chapter 2: audit strategy, audit planning and audit … · first and foremost step of conducting...
TRANSCRIPT
We have covered first chapter of our subject i.e.nature, objective and scope of audit.
Where we understood thatwhat 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 planand continue is what we are going to studyfurther.
CA KANIKA KHETAN
We have covered first chapter of our subject i.e.nature, objective and scope of audit.
Where we understood thatwhat 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 planand continue is what we are going to studyfurther.
2
First and foremost step of conducting any audit is AuditPlanning
SA-300 - “Planning an Audit of FinancialStatement”
states various steps and precautions while planning an audit
Planning is not a discrete phase but rather a continualand iterative process i.e it is to be made and revised asnecessary during the course of audit.
CA KANIKA KHETAN
First and foremost step of conducting any audit is AuditPlanning
SA-300 - “Planning an Audit of FinancialStatement”
states various steps and precautions while planning an audit
Planning is not a discrete phase but rather a continualand iterative process i.e it is to be made and revised asnecessary during the course of audit.
3
Audit planning should cover:
Knowledge of client’s accounting system,policies and internal control procedures to knowthe extend to which they can be relied on.
Determine the nature, timing and extent of theaudit procedures
To coordinate the work to be performed.
CA KANIKA KHETAN
Audit planning should cover:
Knowledge of client’s accounting system,policies and internal control procedures to knowthe extend to which they can be relied on.
Determine the nature, timing and extent of theaudit procedures
To coordinate the work to be performed.
4
It helps the auditor to organise and manage the auditteam according to the capabilities of the team toeffectively and efficiently deal with the workassigned.
To devote appropriate attention to important areasduring audit and resolve potential problems ontimely basis.
Facilitating the direction and supervision ofengagement team members and to review their work
To know the degree of reliance of work done byothers.
CA KANIKA KHETAN
It helps the auditor to organise and manage the auditteam according to the capabilities of the team toeffectively and efficiently deal with the workassigned.
To devote appropriate attention to important areasduring audit and resolve potential problems ontimely basis.
Facilitating the direction and supervision ofengagement team members and to review their work
To know the degree of reliance of work done byothers.
5
Strategy sets the Scope, timing and direction of audit andguides the development of more detailed audit plan
Overall audit strategy helps the auditor to manage theirresources like the areas to be covered, the number ofemployees to be appointed, cut off dates, how to reviewtheir 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.
CA KANIKA KHETAN
Strategy sets the Scope, timing and direction of audit andguides the development of more detailed audit plan
Overall audit strategy helps the auditor to manage theirresources like the areas to be covered, the number ofemployees to be appointed, cut off dates, how to reviewtheir 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.
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After setting up of strategy the auditor moves ahead with amore detailed audit plan.
Developing the audit plan is the responsibility of the auditor.They can take the help of management but care should betaken that the effectiveness of audit is not compromisedwith.
The audit plan can be changed during the course of audit incase of change of circumstances or any new evidenceobtained based on revised consideration of audit risk. So, theaudit plan is flexible and continuous process that continuestill the end of audit.
CA KANIKA KHETAN
After setting up of strategy the auditor moves ahead with amore detailed audit plan.
Developing the audit plan is the responsibility of the auditor.They can take the help of management but care should betaken that the effectiveness of audit is not compromisedwith.
The audit plan can be changed during the course of audit incase of change of circumstances or any new evidenceobtained based on revised consideration of audit risk. So, theaudit plan is flexible and continuous process that continuestill the end of audit.
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For developing an audit plan following factors related to clients business shouldbe kept in mind:
The relevant industry environment, regulatory and reporting framework andother external factors
The nature of entity like to know the class of transactions and requirementsof 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
CA KANIKA KHETAN
For developing an audit plan following factors related to clients business shouldbe kept in mind:
The relevant industry environment, regulatory and reporting framework andother external factors
The nature of entity like to know the class of transactions and requirementsof 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
Direction, Supervision and review here concerns with thereview of work done by the audit team. It should be timelyand 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
CA KANIKA KHETAN
Direction, Supervision and review here concerns with thereview of work done by the audit team. It should be timelyand 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
The plan thus made should be documented properly forconveying it to the team and successful implementation of theplan.
It includes overall strategy, plan and any changes made in planduring audit along with reasons thereof.
Planning documentation should include:
A summary of discussions with the management teamregarding the discussions on scope, changes in scope,reporting purpose, reports on financial and other matters oforganisation etc.
How to report for the financial statements
Audit documentation access letters
CA KANIKA KHETAN
The plan thus made should be documented properly forconveying it to the team and successful implementation of theplan.
It includes overall strategy, plan and any changes made in planduring audit along with reasons thereof.
Planning documentation should include:
A summary of discussions with the management teamregarding the discussions on scope, changes in scope,reporting purpose, reports on financial and other matters oforganisation etc.
How to report for the financial statements
Audit documentation access letters11
CA KANIKA KHETAN
An Audit programme consists of ato be applied to accounts of a company for
the purpose of to enablethe auditor to express an informed opinion on suchstatements.
13
Audit evidence may be defined as the information used bythe auditor in arriving at the conclusions on which theauditors opinion is based.
This is a primary task before the auditor when he draws upthe audit programme.
An auditor should analyze the situation that which auditevidence will best justify a situation and should ask for thatevidence. The auditor should place appropriate weight oneach piece of evidence and accordingly should prescribe thepriority of verification.
CA KANIKA KHETAN
Audit evidence may be defined as the information used bythe auditor in arriving at the conclusions on which theauditors opinion is based.
This is a primary task before the auditor when he draws upthe audit programme.
An auditor should analyze the situation that which auditevidence will best justify a situation and should ask for thatevidence. The auditor should place appropriate weight oneach piece of evidence and accordingly should prescribe thepriority of verification.
14
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
CA KANIKA KHETAN
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
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 tobe done is to be provided in detail
As audit programme depends on the circumstances of theorganisation it can be changed during the course of audit by theprincipal therefore the team should be advised to keep their mindopen.
Periodic review of the programme is essential for removinginadequacies or redundancies and maintaining its utility.
CA KANIKA KHETAN
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 tobe done is to be provided in detail
As audit programme depends on the circumstances of theorganisation it can be changed during the course of audit by theprincipal therefore the team should be advised to keep their mindopen.
Periodic review of the programme is essential for removinginadequacies or redundancies and maintaining its utility.
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Stay withinscope and
limitation ofthe
assignment
Determine theevidence
available andidentify the
best evidence
Co-ordinatethe
procedures
CA KANIKA KHETAN
Determine theevidence
available andidentify the
best evidence
Apply onlyuseful steps inaccomplishingthe purpose
Consider allpossibilities
of error
Co-ordinatethe
procedures
17
The procedures that are needed to implement the audit planshould be in written form.
It should contain audit objectives and instructions toassistants involved in audit.
CA KANIKA KHETAN
It should be made keeping in mind the reliance auditor canhave on internal control system of client. It helps in decidingthe nature and timing of procedures, involvement of otherauditors 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 formodification of procedures. 18
It provides the assistants carrying out audit with total and clear setof 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 capabilitybecomes easier when job is rationally defined, planned andsegregated
It reduces the chances of overlooking or ignoring certain booksand records.
If properly maintained and signed it can help in tracking theresponsibility of work done and can control the work done byassistants.
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.
CA KANIKA KHETAN
It provides the assistants carrying out audit with total and clear setof 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 capabilitybecomes easier when job is rationally defined, planned andsegregated
It reduces the chances of overlooking or ignoring certain booksand records.
If properly maintained and signed it can help in tracking theresponsibility of work done and can control the work done byassistants.
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
The work may become mechanical and task may be carriedout without proper understanding object of whole auditscheme.
The programme often tends to become rigid and inflexible. Itis effective only if it is updated from time to time.
Insufficient assistants may take an excuse that properinstructions were not provided in programme to hide theirdeficiencies.
A hard and fast programme may kill initiative of efficient andenterprising assistants.
CA KANIKA KHETAN
The work may become mechanical and task may be carriedout without proper understanding object of whole auditscheme.
The programme often tends to become rigid and inflexible. Itis effective only if it is updated from time to time.
Insufficient assistants may take an excuse that properinstructions were not provided in programme to hide theirdeficiencies.
A hard and fast programme may kill initiative of efficient andenterprising assistants.
20
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 shouldknow that whether the misstatement will effect the true and fairview 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 generallybelow materiality level. If any deflection in books is more than setstandards then the transaction, account balance or disclosure isconsidered as material.
CA KANIKA KHETAN
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 shouldknow that whether the misstatement will effect the true and fairview 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 generallybelow materiality level. If any deflection in books is more than setstandards then the transaction, account balance or disclosure isconsidered as material.
22
For determining materiality a percentage is often applied to achosen benchmark.
Step 1: Choose a benchmark: Factors that may effectidentification 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 tendto be focused like profit, revenue etc
The nature of entity, industry the economic environmentin which entity functions, ownership, how it is financedlike if it is financed by debt then users would considerfirm’s assets and claims on them too.
CA KANIKA KHETAN
For determining materiality a percentage is often applied to achosen benchmark.
Step 1: Choose a benchmark: Factors that may effectidentification 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 tendto be focused like profit, revenue etc
The nature of entity, industry the economic environmentin which entity functions, ownership, how it is financedlike if it is financed by debt then users would considerfirm’s assets and claims on them too.
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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 onchosen benchmark like any misstatement amounting to 5% ofnet profit would be considered material. The percentage sodecided differs depending on the benchmark selected.
CA KANIKA KHETAN
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 onchosen benchmark like any misstatement amounting to 5% ofnet profit would be considered material. The percentage sodecided differs depending on the benchmark selected.
24
Following are the factors that may effect the user decision whencombined and for which materiality as a whole should beconsidered:
Whether law, regulations or the applicable financialreporting framework affect users expectations regarding themeasurements 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 inlevel of materiality of any transaction then they can reviseperformance materiality and accordingly the nature, timing andextent of further audit procedures.
CA KANIKA KHETAN
Following are the factors that may effect the user decision whencombined and for which materiality as a whole should beconsidered:
Whether law, regulations or the applicable financialreporting framework affect users expectations regarding themeasurements 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 inlevel of materiality of any transaction then they can reviseperformance materiality and accordingly the nature, timing andextent of further audit procedures.
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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 auditprogressed.
CA KANIKA KHETAN
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 auditprogressed.
26
SUMMARY
So in this chapter we have covered:
How to plan for audit before starting theassignment
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 effectauditors decisions.
CA KANIKA KHETAN
So in this chapter we have covered:
How to plan for audit before starting theassignment
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 effectauditors decisions.
27