(ISA300)PLANNING AN AUDIT OF FINANCIAL STATEMENTS

Chapter
8

Study notes on auditing

Planning An Audit Of Financial Statements
(ISA-300)

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 (ISA300)PLANNING AN AUDIT OF FINANCIAL STATEMENTS

ISA-300
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
1 Introduction
2 3.1: Benefits of Planning
1: Introduction
a) Identifying the important areas that require more attention
b) Identifying potential risks having effect on audit as well as
2: Objective financial statements
c) Plan his work to enable him to conduct an effective audit in
an efficient and timely manner
3: The Role and Timing of d) Allocating work to assistants in such a manner that they
Planning would be best utilized
e) Identify the need for expert and co-ordination of work of
others.
3.2: Nature and extent of f) Determining the nature, timing and extent of the audit
planning activities procedures.

3.3: Planning in a continual

process during conduct of audit Sets the
i. Scope
3.4: Discussion of planning ii. Timing
with management iii. Direction of audit
And guides to
detailed audit plan
4.1: Involvement of Key Engagement
Team Members

4: Requirements 4.2: Preliminary Engagement Activities The Overall

Activities Audit strategy
4.3: Planning Activities
Audit plan

4.4: Changes to Planning Decisions during

the Course of the Audit
More detailed than
5: Relationships between the overall
the overall audit
audit strategy and the audit plan 4.5: Direction, Supervision and
strategy; It includes
Review
 Nature
 Timing and
a) Overall audit  Extent of audit
strategy procedures
6: Documentation
a) The audit plan

c) Any significant changes

7: Additional Considerations
in Initial Audit Engagements
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ISA 300
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
1 Introduction:

This International Standard on Auditing (ISA) deals with the auditor’s responsibility to plan an
audit of financial statements. The auditor should plan the audit so that the engagement will be
performed in an effective manner.
Planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan, in order to reduce audit risk to an acceptably low level. Planning
involves the engagement partner and other key members of the engagement team to benefit
from their experience and insight and to enhance the effectiveness and efficiency of the
planning process.
2 Objective:
The objective of the auditor is to plan the audit so that it will be performed in an effective
manner.
3 The Role and Timing of Planning:
3.1 Adequate planning benefits the audit of financial statements in several ways, including the
following:

a) Helping the auditor to devote appropriate attention to important areas of the audit
In planning an audit, an auditor obtains knowledge of the entity and its environment including
the internal control system. He also identifies the significant transactions and those areas
which need more attention. In planning an audit, the auditor decides what work to delegate,
to whom and to what extent. He also decides the number of days that should be allocated to
a particular area.
b) Identifying potential risks having effect on audit as well as financial statements
The auditor also identifies the potential risks associated with the financial statements. He
analyses them and prepares his audit plan accordingly.
c) Plan his work to enable him to conduct an effective audit in an efficient and timely manner
The time required for each section of the audit should be estimated and the appropriate
grade of staff determined. The company’s year and accounting timetable and the deadlines
for the completion of the audit should be reviewed with the company’s chief financial officer
to ensure that all deadlines have been met.
d) Assisting in the selection of engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks
The allocation of individuals to particular audits should take account of the experience of each
staff member and the degree of skill required for the particular assignment concerned. It is
preferable that the audit team contains members of staff who have visited the client
previously, not only to maintain good relationships but also because they will have gained
detailed knowledge of the client and the industry in which the client operates .
e) Assisting, where applicable, in coordination of work done by auditors of components and experts
To ensure that an audit is carried out effectively and efficiently, the work is controlled and
recorded at each stage of its progress. The most important elements of control are the
direction and supervision of the audit staff and the review of the work they have done

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f) Determining the nature, timing and extent of the audit procedures

The auditor also determines the nature, timing and extent of the audit procedures that he should
perform to carry out the audit work in an effective and timely manner. Once the procedure, the
timing and extent are decided, it will be easy for an auditor to perform the audit accounting to
the plan
3.2 Nature and extent of planning activities will vary according to the;
a. size and complexity of the entity
b. key engagement team members’ previous experience with the entity
c. changes in circumstances that occur during the audit engagement
d. audit evidence obtained from the results of audit procedures
e. unexpected events
3.3 Planning in a continual process during the conduct of audit
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after (or in connection with) the completion of the previous audit and continues until
the completion of the current audit engagement. Planning, however, includes consideration of the
timing of certain activities and audit procedures that need to be completed prior to the performance
of further audit procedures. For example, planning includes the need to consider, prior to the
auditor’s identification and assessment of the risks of material misstatement, such matters as:

a) The analytical procedures to be applied as risk assessment procedures.

b) Obtaining a general understanding of the legal and regulatory framework applicable to the
entity and how the entity is complying with that framework.
c) The determination of materiality.
d) The involvement of experts.
e) The performance of other risk assessment procedures.

3.4 Discussion of Planning with management

The auditor may decide to discuss elements of planning with the entity’s management to facilitate
the conduct and management of the audit engagement (for example, to coordinate some of the
planned audit procedures with the work of the entity’s personnel). Although these discussions often
occur, the overall audit strategy and the audit plan remain the auditor’s responsibility. When
discussing matters included in the overall audit strategy or audit plan, care is required in order not to
compromise the effectiveness of the audit by making the audit procedures too predictable.

4 Requirements:
4.1 Involvement of Key Engagement Team Members:
The engagement partner and other key members of the engagement team shall be involved in
planning the audit, including planning and participating in the discussion among all engagement team
members.

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(The involvement of the engagement partner and other key members of the engagement team in
planning the audit draws on their experience and insight, thereby enhancing the effectiveness and
efficiency of the planning process.)

4.2 Preliminary Engagement Activities

1. The auditor shall perform the following activities at the beginning of the current audit
engagement:
(a) Perform procedures (required by ISA 220) regarding the continuance of the client
relationship and the specific audit engagement.
(b) Evaluate compliance with ethical requirements, including independence.
(c) Establish an understanding of the terms of the engagement.
2. Performing these preliminary engagement activities helps to ensure that the auditor plans an
audit engagement for which:
(a) The auditor maintains the necessary independence and ability to perform the engagement.
(b) There are no issues with management integrity that may affect the auditor’s willingness to
continue the engagement.
(c) There is no misunderstanding with the client as to the terms of the engagement.
3. The auditor’s consideration of client continuance and relevant ethical requirements, including
independence, occurs throughout the audit engagement as conditions and changes in
circumstances occur.

4.3 Planning Activities:

The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the
audit, and that guides the development of the audit plan .

4.3.1 The Overall Audit strategy

4.3.1.1 An audit strategy sets the scope, timing and direction of the audit and guides the
development of the more detailed audit plan. Once the overall strategy has been planned, detailed
consideration can be given to each individual audit objective and how it can be best met.
In establishing the overall audit strategy, the auditor shall:
a) Identify the characteristics of the engagement that define its scope;
b) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required;
c) Consider the factors that, in the auditor’s professional judgment, are significant in directing
the engagement team’s efforts;
d) Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the
entity is relevant; and
e) Ascertain the nature, timing and extent of resources necessary to perform the engagement.

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The process of establishing the overall audit strategy assists the auditor to determine, subject to
the completion of the auditor’s risk assessment procedures, such matters as:
 The resources to deploy for specific audit areas, such as the use of appropriately experienced
team members for high risk areas.
 The amount of resources to allocate to specific audit areas, such as the number of team
members assigned to observe the inventory count at material locations, the extent of review
of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to
high risk areas;
 When these resources are to be deployed, such as whether at an interim audit stage or at key
cut-off dates; and
 How such resources are managed, directed and supervised, such as when team briefing and
debriefing meetings are expected to be held, how engagement partner and manager reviews
are expected to take place (for example, on-site or off-site), and whether to complete
engagement quality control reviews.

4.3.1.2 Considerations in Establishing the Overall Audit Strategy

Following are the examples of matters the auditor may consider in establishing the overall audit
strategy. Many of these matters will also influence the auditor’s detailed audit plan. All matters
given below are not relevant to every audit engagement and the list is not necessarily
complete.
Characteristics of the Engagement:
The auditor may consider the following matter when establishing the scope of the audit
engagement:
 The financial reporting framework on which the financial information to be audited has
been prepared, including any need for reconciliation’s to another financial reporting
framework.
 Industry-specific reporting requirements such as reports mandated by industry regulators.
 The expected audit coverage, including the number and locations of components to be
included.
 The nature of the control relationships between a parent and its components that
determine how the group is to be consolidated.
 The extent to which components are audited by other auditors.
 The nature of the business segments to be audited, including the need for specialized
knowledge.
 The reporting currency to be used, including any need for currency translation for the
financial information audited.
 The need for a statutory audit of standalone financial statements in addition to an audit for
consolidation purposes.
 The availability of the work of internal auditors and the extent of the auditor’s potential
reliance on such work.
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 The entity’s use of service organizations and how the auditor may obtain evidence
concerning the design or operation of controls performed by them.
 The expected use audit evidence obtained in prior auditors, for example, audit evidence
related to risk assessment procedures and tests of controls.
 The effect of information technology on the audit procedures, including the availability of
data and the expected use of computer-assisted audit techniques.
 The coordination of the expected coverage and timing of the audit work with any reviews
of interim financial information and the effect on the audit of the information obtained
during such reviews.
 The discussion of matters that may affect the audit with firm personnel responsible for
performing other services to the entity.
 The availability of client personnel and data.

Reporting Objectives, Timing of the audit and Nature of Communications

The auditor may consider the following matters when ascertaining the reporting objectives of
the engagement, the timing of the audit and the nature of communications required.
 The entity’s timetable for reporting, such as at interim and final stages.
 The organization of meetings with management and those charged with governance to
discuss the nature, extent and timing of the audit work.
 The discussion with management and those change with governance regarding the
expected type and timing of reports to be issued and other communications, both written
and oral, including the auditor’s report, management letters and communications to those
charged with governance.
 The discussion with management regarding the expected types and timing of reports to be
issued and other communications in connection with the audit of components .
 The expected nature and timing of communications among engagement team members,
including the nature and timing of team meetings and timing of the review of work
performed.
 Whether there are any other expected communications with third parties, including any
statutory or contractual reporting responsibilities arising from the audit.

Significant Factors, Preliminary Engagement Activities, and Knowledge gained on Other Engagements

 The determination of materiality and, where applicable:

 The determination of materiality for components and communication thereof to
component auditors
 The preliminary identification of significant components and material classes of
transactions, account balances and disclosures.
 Preliminary identification of areas where there may be a higher risk of material
misstatement

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 The impact of the assessed risk of material misstatement at the overall financial statement
level on direction, supervision and review.
 The manner in which the auditor emphasizes to engagement team members the need to
maintain a questioning mind and to exercise professional skepticism in gathering and
evaluating audit evidence.
 Results of previous audits that involved evaluating the operating effectiveness of internal
control, including the nature of identified deficiencies and action taken to address them.
 The discussion of matters that may affect the audit with firm personnel responsible for
performing other services to the entity.
 Evidence of management’s commitment to the design, implementation and maintenance
of sound internal control, including evidence of appropriate documentation of such
internal control.
 Volume of transactions, which may determine whether it is more efficient for the auditor
to rely on internal control.
 Importance attached to internal control throughout the entity to the successful operation
of the business.
 Significant business developments affecting the entity, including changes in information
technology and business processes, changes in key management, and acquisitions,
mergers and divestments.
 Significant industry developments such as changes in industry regulations and new
reporting requirements.
 Significant changes in the financial reporting framework, such as changes in accounting
standards.
 Other significant relevant developments, such as changes in the legal environment
affecting the entity.
Nature, timing and extent of resources:
Once the overall audit strategy has been established, an audit plan can be developed to address
the various matters identified in the overall audit strategy, taking into account the need to
achieve the audit objectives through the efficient use of the auditor’s resources.
 The selection of the engagement team (including, where necessary, the engagement quality
control reviewer) and the assignment of audit work to the team members, including the
assignment of appropriately experienced team members to areas where there may be higher
risks of material misstatement.
 Engagement budgeting, including considering the appropriate amount of time to set aside for
areas where there may be higher risks of material misstatement.

4.3.1.3 Audit of Small entities

In audits of small entities, the entire audit may be conducted by a very small audit team. Many audits
of small entities involve the audit engagement partner working with one engagement team member.
With a smaller team, co-ordination and communication between team members are easier,
establishing the overall audit strategy for the audit of a small entity need not be a complex or time-
consuming exercise. It varies according to the size of the entity and the complexity of the audit. For
example, a brief memorandum prepared at the completion of the previous audit, based on a review
of the working papers and highlighting issues identified in the audit just completed, updated in the

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current period based on discussions with the owner-manager, can serve as the documented audit
strategy for the current audit engagement.
4.3.2 Audit plan:
The audit plan is more detailed than the overall audit strategy in that it includes the nature, timing
and extent of audit procedures to be performed by engagement team members.
The auditor shall develop an audit plan that shall include a description of:
a) The nature, timing and extent of planned risk assessment procedures.
b) The nature, timing and extent of planned further audit procedures at the assertion level,
c) Other planned audit procedures that are required to be carried out so that the engagement
complies with ISAs.
Planning for these audit procedures takes place over the course of the audit as the audit plan for the
engagement develops. For example, planning of the auditor’s risk assessment procedures occurs
early in the audit process. However, planning the nature, timing and extent of specific further audit
procedures depends on the outcome of those risk assessment procedures. In addition, the auditor
may begin the execution of further audit procedures for some classes of transactions, account
balances and disclosures before planning all remaining further audit procedures. The audit plan
contents the nature, timing and extent of the procedures to be performed. The audit plan covers:
i. Allocation of work and duties to the assistants
ii. Allocation of time and cost
iii. Formation of various teams.
iv. Development of detailed audit programmes
v. Data gathering techniques.
vi. Audit objectives
vii. Types of audit evidence desired.
The audit plan is developed in order to reduce audit risk to an acceptably low level.
4.4 Changes to Planning Decisions during the Course of the Audit
The overall audit strategy and audit plan should be updated and changed as necessary during
the course of the audit.
The auditor may need to modify the overall audit strategy and audit plan due to the following
reasons;
i. changes in circumstances that occur during the audit engagement
ii. audit evidence obtained from the results of audit procedures
iii. unexpected events
Information may come to the auditor’s attention that differs significantly from the information
available when the auditor planned the audit procedures e.g. the auditor may obtain audit
evidence through the performance of substantive procedures that contradicts the audit
evidence obtained with respect to the testing of the operating effectiveness of controls .
4.5 Direction, Supervision and Review

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a. The auditor should plan the nature, timing and extent of direction and supervision of
engagement team members and review of their work.
b. The nature, timing and extent of direction and supervision of engagement team members
and review of their work vary depending on many factors, which include;
i. size and complexity of the entity
ii. the area of the audit
iii. the assessed risks of the material misstatement (for example, an increase in the
assessed risk of material misstatement for a given area of the audit ordinarily requires a
corresponding increase in the extent and timeliness of direction and supervision of
engagement team members, and a more detailed review of their work).
iv. capabilities and competence of personnel performing the audit work

4.5.1 Direction, Supervision and Review in case of audit of ‘Small Entities’

In audit of small entities, an audit may be carried out entirely by the audit engagement partner.
In such situations, question of direction and supervision of engagement team members and
review of their work do not arise as the audit engagement partner, having personally conducted
all aspects of the work, is aware of all material issues.

5 Relationships between the overall audit strategy and the audit plan
(a) Audit strategy is prepared before audit plan
(b) Audit strategy gives overall guideline for developing audit plan
(c) If there is any change in audit plan then auditor will have to change audit strategy first.
However, the two planning activities i.e. audit strategy and audit plan are not necessarily
discrete or sequential processes but are closely inter-related as change in one results in change
in the other.

6 Documentation
The auditor shall include in the audit documentation :
(a) The overall audit strategy;
For example, the auditor may summarize the overall audit strategy in the form of a
memorandum that contains key decisions regarding the overall scope, timing and conduct of
the audit.
(b) The audit plan;
The documentation of the audit plan is a record of the planned nature, timing and extent of
risk assessment procedures and further audit procedures at the assertion level in response to
the assessed risks. It also serves as a record of the proper planning of the audit procedures
that can be reviewed and approved prior to their performance. The auditor may use standard
audit programs or audit completion checklists, tailored as needed to reflect the particular
engagement circumstances; and
(c) Any significant change made during the audit engagement to the overall audit strategy or
the audit plan, and the reasons for such changes.

7 Additional Considerations in Initial Audit Engagements

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The auditor shall undertake the following activities prior to starting an initial audit:
(a) Performing procedures regarding the acceptance of the client relationship and the specific
audit engagement; and
(b) Communicating with the predecessor auditor, where there has been a change of auditors,
in compliance with relevant ethical requirements.

For an initial audit engagement, additional matters the auditor may consider in establishing
the overall audit strategy and audit plan include the following:
 Unless prohibited by law or regulation, arrangements to be made with the previous
auditor, for example, to review his working papers.
 Any major issues (including the application of accounting principles or of auditing and
reporting standards) discussed with management in connection with the initial
selection as auditor, the communication of these matters to those charged with
governance and how these matters affect the overall audit strategy and audit plan.
 The audit procedures necessary to obtain sufficient appropriate audit evidence
regarding opening balances
 Other procedures required by the firm’s system of quality control for initial audit
engagements

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