Introduction to Audit Planning
Article by Anne Burke, Examiner Professional 1 Auditing INTRODUCTION This article gives an introduction to audit planning, including: – Purpose and methodology of audit planning – Client acceptance and continuance – Obtain knowledge of client's industry and business – Assess client business risk – Analytical procedures PURPOSE AND METHODOLOGY OF AUDIT PLANNING There are three main benefits from planning audits: it helps the auditor obtain sufficient appropriate evidence for the circumstances, helps keep audit costs at a reasonable level, and helps avoid misunderstandings with the client. ISA 300 Planning an Audit of Financial Statements requires that the planning stage of the audit should be used to establish an overall strategy for the audit, develop an audit plan, and reduce audit risk to an acceptably low level. The standard also requires that: „Auditors should plan the audit work so that the engagement is performed in an effective manner.‟ It is important to clarify what are meant by the terms “overall audit strategy” and “audit plan” as per ISA 300. The overall “audit strategy” describes in general terms how the audit is to be carried out and the “audit plan” details the specific procedures to be carried out to implement the strategy and complete the audit. It is also important for students to understand the precise meaning of the risk terms: “audit risk” and “inherent risk” as both risks influence how the audit is carried out and the costs involved. The auditor will spend quite a bit of time at the early planning stages obtaining information to assess these risks so that “the engagement is performed in an effective manner”. “Audit risk” is the risk that an auditor may give an inappropriate audit opinion on financial statements that are materially misstated. To reduce the audit risk to an acceptably low level means the auditor needs to be more than certain that the financial statements are not materially misstated. This is reiterated by ISA 200, which states, “The auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit.” “Inherent Risk” as per ISA 400 is “the susceptibility of an account balance or class of transactions to misstatements that could be material, individually or when aggregated with misstatements in other balances or classes, assuming that there are no related internal controls”. Assessing audit risk and inherent risk is an essential part of audit planning because it determines the quantity and quality of evidence that will need to be gathered and the Page 1 of 7
staff that need to be assigned to the particular audit. If for example there were valuation issues with property inherent risk would then be assessed as high, therefore meaning more evidence would have to be gathered and staff that are more experienced assigned to perform testing on this account. ACCEPT CLIENT AND PERFORM INITIAL AUDIT PLANNING ISA 300 paragraph 6 states that the auditor should: – Perform procedures regarding the continuance of the client relationship and the specific audit engagement – Evaluate compliance with ethical requirements, including independence (also refer to ISA 220 Quality Control paragraphs 8 -12) – Establish an understanding of the terms of the engagement (also refer to ISA 210 Terms of Audit Engagement). CLIENT ACCEPTANCE AND CONTINUANCE Client acceptance and continuance encompasses both deciding on acquiring a new client or continuation of relationship with an existing one and the type and amount of staff required. ISQC 1 states that audit firms should establish policies and procedures for the acceptance and continuance of client relationships. Typical policies and procedures involved in this process are: 1. Evaluate the client‟s background; 2. Determine whether the auditor is able to meet the ethical requirements regarding the client; 3. Communicate with the previous auditor; 4. Determine need...
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