Audit Planning

• Foundations of Assurance Lecture 5
• Understanding the entity


  • The environment
  • The Company
  • Industry conditions
  • How they operate
  • Laws and regulation
  • Who owns them
  • Competitive environment
  • How they are financed
  • Economic landscape
  • What accounting polices they use
  • Their objectives and strategy
  • What internal control systems they use
• How to get an understanding of a client

  • Your Firm
  • The client
  • Partner
  • Discussion
  • Manager briefing
  • Website
  • Industry experts
  • Analytical procedures
  • Last year's team
  • Other
  • Press articles
  • Past experience
  • Companies House search
  • Internet search
  • Credit reference agencies
  • Industry surveys
• Audit Strategy


  • Characteristics of the engagement
  • Significant factors and preliminary engagement activities
  • Reporting Objectives, timing & communication
  • Nature, timing and extent of resources
• Audit Plan - Operational details


  • The nature, timing and extent of testing
  • What tests should be performed
  • Who should do them
  • How much work should be done
  • When the work should be done
• Interim Audit


  • Completed part way through the year
  • Early enough not to interfere with year end procedures
  • Late enough to enable sufficient work to be done to reduce the pressure on the final audit
• Interim Audit - Purpose

  Allows the auditor to spread out their work and cope with a tight reporting deadline
• Interim Audit - Work Performed

  • Document systems
  • Evaluate controls
  • Detailed testing
• Controls working well


  Fewer substantive tests can be performed on the final audit
• Controls not working well

  More substantive testing will be needed on the final audit
• Final Audit


  • Takes place after the year end once they have their final numbers (trial balance)
  • Done after the client has completed the year end procedures
  • Before the company files their financial statements with the relevant authorities by the required deadline
• Final Audit - Purpose


  To ensure the auditor has sufficient appropriate evidence to give an opinion on the financial statements in the audit report
• Final Audit - Work Performed

  • Audit SoFP balances (only available at the year end)
  • Perform transaction testing for transactions that have occurred after the interim audit
  • Audit year end journals and adjustments
  • Ensure controls tested at the interim stage continued to operate up until the year end
  • Look at going concern and subsequent events
  • Perform an overall review of the financial statements
  • Communicate misstatements to management
• Fraud


  An intentional act using deception to obtain an unjust or illegal advantage
• Types of Fraud


  • Fraudulent financial reporting - Intentionally misstating the financial statements to make them look better or worse than is really the case
  • Misappropriation - The theft of a company's assets such as cash or inventory
• Error


  An unintentional misstatement
• Enron $63 billion of assets were virtually non existent
• Mark to Market


  Contract to supply energy, Under US mark-to-market rules, when companies have outstanding energy-related or other derivative contracts (either assets or liabilities) on their balance sheets, they adjust them to fair market value, booking unrealized gains or losses to the income statement of the period
• Much of the profits in Enron's P&L were unrealised and vastly over estimated by management
• Special purpose vehicles


  Enron used off balance sheet special purpose vehicles to hide mountains of debt and loss making contracts- their sole purpose was to hide accounting realities and make the Enron accounts look better than was really the case
• Responsibilities for fraud and error


  • Directors
  • Auditors
• Directors' responsibilities for fraud and error


  • Primarily responsible for the prevention and detection of fraud
  • Implementing effective internal controls to prevent fraud
  • Create a culture that reduces the risk of fraud
  • Consider the need and role of an internal audit department to reduce the risk of fraud
• Auditors' responsibilities for fraud and error

  • To obtain reasonable and appropriate evidence to give an opinion as to whether the financial statements are free from material misstatement whether caused by fraud or error
  • To be professional sceptical during the audit
  • Have an open and questioning mind
  • Critically assess the audit evidence
  • Be alert
• Auditors' response to the risk of fraud

  • Obtain written representations from management that they have informed us of known and suspected fraud
  • Test year end journals and adjustments
  • Test accounting estimates and areas requiring the judgement of management
  • Make audit procedures unpredictable
  • Use more experienced staff to audit risky areas
• Who is fraud reported to?

  • Management
  • Those charged with the company's governance
  • To 3rd parties if there is a duty to report
  • To shareholders if material by giving a modified audit opinion
• Laws and Regulations - Auditors' responsibility

  • Non-compliance with laws and regulations may lead to a misstatement in the financial statements
  • Non-Compliance may be intentional or unintentional
  • 2 types of non compliance: i) accounting standards ii) Other laws and regulations
• Laws and Regulations - Recent examples

  • National Grid fined £4m
  • British Airways fined £1.8m
  • Drayton Manor fined £1m
• Laws and Regulations - Responsibilities

  • Directors
  • Auditors
• Directors' responsibilities for laws and regulations


  • To ensure the company complies with laws and regulations
  • Keep up to date with changes in legislation
  • Develop adequate controls to ensure legislation is adhered to
• Auditors' responsibilities for laws and regulations

  • Obtain sufficient appropriate evidence that laws and regulations have been adhered to
  • Respond appropriately if non-compliance is found
• Audit procedures for laws and regulations

  • Obtain a general understanding of laws and regulations that affect the client
  • Inspect correspondence with regulatory authorities
  • Ask management if there have been any compliance issues
  • Remain alert to possible instances of non-compliance
  • Obtain written representations from management that all known and suspected instances of non-compliance have been shared with us
• Reporting non-compliance with laws and regulations

  • Management
  • Those charged with the company's governance (if deliberate act by management)
  • To 3rd parties if there is a duty to report
  • To shareholders if material by giving a modified audit opinion
• Ethical standard - Responding to Non-compliance with laws and regulations

  • Provides guidance to accountants as to actions to be taken if they become aware of illegal acts by a client or employer
  • Addresses the duty of confidentiality
  • Auditors need to speak to management and encourage self reporting
  • Or it falls to auditors to report the activity/breach
  • Aims to encourage response by management, stop adverse consequences, and allow public authorities and regulators to take action
• Quality control for the audit firm

  • Leadership
  • Ethical requirements
  • Acceptance/continuance
  • Human resources
  • Engagement performance
  • Monitoring of quality control
• Quality Control - Leadership


  The audit partner takes overall responsibility for the quality of the audit and ensures compliance with ethical requirements, appropriate acceptance and continuance, competent engagement team, appropriate reviews have been done, sufficient appropriate evidence has been obtained, appropriate consultation on contentious matters
• Quality Control - Engagement performance


  • Direction - Ensure team members know their responsibilities, the nature of the business and risks
  • Supervision - Track the progress of the audit, monitor the competence of the team, address significant matters during the audit, arrange consultation where required
  • Review - Work has been performed in accordance with auditing standards, work performed is consistent with the conclusions made, evidence is sufficient and appropriate, engagement partner must review critical areas of judgement and significant risks
• Engagement Quality Control Review (EQCR)

  • PLCs and other high risk clients must be subject to a EQCR or 'Hot review' - An independent partner review
  • The reviewer should have appropriate technical qualifications, experience and authority, and be objective - Not been involved in the audit
• What an EQCR includes

  • Discussion of significant matters with the engagement partner
  • Review of the financial statements and audit report
  • Significant risks and responses
  • Significant judgements made
  • Significant uncorrected misstatements
  • Matters communicated to management and regulatory bodies
  • Conclusions made in forming the audit opinion
  • The independence of the team
  • If appropriate consultation has been sought
  • Whether the documented audit work supports the conclusions made
• Cold review - post issue of the audit report

  • To assess whether the firm's policies and procedures are working appropriately
  • It is performed by the firms quality control department or an external consultant or an independent partner
  • Working papers should contain sufficient appropriate evidence, show all matters were resolved before the audit report was issued, and be complete and signed and reviewed
• Cold review - actions if deficiencies found


  • Additional staff training
  • Increase the frequency of quality control reviews
  • Change the firm's quality control policies
  • Take disciplinary action