Title: The Importance of Audit Planning (Part 1)
(Relevant to ACCA F8, P7 and CAT T8)
This is the first of two articles looks at the vital aspect of an auditor’s work which is planning of the audit. Students studying for Audit papers in ACCA and CAT will benefit from the contents of this article.
An efficient and effective audit can only be performed if the audit has been thoroughly and properly planned. In my years in practice, 40% of the time is spent on planning 20% doing and 40% review. The importance of audit planning cannot be over emphasised and ISA 300 (redrafted) ‘Planning an Audit of Financial Statements’ contains the guidelines which the auditor is required to comply with in planning an audit.
In a nutshell, ISA 300 says that the planning stage of the audit should be used to establish an overall audit strategy, develop an audit plan and reduce audit risk to an acceptably low level. In other words, the auditor should plan the audit engagement so that it will be performed in an effective manner and in accordance with the International standards of auditing.
Adequate audit planning will ensure that appropriate attention is given to crucial areas of the audit and that potential problems are identified on a timely basis. At the planning stage the audit engagement partner should assign the necessary staff who possesses the skills and ability required in order to ensure the audit is carried out efficiently and in accordance with the International Standards on Auditing.
Preliminary Engagement Activities
When the auditor engages a new audit client, then ISA 300 stipulates certain procedures the auditor is required to carry out as follows:
• Perform procedures regarding the continuance of the client relationship and the specific audit engagement;
• Evaluate compliance with ethical requirements, including independence; and
• Establish an understanding of the terms of the engagement.
Performing these preliminary activities ensures that the auditor:
• Maintains the necessary independence and ability to perform the engagement;
• Ensures that there are no issues with management integrity that may affect the auditor’s willingness to continue with the engagement; and
• Ensures that there is no misunderstanding with the client as to the terms of the engagement.
The auditor should also communicate with the entity’s previous auditors where there has been a change of auditors in accordance with the relevant Ethical Standards.
Planning activities for initial engagements will often be more in depth than for a recurring engagement simply because the auditor will not have previous experience of the audit engagement and therefore the auditor needs to ensure they gain a thorough understanding of the entity and the environment in which it operates in accordance with ISA 315 (redrafted) ‘Understanding the Entity and its Environment and Assessing the Risk of Material Misstatement’.
Initial engagements will also include additional audit procedures required to be adopted to gather audit evidence concerning the opening balances. ISA 510 (redrafted) ‘Initial Engagements – Opening Balances’ deals with issues where the audit firm was not the previous year’s auditors and the procedures required to deal with the opening balances.
At the planning stage the auditor will develop the overall audit strategy. The audit strategy sets the scope, timing and direction of the audit. At this stage the auditor will develop the detailed audit plan which will help identify problem areas and important audit areas.
At the planning stage the materiality level is set and areas where material misstatement might occur are identified. Materiality must always be assessed where an audit opinion is given.
Once the audit strategy has been established, then the auditor is able to develop the more detailed audit plan to address the matters identified in the overall audit strategy. The auditor should then reduce the audit risk to an acceptably low level. Audit risk is the risk that the auditor will arrive at the wrong opinion.
The planning stage of the audit is an extremely vital area. The next article will look at the contents of Audit Plan.