Question

ISA 300 Planning an audit of financial statements requires the auditor to plan his audit work so that the audit will be performed in an effective manner.

Required:

a) Explain why the need for planning exists and what benefits are to be derived from adopting such an approach.

b) Set out the steps you would take prior to the commencement of an audit of a limited company which has been a client for a number of years.

c) Planning is equally relevant to the work of the internal auditor. Explain how the internal auditor’s

planning differs to that of the external auditor.

Answer 1

(A) Need for planning in audit :-

A good audit planning will help the auditor to minimize its risks, improve audit efficiency, and meet its objective at the minimum effort.

Auditors are required to prepare a proper audit plan to ensure that all audit risks are identified and correct audit strategies are deployed to detect all concerning risk areas.

It is essential for the auditor to prepare a good strategic audit plan. If the plan is well prepared, all kind of audit risks is identified and detected.

This will help the auditor to minimize the audits risks of issuing the incorrect opinion to financial statements.

Benifits of audit planning :-

Helping the auditor to devote appropriate attention to important areas of the audit.

Helping the auditor properly organize and manage the audit engagement so that it is performed in an effective and efficient manner.

Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks, and the proper assignment of work to them.

Facilitating the direction and supervision of engagement team members and the review of their work.

Assisting, where applicable, in coordination of work done by auditors of components and experts.

(B) Steps to be taken prior to commencement of audit of limited company :-

Performing procedures regarding the continuance of the client relationship and the specific audit engagement.

Evaluating compliance with relevant ethical requirements, including independence.

Establishing an understanding of the terms of the engagement.

Establish the overall audit strategy for the engagement

Develop an audit plan.

Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required.

Consider the factors that are significant in directing the audit team’s efforts in the auditor’s professional judgment.

Ascertain the nature, timing and extent of resources necessary to perform the engagement.

Planning an audit involves more than just obtaining business understanding and performing risk assessment. Planning is a dynamic process that may evolve during the audit, and should always respond to changes in the circumstances of the audited entity. Adherence to the requirements of ISA 300 should result in a well-focused audit, staffed by appropriate personnel, performing relevant and appropriate audit procedures.

(C) Difference in planning of internal auditor and planning of external auditor :-

The internal auditor must establish a risk-based plan to determine the priorities of the internal audit activity, consistent with the organization’s goals. While external auditor has to make plan according to financial reporting risk.

The purpose of internal audit planning is to ensure that the audit is relevant to the organization’s needs and is adding value towards the achievement of the preset objectives. It also helps in better utilization of the limited resources. While on the other hand external auditor expresses opinion on financial statements. So they have to make plan according to their respective objective.

Internal auditors are employees of the corporations that they audit, therefore, they are not "independent". While external auditors are "fully independent". So they both have to consider this scenario while planning.

Audit planning includes knowledge of client's business, which consists of- Financing, Legal framework, Government norms, Investments, accounting policies, business risk and financial risk. Internal auditor being the employee of the company know all these things upto an advance level, so he can have more flexibility in planning in comparison to external auditor.