ARTICLE ON THE IMPORTANCE OF AUDIT PLANNING

The Importance of Audit Planning

This article takes a look at a vitally important aspect of an auditor’s work which is that of the planning of the audit.  Students studying ACCA F8 and P7 will benefit from the contents of this article.

An efficient and effective audit can only be performed if the audit has been thoroughly and properly planned.  The importance of audit planning cannot be over emphasised and ISA 300 (redrafted) ‘Planning an Audit of Financial Statements’ contains the provisions which the auditor is required to comply with in planning an audit.

In summary, ISA 300 says that the planning stage of the audit should be used to establish an overall strategy for the audit, develop an audit plan and reduce audit risk to an acceptably low level.  In other words, the auditor should plan the audit engagement so that it will be performed in an effective manner and in accordance with auditing standards.

Adequate audit planning will ensure that appropriate attention is given to crucial areas of the audit and that potential problems are identified on a timely basis.  At the planning stage the audit engagement partner should assign the necessary staff who possess the skills and ability required in order to ensure the audit is carried out efficiently and in accordance with the International Standards on Auditing.

Preliminary Engagement Activities

When the auditor engages a new audit client, then ISA 300 stipulates certain procedures the auditor is required to carry out as follows:

• Perform procedures regarding the continuance of the client relationship and the specific audit engagement;
• Evaluate compliance with ethical requirements, including independence; and
• Establish an understanding of the terms of the engagement.

Performing these preliminary activities ensures that the auditor:

• Maintains the necessary independence and ability to perform the engagement;
• Ensures that there are no issues with management integrity that may affect the auditor’s willingness to continue with the engagement; and
• Ensures that there is no misunderstanding with the client as to the terms of the engagement.

The auditor should also communicate with the entity’s previous auditors where there has been a change of auditors in accordance with the relevant Ethical Standards.

Planning activities for initial engagements will often be more in depth than for a recurring engagement simply because the auditor will not have previous experience of the audit engagement and therefore the auditor needs to ensure they gain a thorough understanding of the entity and the environment in which it operates in accordance with ISA 315 (redrafted) ‘Understanding the Entity and its Environment and Assessing the Risk of Material Misstatement’.

Initial engagements will also include additional audit procedures required to be adopted to gather audit evidence concerning the opening balances.  ISA 510 (redrafted) ‘Initial Engagements – Opening Balances’ deals with issues where the audit firm was not the previous year’s auditors and the procedures required to deal with the opening balances.

Planning Activities

At the planning stage the auditor will develop the overall audit strategy.  The audit strategy sets the scope, timing and direction of the audit.  At this stage the auditor will develop the detailed audit plan which will help identify problem areas and important audit areas.

At the planning stage the materiality level is set and areas where material misstatement might occur are identified.  Materiality must always be assessed where an audit opinion is given.

Once the audit strategy has been established, then the auditor is able to develop the more detailed audit plan to address the matters identified in the overall audit strategy.  The auditor should then reduce the audit risk to an acceptably low level.  Audit risk is the risk that the auditor will arrive at the wrong opinion.

Contents of the Audit Plan

The audit plan is more detailed than the overall audit strategy and ISA 300 defines the contents which the detailed audit plan should take.

The audit plan should document the nature, timing and extent of the audit procedures to be adopted which should be sufficient and effective enough to be able to assess the risks of material misstatement within the financial statements.

The detailed audit plan should also contain a description of the nature, timing and extent of planned further audit procedures at the assertion level for each material class of transactions, account balances and disclosures.  This section of the audit plan interlinks with the provisions of ISA 330 ‘The Auditor’s Procedures in Response to Assessed Risks’.

Finally, the audit plan should also contain details of other audit procedures to be adopted so that the audit can be carried out in accordance with the ISA’s (for example, ISA 620 (revised and redrafted) ‘Using the Work of an Auditor’s Expert’).

It is important to understand that planning for the audit procedures takes place over the course of the audit engagement.  Risk assessment procedures are carried out early on in the audit, whereas the nature, timing and extent of audit procedures will be carried out in response to the risk assessment.

Typical contents of the detailed audit plan are:

• Nature of the business and what it does
• Risk and problematic areas (both business risk and financial statement risk)
• Details of any complexities associated with the audit assignment
• Specific accounting and auditing standards relevant to the assignment
• Budgets
• Planned audit procedures
• Details of sampling techniques
• Key personnel employed at the clients
• Points brought forward from previous audits

Planning During the Audit

It is important to understand that once the planning of the audit is completed, it is not simply forgotten about.  There could be occasions when the audit plan might need to be changed, for example due to unforeseen circumstances and in these respects the auditor will need to change the overall audit plan.

Supervision

During the planning stage the auditor plans the nature, timing and extent of the audit procedures to be carried out.  This is not the only issue which the auditor needs to address during the course of the planning.  The auditor should also ensure that they plan the nature, timing and extent of the review of the work of the engagement team members.

The review of the engagement team members work will vary depending on various factors such as the complexity of the audit engagement, the risk of material misstatement and the competencies involved.  These factors are not exhaustive and specific factors attached to the audit engagement should be considered when planning the nature, timing and extent of the engagement team members work review.

Documentation

The provisions of ISA 300 state that the auditor must document the overall audit strategy and the audit plan.  In addition, any significant changes to the overall audit strategy and audit plan must also be documented.  Standard audit programmes can be used to deal with this issue, however it is important that the auditor tailors the audit programme appropriately so it is specific to the engagement.  Remember, the audit is not simply a ‘tick box’ exercise. ISA 230 (revised) ‘Audit Documentation’ governs the documentation required during the course of an audit.

Conclusion

The planning stage of the audit is an extremely vital area.  Going in to an audit ‘blind’ is wreckless and does not conform to the ISAs relating to planning – namely ISA 300 and ISA 315.  The core principle involved in the audit planning is to ensure the audit is carried out efficiently and that sufficient attention is devoted to important audit areas.

Steve Collings FMAAT ACCA DipIFRS is audit manager at Leavitt Walmsley Associates (http://www.lwaltd.com) and is partner in AccountancyStudents.co.uk.  Steve is also the author of ‘A Summary of IFRS and IAS’ which can be purchased direct from AccountancyStudents.co.uk