that accounting records and the supporting documents and the financial reporting processes.

The auditor needs to understand the clients accounting system at the planning stage to enable him:

1. Identify the major classes of
2. Understand how the transactions are identified and processed.
3. Understand the format of the clients accounting
4. Understand the client’s financial reporting

6. Internal control system

The ICS refers to the whole system of controls put in place by the management to ensure that:

• Business is conducted in an orderly and efficient
• The assets of the organization are
• There is adherence to the management
• To secure a far as possible completeness an accuracy and timely provision of financial

The auditor needs to determine the nature of the ICS in the client’s business and how it operates.

He should then evaluate the systems to determine the extent of reliance he can place on the systems.

If the systems are strong, he will place reliance on the system and plan to do limited substantive testing.

If on the other hand the systems are deficient, the auditor will not place reliance on the system and will therefore plan to carry out extensive substantive testing.

7. Preparing the overall audit plan and strategy

The audit partner should develop the overall audit plan and audit strategy which will involve documentation of a description of:

• The nature, timing and extent of planned risk assessment
• The nature timing and extent of further audit procedures at the assertion
• Other planned audit procedures that are required to be carried out so that the engagement complies with the ISA’s.

Specifically the audit plan should provide for the following:

• Planning for the audit of interim financial
• Planning for the field
• Planning for substantive tests on transactions and
• Planning for verification of assets and
• Planning for 3rd party
• Planning for attendance of the annual stock
• Planning for comparison of audit
• Planning for employment of
• Planning for time and cost

Planning memorandum Dec 2014 Q 6c

This is a documentation or file containing all the planning details and all

………………………… that will be relevant for the conduct of the audit.

 

Contents:

• A summary of the terms of engagement that sets out the nature and the scope of the audit
• The job time-tables giving the dates and the timing of the audit
• Background information about the
• A record of any changes in the client since the last
• Details of planning decisions such as identified areas of weaknesses in the systems which will require more detailed
• Entails of the key clients contracts such as the finance director, internal auditor, chief accountant
• Extent of reliance that will be placed on the internal auditors
• The materially levels
• Staffing requirements
• Risk

NB

The planning memorandum sets out the proposed strategy for the audit and it’s based on cumulative audit knowledge and experience as well as important matters which have been brought to the attention of the auditor.

Matters to put into consideration in developing the overall

Audit strategy – the overall audit strategy describes in general terms how it will be carried out.

The audit plan on the other hand details the specific procedures to be carried out to implement the strategy and to complete the audit.

1. Characteristics of the engagement

• The financial reporting framework used by the
• Industry specific reporting
• Expected coverage including the of locations of components.
• Availability of the work of internal auditors and the extent of reliance on the
• Effect of IT on audit
• Availability of personal

2. Significant factors such as preliminary engagement activities and knowledge gained on other engagements
3. The reporting objectives such as timing of the

The nature of communications, entities timetable for reporting, meeting with the management and those charged with governance, communication with auditors’ components.

4. The nature, timing and extent of
5. The ICS and the accounting
6. The volume of
7. Conditions that require special
8. Possibility that the going concern assumption may be
9. Co-ordination, direction, supervision and

8. Preparing the Audit programmes

An audit program is a breakdown of all the audit work to be performed with respect to each item included in the financial statement.

It provides for the substantive procedures necessary in the audit of financial statement.

A separate audit program will be prepared for each item included in the financial statement.

Audit programme sample/Example

Name of audit firm Address

Name of client Address of client

Financial period covered………………..

Audit program for cash

Specific audit procedures	Specific audit objective	Audit findings	Audit conclusions	Auditor’s initials	Date
Test the control over cash payments	To verify that all cash payments are valid and authorized.

Count cash

To verify existence and amount available in the company.

 

CONTENTS

• Name and address of the audit
• Name and address of the client
• The financial period covered by the financial statements being
• The specific audit procedures to be carried
• The specific objectives to be achieved by each
• The timing of each
• The auditor’s findings from the
• The auditors conclusion based on the
• The initials of the auditor who carries out the audit

Types of Audit programs

• Standardized Audit programs
• Progressive Audit programmes

Importance of Audit programmes

• They set out the procedures that are needed to implement the audit
• The programme serves as a set of instructions for the audit
• The programmes provide a means of control and record of work
• They facilitate effective and efficient completion of the
• They force the auditor to adopt a systematic approach to the
• They facilitate review of the work
• They facilitate timely completion of the audit

a) Standardized Audit programs

These are pre-prepared audit programmes developed by the audit firm to be used for all audits.

Advantages

• They save on time and
• They enhance uniformity of the audit
• They provide for cross-referencing of the work done by the
• They facilitate review of the audit
• They serve as a set of staff
• They facilitate planning of the subsequent year’s
• They force the auditor to adopt a systematic approach to the audit which enhances the quality of the
• They facilitate delegation of audit
• They facilitate training of new

Limitations

• If followed mechanically they will make the audit to become mechanical and hence
• They discourage initiative and use of auditors’
• The client staff may become familiar with the auditor’s
• They lack flexibility to cope with
• They assume that all the audit clients are the
• Inefficient staff may hide their inefficiency in the audit

b) Progressive Audit programs

These are audit programs that are allowed to develop as the audit progresses.

The auditor uses his professional skill and judgment to determine the proceeds to perform.

9. Budgeting and staffing considerations Importance of time budgets in the Audit

• It enables the auditor to meet the clients reporting
• It shows the time covered in each area of the
• It shows the level of staff who will do the
• It ensures that all the audit matters are addressed within the required
• The budgets shows the charges per hour and the total amount for each audit area e. it assists the auditor in costing the audit.

It facilitates faster completion of audit work.