B3

• Why Plan an Audit?


  • Plan the audit so that the engagement will be performed in an effective manner
  • Time spent planning the audit to ensure it is carried out efficiently will reduce the time taken and thus the cost
  • The planning process will also assess and thus reduce risk
  • The auditor will want to ensure that the correct team is in place to conduct the audit, they are working efficiently and that work is focused on material areas of risk and potential problem areas
• Planning Activities


  1. Risk Assessment

  2. Audit Strategy
• Risk Assessment


  The identification of risk will determine the entire audit process
• Audit Strategy


  The audit strategy sets out the scope, timing and direction of the audit
• Scope


  • The scope of the audit will be determined by the reporting framework applied as well as any industry specific requirements
  • If there are any geographical or other factors which may affect the audit, they will be considered here
• Timing


  • The timing of the audit will set out any deadlines applicable and the dates of the interim and final audit visits
  • The interim audit is conducted before the final audit to evaluate controls and document the systems in place
  • In addition there may be some substantive tests carried out
  • The attendance at the stock count will be carried out at this time and perhaps the receivables circularisation
  • The final audit will involve the bulk of the audit work and it may be possible to concentrate on the statement of financial position figures if sufficient work has been carried out during the interim audit
• Direction


  • The direction of the audit will be determined by the identification of high risk areas and materiality
  • The strategy decided upon will be tailored to the client and the nature of their business and their structure
  • The auditor must ensure that the strategy selected is appropriate
• Stages in the planning process


  1. Ensure understanding of the business

  2. Undertake analytical review

  3. Assess the risks involved with the business

  4. Establish materiality levels

  5. Establish tolerable error for material errors

  6. Decide the audit approach

  7. Ensure auditor independence

  8. Decide the budget and staff requirements

  9. Timetable the audit & set deadlines
• Permanent file


  Knowledge of the business kept by the audit firm, must be kept up to date
• Current file


  Contains the evidence and documents relevant to the current year
• Contents of the current file


  • Planning section covering all the areas above
  • Completion section reviewing the audit
  • Sub-sections for each balance sheet item and income statement item with work done and evidence documented
• Audit strategy


  Sets out the overall approach
• Audit plan


  Fills in the operational details
• Both strategy and plan need to be fully documented
• Main characteristics of the engagement which define its scope

  • If the accounts have been prepared in accordance with IFRS
  • How much audit evidence obtained in previous audits will be used
  • Whether computer-assisted audit techniques will be used
  • The availability of key personnel
• Reporting objective


  Understood in order to plan the timing of the audit
• Things to include in the audit plan


  • The audit timetable for reporting and whether there will be an interim as well as final audit
  • Organisation of meetings with management to discuss any audit issues arising
  • Location of Inventory counts
  • The timings of the audit team meetings and review of work performed
• Factors directing the audit team's effort


  • Materiality levels
  • Using professional skepticism in gathering and evaluating audit evidence
• The audit plan should consider the knowledge from preliminary planning & other areas
• Examples of knowledge to consider

  • Results of previous audits and any tests of internal controls
  • Evidence of management's commitment to the design, implementation and maintenance of sound internal control
  • Volume of transactions, which may determine whether it is more efficient for the audit team to rely on internal control
• Analytical procedures


  Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data
• Analytical procedures are compulsory at two stages of the audit under ISA 520 - the planning stage and the review stage
• How to perform Analytical Procedures

  1. Predict a figure, based on a relationship

  2. Define what a significant difference is

  3. Calculate the procedure and the difference to the prediction in step 1

  4. Investigate the difference
• Types of analytical procedures

  • Trend analysis
  • Ratio analysis
  • Reasonableness testing
• Limitations when using analytical procedures for Planning

  • Often budgets and forecasts needed
  • If done before Y/E extrapolations used - these aren't reliable if business is seasonal
  • Many accounting adjustments missed as only done at Y/E
  • Often uses less rigorous management accounts
  • Even more difficult for smaller companies who don't have good management accounts
• Key ratios used in analytical procedures


  • Profitability/Return
  • Liquidity/Efficiency
  • Gearing
• Gross Margin


  Gross profit / Revenue
• Net Margin


  Profit before interest and tax / Revenue
• ROCE


  Profit Before Interest and Tax / (Total Assets - Current Liabilities)
• ROE


  Profit after tax - preference dividends / Equity shareholders funds
• Current Ratio


  Current Assets / Current Liabilities
• Quick Ratio


  (Current Assets - Inventories) / Current Liabilities
• Financial Gearing


  Debt / (Debt + Equity)
• Operational Gearing


  Debt / Equity
• Interest Cover


  Profit before Interest and Tax / Interest payable
• Inventory Days


  Closing (or average) Inventory / Cost of Sales * 365
• Receivable Days


  Trade Receivables / Credit Sales * 365
• Payable Days


  Trade Payables / Credit Purchases * 365
• Planning issues auditors should consider

  • The use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters
  • The amount of resources to allocate to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors' work in the case of group audits, or the audit budget in hours to allocate to high risk areas
  • How such resources are managed, directed and supervised, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place
• Audit programme


  A list of specific procedures to be performed and documentation to be collected for each specific class of transactions of balances