CHAPTER 2: AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME. By CA Kanika Khetan

Transcription

1 CHAPTER 2: AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME By CA Kanika Khetan

2 We have covered first chapter of our subject i.e. nature, objective and scope of audit. Where we understood that what audit is? How to maintain Quality of our work? How to accept and continue our client relationships? Now upto this chapter we are already having clients so how to start the work i.e how to plan and continue is what we are going to study further. 2

3 First and foremost step of conducting any audit is Audit Planning SA Planning an Audit of Financial Statement states various steps and precautions while planning an audit Planning is not a discrete phase but rather a continual and iterative process i.e it is to be made and revised as necessary during the course of audit. 3

4 Audit planning should cover: Knowledge of client s accounting system, policies and internal control procedures to know the extend to which they can be relied on. Determine the nature, timing and extent of the audit procedures To coordinate the work to be performed. 4

5 It helps the auditor to organise and manage the audit team according to the capabilities of the team to effectively and efficiently deal with the work assigned. To devote appropriate attention to important areas during audit and resolve potential problems on timely basis. Facilitating the direction and supervision of engagement team members and to review their work To know the degree of reliance of work done by others. 5

6 Strategy sets the Scope, timing and direction of audit and guides the development of more detailed audit plan Overall audit strategy helps the auditor to manage their resources like the areas to be covered, the number of employees to be appointed, cut off dates, how to review their activities etc In establishing the strategy auditor shall: Define the scope of audit Ascertain the reporting objectives Consider the factors significant for directing the audit team Consider its previous engagement s experiences with the firm Ascertain the nature, timing and extent of resources. 6

7 CHAPTER 2.1: AUDIT PLAN By CA Kanika Khetan

8 After setting up of strategy the auditor moves ahead with a more detailed audit plan. Developing the audit plan is the responsibility of the auditor. They can take the help of management but care should be taken that the effectiveness of audit is not compromised with. The audit plan can be changed during the course of audit in case of change of circumstances or any new evidence obtained based on revised consideration of audit risk. So, the audit plan is flexible and continuous process that continues till the end of audit. 8

9 For developing an audit plan following factors related to clients business should be kept in mind: The relevant industry environment, regulatory and reporting framework and other external factors The nature of entity like to know the class of transactions and requirements of financial statements: Its Operations Its ownership and governance Its investment types The way it is financed The accounting policies applied and their appropriateness The risks associated with the entity 9

10 Direction, Supervision and review here concerns with the review of work done by the audit team. It should be timely and is conducted based on various factors like: The size and complexity of the entity The area of audit The assessed risk of material misstatement The capabilities and competence of team members 10

11 The plan thus made should be documented properly for conveying it to the team and successful implementation of the plan. It includes overall strategy, plan and any changes made in plan during audit along with reasons thereof. Planning documentation should include: A summary of discussions with the management team regarding the discussions on scope, changes in scope, reporting purpose, reports on financial and other matters of organisation etc. How to report for the financial statements Audit documentation access letters 11

12 CHAPTER 2.2: AUDIT PROGRAMME By CA Kanika Khetan

13 An Audit programme consists of a to be applied to accounts of a company for the purpose of to enable the auditor to express an informed opinion on such statements. 13

14 Audit evidence may be defined as the information used by the auditor in arriving at the conclusions on which the auditors opinion is based. This is a primary task before the auditor when he draws up the audit programme. An auditor should analyze the situation that which audit evidence will best justify a situation and should ask for that evidence. The auditor should place appropriate weight on each piece of evidence and accordingly should prescribe the priority of verification. 14

15 Documentary evidence Physical examination Statements and explanation of management, officials, employees and third party Arithmetical calculations by the auditor. State of internal controls and internal checks Inter relationship of various accounting data Subsidiary and memorandum records Minutes 15

16 For developing a programme the auditor should keep in mind Nature, size and composition of the business Dependability of the internal control Scope of the work Audit programme is a detailed document so the nature of work to be done is to be provided in detail As audit programme depends on the circumstances of the organisation it can be changed during the course of audit by the principal therefore the team should be advised to keep their mind open. Periodic review of the programme is essential for removing inadequacies or redundancies and maintaining its utility. 16

17 Stay within scope and limitation of the assignment Co-ordinate the procedures Determine the evidence available and identify the best evidence Consider all possibilities of error Apply only useful steps in accomplishing the purpose 17

18 The procedures that are needed to implement the audit plan should be in written form. It should contain audit objectives and instructions to assistants involved in audit. It should be made keeping in mind the reliance auditor can have on internal control system of client. It helps in deciding the nature and timing of procedures, involvement of other auditors and experts etc. The timing of procedures is to be included in audit program. Auditor should decide them by coordination with client. The audit planning based on review of internal controls, preliminary evaluation, procedures should be considered for modification of procedures. 18

19 It provides the assistants carrying out audit with total and clear set of instructions of the work generally to be done. It provides total perspective of the work to be performed Selection of assistants for the job on the basis of capability becomes easier when job is rationally defined, planned and segregated It reduces the chances of overlooking or ignoring certain books and records. If properly maintained and signed it can help in tracking the responsibility of work done and can control the work done by assistants. It serves as a guide for audits to be carried out in succeeding years. It serves as an evidence of work done by the auditor. 19

20 The work may become mechanical and task may be carried out without proper understanding object of whole audit scheme. The programme often tends to become rigid and inflexible. It is effective only if it is updated from time to time. Insufficient assistants may take an excuse that proper instructions were not provided in programme to hide their deficiencies. A hard and fast programme may kill initiative of efficient and enterprising assistants. 20

21 Chapter 2.3: audit MATERIALITY By CA Kanika Khetan 21

22 SA-320 Materiality in Planning and Performing an Audit States that auditor should consider materiality and its relationship with audit risk while conducting an audit. The auditor should know that whether the misstatement will effect the true and fair view of financial statements. We consider three points to understand the effect for materiality: Class of transactions Account balances Disclosures Professional Materiality: Amounts are set by the auditor generally below materiality level. If any deflection in books is more than set standards then the transaction, account balance or disclosure is considered as material. 22

23 For determining materiality a percentage is often applied to a chosen benchmark. Step 1: Choose a benchmark: Factors that may effect identification of a benchmark includes: The elements of financial statements like assets, liabilities, equity, revenue, expenses etc. Whether there are items on which attention of users tend to be focused like profit, revenue etc The nature of entity, industry the economic environment in which entity functions, ownership, how it is financed like if it is financed by debt then users would consider firm s assets and claims on them too. 23

24 Step 2: Chosen benchmark relevant financial data The benchmark so chosen can be from: Prior period s financial results and financial positions The period to date financial results and financial position Budgets or forecasts for the current period Adjusted for significant changes in the circumstances. Step 3: Determining the percentage to be applied Auditor need to determine the percentage to be applied on chosen benchmark like any misstatement amounting to 5% of net profit would be considered material. The percentage so decided differs depending on the benchmark selected. 24

25 Following are the factors that may effect the user decision when combined and for which materiality as a whole should be considered: Whether law, regulations or the applicable financial reporting framework affect users expectations regarding the measurements of certain items like related party transactions The key disclosures in relation to its industry Whether attention is focused on a particular aspect If during audit the auditor concludes that there is a change in level of materiality of any transaction then they can revise performance materiality and accordingly the nature, timing and extent of further audit procedures. 25

26 It may include the following factors: Materiality for the financial statement as a whole Materiality level for particular transaction, account balances or disclosures Performance materiality Any reasons of changes or deviations as the audit progressed. 26

27 SUMMARY So in this chapter we have covered: How to plan for audit before starting the assignment How to determine its strategy and procedures What is audit programme and how it is made What are evidences to be considered What is the concept of materiality that effect auditors decisions. 27