In management, planning is defined as the process of deciding what objectives to pursue during a future time period and what to do, so as to achieve those objectives, and how the current decisions may limit the scope of future actions. You may recall, that the first standard of fieldwork, requires that the work must be adequately planned. Planning is a technical area in auditing because it demands competence and technical knowledge. It is of great importance that an audit is planned in advance because
- the intended means of achieving the audit objectives must be established;
- the audit can be controlled and directed;
- attention can be focused on the critical and high risk areas;
- the work can then be completed economically and to time scale requirements.
In this unit, you will be dealing with some matters to be taken into account, and the preparation of an audit plan.
At the end of this unit, you should be able to:
- specify some matters to be taken into account in planning audits
- list matters which are relevant to the preparation of an overall audit plan
- define an audit programme and state what must be taken into
- account in developing it
- describe ways in which knowledge of the business may be gained.
3.0 MAIN CONTENT
3.1 Audit Planning: Matters to Take into Account
Matters to be taken into consideration in audit planning are as follows:
- The work to be performed in addition to the audit;
- Reviewing previous years’ working papers;
- Changes in legislation or auditing or accounting practice;
- Analytical review of management accounts, consulting with management;
- Changes in the business or its management or ownership;
- Changes in systems or accounting procedures;
- Timing requirements;
- Extent of preparation by the client of analyses and summaries;
- Use of internal audit;
- Degree of reliance on internal controls;
- Joint auditors, if any;
- Rotational testing;
- Liaison with the audit committee.
3.2 Overall Audit Plan
The general strategy, in the preparation of overall audit plan, will be directed towards the following matters:
- Terms of engagement – work to be done (audit), precise accounting work to be done for client, tax, etc., letters to be sent (letter of weakness, etc.), reports to third parties (regulatory authorities);
- The clients and their backgrounds – history, products, locations,especially noting factors like a new managing director, a new product;
- Important figures and ratios – from previous years and if available, from management and draft accounts;
- Audit risk areas – these might include stock, work-in-progress, or dealings with a company under common ownership;
- The effect of information technology on the audit;
- Extent of involvement of internal audit;
- Requirement for involvement of specialists;
- Setting of materiality levels;
- Clients assistance – may be required in providing documents and analyses, arranging visits to branches;
- The audit approach – the extent of reliance on internal control, the use of substantive tests and analytical review procedures;
- Time-table – dates of interim, year end and final audits, and of deadlines to meet;
- Staffing requirements – in terms of experience and special skills needed, and of availability;
- Budget and fee;
- The operating style and control consciousness of directors and management;
- Possibilities of error or fraud;
- Involvement with subsidiaries and their auditors, branches, divisions and other component of the audit assignment;
The audit programme needs to take the following into account:
- Risks of error;
- Amount of audit evidence required in each area;
- Coordination of auditing with accounts preparation (if accounts are prepared by the audit team);
- The coordination of any assistance from client staff, for example, on schedule preparation, availability of records, internal audit;
- Involvement of other auditors (especially with groups) and experts, if required.
3.4 Knowledge of the Client’s Industry, Business and Organisation
It is essential that all members of the audit team fully understand the client’s industry, business and organisation. This is so because:
- only in that way can they judge the risks associated with the engagement;
- an economical and effective audit can only be carried out with a full knowledge of significant environmental, operational and organisational factors;
- knowledge of the factors helps in communication with client’s staff, in assessing the reliability of management representations and in judging the appropriateness of accounting policies and disclosures.
This knowledge can be gained from:
- the client’s annual report and accounts;
- analytical review of the client’s interim accounts, financial reports, variance analyses, etc.
- internal audit reports;
- visits to the client’s premises and discussions with management and staff;
- perusal of minutes of shareholders, directors, audit committee, budget committee, etc;
- previous year’s audit files including the permanent file;
- consideration of the state of the economy;
- reports from within the audit firm which may be relevant to the client, for example, management consultancy and appropriate tax authorities;
- perusal of relevant literature from credit rating agencies, stockbrokers, investment analysts;
- perusal of relevant trade magazines and journals.
SELF-ASSESSMENT EXERCISE 2
For the purpose of audit planning, list ways in which knowledge of the business may be gained.
You have learnt from this unit that the most effective and efficient audit can only be performed if it is well planned. Planning includes getting
the right mix of evidence gathering, in terms of analytical review, systems testing and substantive testing.
However, much as audit is planned, it is impossible to take into account every factor which will actually affect the audit. To this end, identifying the probable factors will at least enable the audit firm to take them into account in formulating the plan and the staffing requirements.
In this unit, you have been able to acquaint yourself with the followings.
Importance of planning an audit in advance;
Matters to take into account in audit planning;
Overall audit plan;
Knowledge of the client’s industry, business and organisation.
ANSWER TO SELF-ASSESSMENT EXERCISE 1
It is important that an audit is planned in advance for the following reasons.
- The intended means of achieving the audit objectives must be established.
- Attention can be focused on to critical and high risk areas.
- The audit can be controlled and directed.
- The work can then be completed economically and to time scale requirements.