Question

a. Enumerate the different planning procedures. Explain each one briefly.

b. What is the general objective of planning for an audit?

c. Give examples of other planning considerations.

d. Contrast the following terms:

- Audit strategy

- Audit program
- Audit plan

e. What is the purpose of analytical procedures performed during audit planning?

f.May an external auditor use the work of an internal auditor? Explain.

g. Planning is a discrete phase of the audit. Is this statement correct? Explain.

h. What are the two types of audit programs? Explain each type briefly.

I. Which of the following audit team members may perform supervision duties?

- Partner or sole proprietor
- Manager
- Senior associate
- Audit associate

j. What are the contents of the audit plan?

Answer 1

A) Different types of procedures

1) Analytical Review:

Analytical review is not the procedure that uses to obtain audit evidence, but it is the procedure used to assess the unusual transactions or events as the principle or basic to perform other procedures.

For example, when auditor found there is unusual transactions or event as the result of using analytical review, then the auditor will use other procedures that are applicable to obtain evidence.

2) Inquiry:

Auditors inquire accountant and related management to gather information and obtain an explanation on the mater that found by auditors.

Sometimes auditors inquire about management about the business process and the ways how financial transactions are recording as well as the major control on business transactions.

The inquiry is also one of the most important audit procedures and it could be used in different stages.

3) Observation:

Observation is one of the audit procedures that auditors use to obtain an understanding and gather audit evidence mainly to the real process or the ways how clients have done some specific business process.

This kind of audit procedure is mainly to confirm the process that the client told, physical confirmation, or some time used to obtain audit evidence in order to make their own projection which will be used for comparison with the client figure.

For example, auditor joins client stock take at the year-end and observe whether the way that they count are in the correct procedures or not.

In this procedure, the audit is not confirmed whether the client counts their inventories correct or not, but it confirms whether clients counting procedure is correct or not is one thing.

Another thing is the auditor tries to confirm whether the counting has really existed.

However, in practice, sometimes the auditor is not only observed how the client counts but they also jointly perform counting inventories.

4) Inspection:

Inspection refers to verification or vouching documents. This is one of the most important and it can be 60% of audit work involve with the inspection of documents.

For example, the auditor examines the sales invoices that record in financial reports.

5) Recalculation:

Recalculation is the type of audit procedure that normally done by re-performing the works performed by the client in the purpose of assessing if there any difference between the audit’s work and the client’s work.

For example, the auditor might re-perform depreciation calculation and assess if there any difference between auditor calculation and its client’s calculation.

B) GENERAL OBJECTIVE FOR PLANNING FOR AN AUDIT

The main objective of audit planning is to ensure appropriate attention is given to all areas of the audit. More attention should be devoted in auditing high risk of the entity. Low risk areas should be given less time to conserve resources.

Secondly planning is done to pick potential problems during audit such as weaknesses in the internal control system and may have material effects on the financial statements.

C)EXAMPLES OF PLANNING CONSIDERATIONS

• evaluate the information collected in the knowledge of business acquisition phase from a gender equality perspective;
  
• consider whether audit team members possess sufficient knowledge of gender equality to conduct the audit;
  
• consider whether the audit team will need the support of an expert to plan and conduct the audit; and
  
• consider the types of findings likely to result from the audit, and ways to increase the impact of the audit report.

D) Audit strategy :-

The audit strategy sets the scope, timing and direction of the audit. It allows the auditor to determine the following:

• the resources to deploy for specific audit areas (e.g. experience level, external experts);
• the amount of resources to allocate (e.g. number of team members);
• when the resources are to be deployed; and
• how the resources are managed, directed and supervised, including the timings of meetings, debriefs and reviews

Audit programme:-

An audit program is a set of directions that the auditor and its team members need to follow for the proper execution of the audit. After preparing an audit plan, the auditor allocates the work and prepares a program which contains steps that the audit team needs to follow while conducting an audit. Thus, an auditor prepares a program that contains detailed information about various steps and audit procedures to be followed by the audit.

Audit plan

Audit planning is defined as the process in which the strategy is designed to conduct the expected result which also defines the scope of audit inside the company. The size, nature and the time for the audit plan may vary. It depends on the size of the business. If the business is spread to the large scale, the strategy making and its implementation will take more time and also the overall scope of Audit plan may also increase. It’s basically the step by step methodology where the audit in control reviews the financial process and the internal environment along with the engagement preparation.

E)PURPOSE OF ANALYTICAL PROCEDURES

Analytical procedures are used throughout the audit process and are conducted for three primary purposes:

1. Preliminary analytical review – risk assessment (required by ISA 315)
   Preliminary analytical reviews are performed to obtain an understanding of the business and its environment (eg financial performance relative to prior years and relevant industry and comparison groups), to help assess the risk of material misstatement in order to determine the nature, timing and extent of audit procedures, ie to help the auditor develop the audit strategy and programme.
2. Substantive analytical procedures
   Analytical procedures are used as substantive procedures when the auditor considers that the use of analytical procedures can be more effective or efficient than tests of details in reducing the risk of material misstatements at the assertion level to an acceptably low level.
3. Final analytical review (required by ISA 520)
   Analytical procedures are performed as an overall review of the financial statements at the end of the audit to assess whether they are consistent with the auditor’s understanding of the entity. Final analytical procedures are not conducted to obtain additional substantive assurance. If irregularities are found, risk assessment should be performed again to consider any additional audit procedures are necessary.

F)USING THE WORK OF AN INTERNAL AUDITOR

As a basis for determining the areas and the extent to which the work of the internal audit function can be used, the external auditor shall consider the nature and scope of the work that has been performed, or is planned to be performed, by the internal audit function and its relevance to the external auditor’s overall audit strategy and audit plan.

The external auditorshall make all significant judgments in the audit engagement and, to prevent undue use of the work of the internal audit function,shall plan to use less of the work of the function and perform more of the work directly: (a)The more judgment is involved in:(i) Planning and performing relevant audit procedures; and (ii) Evaluating the audit evidence gathered;(b)The higher the assessed risk of material misstatement at the assertion level, with special consideration given to risks identified as significant; (c)The less the internal audit function’s organizational status and relevant policies and procedures adequately supportthe objectivity of the internal auditors; and(d)The lower the level of competence of the internal audit function.

The external auditorshall not use the work of the internal audit function if the external auditor determines that:

(a)The function’s organizational status and relevant policies and procedures do not adequately support the objectivity of internal auditors;

(b) The function lacks sufficient competence; or

(c) The function does not apply a systematic and disciplined approach, including quality control.

G)PLANNING IS A CONTINUOUS PROCESS

Planning the audit includes establishing the overall audit strategy for the engagement and developing an audit plan, which includes, in particular, planned risk assessment procedures and planned responses to the risks of material misstatement. Planning is not a discrete phase of an audit but, rather, a continual and iterative process that might begin shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit.

H)TWO TYPES OF AUDIT PROGRAMMES

Fixed Audit Program.

It is a set of standardized instructions, which are to be followed while conducting the audit. A fixed audit program includes all possible audit procedures, although all of them may not be applicable in a situation. Its attempts to take care of every possible audit situation, therefore, it prescribes procedure to be followed in each situation.

The problem with this kind of program is that it is very rigid. Nothing is left to the initiative of the audit team. Further, it is difficult to follow the same audit program even in the same organization over the years, as the conditions in the enterprise are likely to undergo changes.

Flexible Audit Program.

A flexible audit program does not prescribe the exact audit procedure to be followed. It prefers to give an outline of the scope, nature and limitations of the audit assignment. It does not predetermine the nature of work to be performed by each person of the audit staff. Most of the things are decided as the work proceeds and the reliability of procedures and internal control system becomes known to the auditor.

Thus, a flexible audit program allows the auditor to develop, adapt and modify the program according to the needs of the situation. It also leaves scope for some initiative by the audit staff if the situation so warrants. However, the danger is that some important audit procedures may not be followed.

I)PARTNER OR SOLE PROPRIETOR

J)CONTENT OF AUDIT PLAN

The auditor should develop and document an audit plan that includes a description of:

1. The planned nature, timing, and extent of the risk assessment procedures;¹¹
2. The planned nature, timing, and extent of tests of controls and substantive procedures;¹² and
3. Other planned audit procedures required to be performed so that the engagement complies with PCAOB standards.