SA 300/NSA 8 directs that the auditor should plan the audit so that the engagement will be performed in an effective manner. Planning the audit involves establishing the overall audit strategy for the engagement and developing an audit plan, in order to reduce audit risk to an acceptable low level. Planning an audit demands developing both a general strategy and a detailed approach for the expected nature, timing and extent of the audit.
Audit Plan can be understood as the plan for carrying out the audit of an organization, which comprises of strategies or guidelines. Audit Plan is the fundamental principle of the audit, which says that the auditor should acquire details of the business undertaken by the client. This is to ascertain the nature, time and extent of audit procedures, which is carried out by the engagement team members. Besides other facts, it should be developed to cover:
Audit planning is a regular process, which starts just after the accomplishment of the previous audit and tends to last until the accomplishment of current engagement. The audit plan should be so flexible that they can be changed or revised, as per the circumstances.
AUDIT PLANNING OBJECTIVES AND PROCEDURES
The objective of audit planning is to determine the amount and type of evidence and review required to assure the auditor that there are no material misstatements of the financial statements. The planning procedures include:
- Perform audit procedures to understand the entity and its environment, including its internal control system.
- Assess the risk of material misstatement of accounts.
- Determine materiality for planning purposes. This is the auditor’s preliminary estimate of the smallest amount of misstatement that would influence the judgement of a reasonable person relying on the financial statements.
- Prepare the planning memorandum, the audit plan and audit program containing the auditor’s response to identified risks.
BENFITS OF AUDIT PLANNING
- The audit objective is established and achieved.
- Attention is devoted to important areas of the audit, that is, to critical and high areas.
- Potential problems are identified and resolved on timely basis.
- The resources needed for the engagement, including the use of experts, are identified and procured.
- Works are properly/appropriately assigned to engagement team members.
- The audit engagement is properly organized and managed for effectiveness and efficiency.
- The direction and supervision of the audit, including the review of the works of team members are facilitated.
- The co-ordination of the works of joint auditors (in the case of a group audit) and experts are facilitated.
- The audit engagement is completed economically within time schedule.
STEPS IN AUDIT PLANNING
Audit planning can be broken down in seven (7) stages:
STAGE 1: APPOINTMENT
The main issue at this stage is to ensure that there are no factors that prohibit the assignment from commencing. At this point the Auditor must ensure: –
- Clients due diligence.
- Review whether there is any ethical threat to the assignment, if any, how to safeguard.
- If there was a different auditor in prior years, appropriate evidence has to be obtained from such auditor before the assignment can be accepted.
- A letter of engagement is prepared and signed.
STAGE 2: RISK ASSESSMENT
- This entails assessment of the organization from several sources in order to determine the overall audit risk inherent in the assignment it involves:
- Review of issues arising in previous years.
- Review of permanent audit files and other important correspondence.
- Discussions with management on any relevant issues which occurred during the year.
- A review of draft financial information to do a preliminary analytical review.
- Calculation of materiality.
- Preliminary assessment of going concern.
STAGE 3: AUDIT APPROACH
For each individual financial structure level, a planned audit approach should be documented. All risk areas should have an appropriate plan to deal with that risk. The work program of the audit should be driven by this. Also to be considered at this stage is the framework on which the financial statement will be prepared and if reduced disclosure options are available.
STAGE 4: ADMINISTRATION
Staffing plan takes the Centre at this point. (with appropriate skill sets and experience assigned to the team). Timetable for the completion of the job should also be agreed with the client here.
STAGE 5: AUDIT TEAM BRIEFING
A team meeting sets on the planned audit approach, the key risk areas, how these risks will be addressed and clarifies each member role in the assignment.
STAGE 6: CLIENT SERVICE
Consider whether any useful recommendations can be made to the clients regarding any issues identified.
STAGE 7: CLIENT COMMUNICATION
The client should be notified of any changes in the nature/scope of the assignment. In addition to this, the information required by the audit team is communicated to and agreed with the client.
After this stage, the audit proper commences.
THE PLANNING PROCESS (POINTS FOR CONSIDERATION IN AUDIT PLANNING)
It is important that the planning is documented in a document called the audit planning memorandum.
The planning process will involve:
- Review of previous years’ working papers for key issues and problem areas.
- Considering the impact of any changes in legislation, auditing or accounting standards, especially in relation to their effects on the operations and/or reporting requirements of the enterprise.
- Considering the background of the client and any changes in the industry or issues that may affect the audit work.
- Considering changes in the business, its management or ownership. A change in the CEO, CFO, a new management structure, establishment of a new business line, new branch, etc, will result in significant changes in the circumstances of the company that will affect the audit plan.
- If there are changes in systems, accounting procedures and policies, review their effect on the audit.
- Carry out analytical review of management accounts and note key performance indicators (KPIs).
- Decide on the audit approach (substantive, systems-based or risk-based).
- Agree on timing of the audit work – interim, final including the established deadlines for the submission of audit report.
- Agree on time for availability of draft accounts, supporting schedules, analyses and summaries by clients.
- Evaluate internal controls and decide on level of reliance to be placed on them.
- Consider the use of experts, if necessary, and incorporate in plan.
- Plan rotational visits and testing, where many branches exist.
- Work out time budget.
- Plan and arrange staffing requirement and decide on likely fee chargeable.
- Organize liaison with the audit committee (if any) and joint auditors, in case of group audits.
An audit programme is the blueprint of the audit plan, which specifies, how the audit is to be performed, who is going to perform and what are the steps to be followed for conducting the same. It is a set of instructions, which audit staff pursues, for proper execution of audit.
Once the audit plan is formulated, an audit programme, comprising of various steps, is developed. It is nothing but a comprehensive plan for implementing audit procedures, in specific conditions, with directions for selecting the appropriate method for attaining audit objectives. It is primarily based on the size of the entity and similar other factors.
The audit programme determines what and how much evidence or facts are to be obtained and analyzed. Further, it chalks out responsibilities for the audit staff, to conduct the audit. The audit programme should be flexible enough to be revised, as per the prevailing conditions.
DIFFERENCE BETWEEN AUDIT PLAN AND AUDIT PROGRAMME
The difference between audit plan and audit programme can be drawn clearly on the following grounds:
- Audit plan is defined as the scheme or design prepared by the auditor for conducting an audit, in an effective manner. On the other hand, audit programme refers to an exhaustive plan which comprises of a list of verification steps, to be implemented, to the final accounts of the organization, to collect sufficient facts and evidence, so as to facilitate the auditor for expressing the opinion.
- An audit plan is nothing but a first and foremost principle of the audit. Conversely, audit programme is a series of examination and verification steps.
- The audit plan is designed by the auditor first, after which a comprehensive audit programme comprising various steps is created
- An audit plan is a design prepared by an auditor when conducting an audit. The Audit Program is the execution of the project itself, which has an extensive procedure on how it should be exhausted.
- The audit plan always comes first, followed by the audit program. audit plan vs audit program
ADVANTAGE OF AUDIT PROGRAMME
- An audit program provides total perspective of the work to be performed.
- It helps in ensuring that all important areas are considered while conducting the audit.
- An audit program helps an auditor in the allocation of work among its team members according to their skills and competency.
- It enhances the accountability of audit team members towards work performed by them.
- It helps the auditor in checking the status of audit works, its progress, how much it is left for performance while conducting the audit.
- Auditors prepare audit working papers which contains a record of various audit procedure applied which serves as evidence against the charge of negligence.
- Audit program enables the auditor to keep a record of useful information specifically for future audit and references.
DISADVANGES OF AUDIT PROGRAMME
- RIGIDITY: There is no set standard audit program that can be applied in the case of every entity. However, programs differ for different types of entities. Every entity has its own problems. Therefore, we cannot apply for a single audit program in the case of all business entities.
- REDUCES THE INITIATIVE OF EFFICIENT STAFF: A program reduces the initiative of efficient and competent staff. Thus, staff members cannot make changes in the audit plan and cannot make suggestions to it.
- AUDIT WORL BECOMES MECHANICAL: The program becomes mechanical them it ignores other aspects like internal control.
- OVERLOOKING NEW AREA: A program may overlook the new areas with the change in time and technology, new problems may rise which an audit program may not consider.
Both audit plan and audit programmes are helpful in obtaining the relevant evidence, so as to support auditor’s opinion on the report. Moreover, they keep audit cost at the reasonable level and also keep a check on the activities of the business, if implemented in an effective way.