fa

Auditing and Assurance www.IndigoLearn.com 1

Auditing and Assurance www.IndigoLearn.com 2
Auditing and Assurance www.IndigoLearn.com 3
 AUDIT STRATEGY, AUDIT PLANNING AND AUDIT
PROGRAMME

Contents
• Audit Strategy and Planning
• Audit Planning
• Nature, Timing and Extent of Audit Planning
• Audit Planning – Process & Documentation
• Audit Programme – Advantages
• Audit Planning & Materiality

1. Audit Strategy and Planning

1.1 Audit Planning

• It is said, ‘Well begun is half done’. Thus, audit planning is the preparatory work
done by the auditor before he starts the audit. It is an essential step in conducting
the audit. Audit flow chart is given below
• SA-300, “Planning an Audit of Financial Statements” further emphasizes that
planning is not a discrete phase of an audit, but rather a continual and iterative
process. Plans should be further developed and revised as necessary during the
course of the audit.
• Per SA- 300 the process begins shortly after (or in connection with) the completion
of the previous audit and continues until the completion of the current audit
engagement.
• 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.
• Plans must cover the following:

• Understanding business environment

1
 ▪ Acquiring knowledge of the client’s accounting systems, policies, and internal
control procedures.
▪ Understanding the environment in which the client operates helps in making
the planning more effective.
• Study of Internal control
▪ This helps in establishing the expected degree of reliance to be placed on
internal control i.e., the extent to which internal controls are strong.
▪ This highlights the areas that need focus. A detailed plan is required for such
areas.
• Determining and programming the nature, timing, and extent of the audit
procedures to be performed
▪ Nature helps to decide on the audit procedure to be applied e.g. Whether we
should apply compliance testing or substantive testing.
▪ Timing involves decisions like whether audit should be commenced at the end
of the year or if surprise checks during the year is required etc.
• Coordinating the work to be performed
▪ This includes decisions regarding the audit team size, the delegation of work
etc.

1.2 Benefits of Audit Planning

Critical risk areas can

It helps the auditor to devote appropriate
be identified and
attention to important areas of the audit.
verified
Audit issues are Any issue that arises during the course of audit is
identified and resolved addressed immediately. Such a mechanism should
in time be inbuilt as part of audit procedure.
Conduct of audit in It helps the auditor to properly organize and
efficient and effective manage the audit engagement so that it is
manner performed in an effective and efficient manner.
Selection of Based on the risk analysis and complexity of
engagement team transactions, appropriate engagement team
members members are selected with appropriate levels of
capabilities and competence to respond to
anticipated risks, and the work is assigned
accordingly.

2
 Audit work It facilitates the direction and supervision of
coordination becomes engagement team members and the review of
easy their work.
Using work of others
(internal auditors, It assists, where applicable, in coordination of
branch auditors, work done by auditors of components and
experts etc) is made experts.
easy

2. Audit Planning

2.1 Audit Strategy vs. Audit Plan

• In very simple terms, strategy refers to Where one wants to reach, and planning
refers to how to reach there.
• Thus, the audit planning is based on the • Audit strategy
Sets the scope, timing, and
strategic goals of the audit firm.
direction of the audit.
• Once the overall audit strategy has been • Audit planning
established, an audit plan can be It is the procedure to
developed to address the various execute/achieve the strategy.
matters identified in the audit strategy.
• The audit strategy and the detailed audit plan are closely inter-related since
changes in one may result in consequential changes to the other.

2.2 Establishment of Overall Audit Strategy

3
The overall audit strategy and the audit plan remains the auditor’s responsibility. By
no means it can, be shared with the management. However, to coordinate some of
the planned audit procedures with the work of the entity’s personnel such
discussions are necessary.

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. The
involvement of the engagement partner and other key members of the
engagement team in planning the audit enhances the effectiveness and efficiency
of the planning process. It is because of their experience, expertise and insights.

In establishing the overall audit strategy, the auditor shall

• Identify the characteristics of the engagement that define its scope -
▪ Number and locations or branches to be audited.
▪ Nature of business (E.g.: Manufacturing, service oriented etc) and number of
business segments.
▪ Previous experience gained about the client etc.
• Ascertain the reporting objectives of the engagement to plan the timing and the
nature of the communications required -
▪ When should the audit be completed and by when the audit report should be
submitted?
▪ Who from the management team should be reached in case of clarifications?
▪ Whom should be updated on the status of audit work throughout the
engagement?
• Consider the factors that, in the auditor’s professional judgment, are significant
in directing the engagement team’s efforts -
▪ Suppose the client has started a new factory then transactions relating to the
factory should be checked more thoroughly.
• Consider the results of preliminary engagement activities -
▪ whether the auditor has collected any preliminary information through
questionnaires etc. before starting the audit.
▪ whether knowledge gained on other engagements performed for the same
entity.
• Ascertain the nature, timing, and extent of resources necessary to perform the
engagement.

4
3. Nature, Timing and Extent of Audit Planning

3.1 Nature
Refers to kind of work that needs to be done.

Nature - Kind of work that needs to be done

Compliance procedures Substantive procedures

Test of compliance Substantive

Test of Test of
with laws and analytical
controls details
regulations procedures

3.2 Timing of audit procedures

Refers to time when the audit procedures have to be performed. For e.g.: If the
auditor wants to verify the cash balance as on 31st March, then physical verification
has to happen on that day itself.

Timing

Beginning of the year During the year End of the year

3.3 Extent
Refers to the scope of work to be included.

5
 Timing

What all areas needs to be verified in How many transactions are to be verified
detail? in selected areas?

One of the important principles in developing an overall audit plan is Knowledge of

the Client’s Business. In fact, without adequate knowledge of client’s business, a
proper audit is not possible. What should the auditor know as part of knowledge of
client’s business? Explain with examples.

Yes. Knowledge of client’s business is the primary requirement for audit planning. As
each business has its own risk. Only a complete knowledge of client’s business will
help him in performing risk assessment procedures.

In order to get the knowledge of client’s business the auditor will have to obtain the
understanding of the following factors which affect the client’s business:
1. Global factors
2. National and policy level factors
3. Industry specific factors and
4. Company specific factors.

The information is gathered in the above order only. Thus, the auditor will first get
the understanding of macroeconomic factors (or external factors) and then come to
company specific factors.

Global factors

National and policy factors

Industry specific

Company
specific

6
3.4 Global factors
• Competitive environment like demand, cost of raw material in the global market.
• An entity with components in multiple tax jurisdictions, has additional risk.

3.5 National and policy factors

• Income tax rates, Government schemes etc.

3.6 Industry specific factors

• Technological developments, such as those related to the entity’s products,
Shortage of skilled labour etc.
• Supplier and customer relationships, such as types of suppliers and customers.

3.7 Company specific factors

• Non-financial factors like production capacity, headcount, input-output ratio.
• Financial factors like Past performances, turnovers, employee cost etc.

4. Audit Planning – Process & Documentation

4.1 Is audit planning a continuous process or a discrete one?

• Planning is definitely not a discrete process, but rather a continual and iterative
process.
• It begins shortly after (or in connection with) the completion of the previous audit
and continues until the completion of the current audit engagement.
• A good audit plan is never rigid. It has the inbuilt flexibility to make changes based
on the circumstances.
• The auditor shall update and change the overall audit strategy and the audit plan
as necessary during the course of the audit.
• The change in planned nature, timing and extent of further audit procedures may
happen -
▪ When information comes to the auditor’s attention that differs significantly
from the information available when the auditor planned the audit procedures
▪ When unexpected events or changes in conditions occur,

7
 ▪ When audit evidence obtained from the results of audit procedures
necessitate a change.
• Thus, the iterative process is inevitable.
• 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:
▪ The analytical procedures to be applied as risk assessment procedures.
▪ Obtaining a general understanding of the legal and regulatory framework
applicable to the entity and how the entity is complying with that framework.
▪ The determination of materiality.
▪ The involvement of experts.
▪ The performance of other risk assessment procedures.

4.1.1 Additional Considerations

• The auditor shall undertake the following activities prior to starting an initial audit:
▪ Performing procedures required by SA 220 regarding the acceptance of the
client relationship and specific audit engagement, and
▪ Communicating with the predecessor auditor, where there has been a change
of auditors, in compliance with relevant ethical requirements

8
 Planning

Review and
Implementing
Monitor

Make
Issues crop
necessary
up
changes

4.2 Auditor strategy – Auditor

The process of establishing the overall audit strategy assists the auditor to
determine:
• The resources to deploy for specific audit areas - such as
▪ The use of appropriately experienced team members for high risk areas.
▪ The involvement of experts on complex matters etc.
• The number of resources to allocate to specific audit areas - such as
▪ The number of team members assigned to observe the inventory count.
▪ The extent of review of other auditors’ work in the case of group audits.
• Time of resources deployment -Example
▪ Whether at an interim audit stage or at key cut-off dates.
▪ How many days for internal control testing etc.
• How such resources are managed, directed, and supervised - Example
▪ 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).

9
4.3 Factors influencing Direction, Supervision, and review in the
context of audit planning.
• Direction refers to giving guidance to the audit team by the engagement
partner. The guidance is given both while framing the audit plan and also while
executing it.
• Supervision and review refer to the constant overview of the plans by the
superiors and engagement partner.
• It provides a constant feedback and support mechanism to ensure the
achievement of audit goals.
• Thus, the auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their work.
• The factors that influence the nature, timing and extent of direction,
supervision and review are:
▪ The size of the audit entity.
▪ The complexity of the audit entity.
▪ The area of the audit
▪ The assessed risks of material misstatement
▪ The capabilities and competence of the individual team members
performing the audit work.

4.4 Documentation of Audit plan.

The following should be documented:
• The overall audit strategy – It is a record of
▪ Key decisions considered necessary to properly plan the audit and
▪ Communicate significant matters to the engagement team.
• The audit plan – It 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.
• Any significant changes made during the audit engagement to the overall audit
strategy or the audit plan and the reasons for such changes – It is a record which
explains
▪ Why the significant changes were made,

10
 ▪ The overall strategy and audit plan finally adopted for the audit and
▪ The appropriate response to the significant changes occurring during the
audit.

5. Audit Programme

5.1 Audit programme, Audit plan and Audit strategy

An audit programme is a detailed plan of applying the audit procedures in the given
circumstances with instructions for the appropriate techniques to be adopted for
accomplishing the audit objectives.

It is a list of examination and verification steps to be applied and set out in such
a way that the inter-relationship of one step to another is clearly shown.

Detailed plan of With instructions for the

for accomplishing
applying the audit appropriate techniques
the audit objectives.
procedures to be adopted

Audit programme is nothing but an elaborate description of steps to execute audit

plan. Thus, it ensures the accomplishment of audit plan. And Audit plan ensures the
accomplishment of audit strategy.

The relationship between audit plan, strategy and programme can be shown as
below.

Audit programme -
Audit strategy - Audit plan - Specifies
Specifies step by step
Specifies what needs to how it needs to be
procedures for
be done done
executing audit plan.

5.2 Features of an Audit programme

The following are the features of an audit programme:

5.2.1 One Audit Programme for every audit

The following factors vary from assignment to assignment.

11
• Nature of business, their size and composition
• Work which is suitable to one business may not be suitable to others,
• Efficiency and operation of internal controls and
• The exact nature of the service to be rendered by the auditor.

Thus, one audit programme applicable to all business under all circumstances is not
practicable. We need to draw a separate audit programme for every engagement.

5.2.2 The Assistant engaged – Be encouraged to keep an open mind

The engagement team should be instructed to

• Trust the audit programme

▪ The trust can be built by involving them in the planning phase itself.
• Keep an open mind and focused view
▪ Open mind refers to being vigilant and make necessary changes to the
programme wherever required and
▪ Focused view refers to ensuring that the procedure followed helps to meet the
objective.
• Note and report significant matters coming to his notice, to his seniors or to the
engagement partners.

So long as the suggested change is not approved by the principal, every team
member should stick to the initial programme. This is only to ensure that only
genuine changes are made.

5.2.3 Periodic Review of The Audit Programme

The auditor prepares a standard audit programme keeping in mind the

• nature, size, and composition of the business
• the dependability of the internal control
• His past experience with such engagement
• and the given scope of work.
However periodic review of the audit programme should be done to assess
• If there are any inadequacies in collecting the proper evidence.
• If there is any procedure which is redundant and need not be carried on.
• If it is relevant to the audit, based on the changed facts and circumstances.
The client’s operations and internal control should also be reviewed periodically.

12
If periodic review is not done -
• any change in the business policy of the client may not be adequately known.
• the auditor may have to face legal consequences for negligence of duty.

5.3 Important points for constructing an Audit programme

The following are the key factors to be kept in mind while drawing an audit
programme:
• Stay within the scope and limitation of the assignment.
▪ Example of scope – The various laws that the entity has to comply with.
▪ Example of limitation – The strength of internal control.
• Determine the evidence reasonably available and identify the best evidence for
deriving the necessary satisfaction.
▪ For every assertion, there will be multiple evidences. The auditor should
understand what the possible evidences are available with the entity and
which one provides most corroborative evidence.
• Apply only those steps and procedures which are useful in accomplishing the
verification purpose in the specific situation.
▪ Every procedure should be drawn keeping the objective in mind. For eg. The
best way to verify cash balance is physical counting.
• Consider all possibilities of error.
▪ This does not mean that the procedures should be drawn with a doubtful mind
but instead they should be drawn with a vigilant mind.
• Co-ordinate the procedures to be applied to related items.
▪ This refers to the order in which the procedures have to be carried on. Because
evidence regarding one area may also provide suggestions regarding another
area.

5.4 Audit Programme is designed to provide Audit Evidence

Audit Evidence is defined as the information collected, examined, and used by the
auditor in arriving at the conclusions on which the auditor’s opinion is based.

Used for drawing

Information collected Examined
conclusions

13
It can be either from an internal source or from an external source.
As per the audit flowchart (discussed in chapter 1), audit techniques are applied to
obtain audit evidence.
And audit procedures are performed to examine the audit evidence. In other words,
audit procedures are aimed at ensuring the sufficiency and appropriateness of the
audit evidence. So that appropriate opinion can be formed.

Aim of Audit procedures

To ensure audit evidence is

Sufficient Appropriate

Refers to Quantity or Refers to Quality

adequacy measured by

Reliability – means
Relevance - means
whether it is a
whether it answers
corroborative or
the specific
complimentary in
assertion in question
nature

What is best evidence is a matter of expert knowledge and experience. This is the
primary task before the auditor when he draws up the audit programme.
In all cases one procedure may not bring the highest satisfaction and thus he has to
collect many evidences for the same assertion.
Each evidence is weighed to ascertain its weight to prove or disprove the assertion.

5.5 Steps in developing the audit programme

• Written Audit Programme: Once the detailed programme is written, it is easy to
communicate it to the engagement team.

14
• Audit Objective and Instruction to Assistants: The programme should contain
▪ Audit objectives for each area and
▪ A set of instructions to the assistants with sufficient details
This gives great clarity to the team as to what is expected out of them or what is
course of action in every scenario. Thus, it becomes a means to control the proper
execution of the work.
• Reliance on Internal Controls: The auditor, should have an understanding of the
accounting system and related internal controls for determining the nature,
timing, and extent of required auditing procedures.
As part of compliance procedure, the auditor has to check
▪ If controls exist
▪ If they are adequate and
▪ If they are operating effectively.
This will help him decide the nature, timing, and extent of substantive procedures.
However, the auditor may decide not to rely on internal controls when there are
other more efficient ways of obtaining sufficient appropriate audit evidence.
The auditor should also consider the coordination from the client, the availability
of assistants, and the involvement of other auditors or experts.
• Timings of Performance of Audit Procedures: The auditor normally has flexibility
in deciding when to perform audit procedures.
However, in some cases, the auditor may have no discretion as to timing, for
example, when observing the taking of inventories by client personnel or verifying
the securities and cash balances at the year-end.
• Audit Planning: The audit procedures should be aligned to the audit plan, which
in turn should aligned to audit strategy. Planning ideally commences at the
conclusion of the previous year’s audit. Planning and procedures are subject to
change as the audit progresses.

15
5.6 Advantages & Disadvantages of audit programme

• Provides clear set of instructions to audit assistants.

• Provides a total perspective of the work to be performed.
• Helps in Selection of audit team on the basis of capabilities.
Advantages

• Ensures that all areas and issues relevant to audit are considered.
• Ensures accountability of audit assistants.
• Principal can control the progress of the various audits in hand.
• Serves as a guide for audits to be carried out in the succeeding year.
• Serves as evidence in the event of any charge of negligence being
brought against the auditor.

• Work may become mechanical and particular parts of the programme

may be carried out without any understanding of the object.
Disadvantages

• Programme may become rigid and inflexible.

• Incomplete audit programmes may increase the risk of material
misstatement.
• Inefficient assistants may take shelter behind the programme
• Hard and fast audit programme may kill the initiative of efficient and
enterprising assistants.

Disadvantages may be eliminated by

• Extensive supervision of the work carried on by the assistants.

• The auditor must have a receptive attitude as regards the assistants and
• The assistants should be encouraged to observe matters objectively and bring
significant matters to the notice of supervisor/principal.

5.7 Audit Programme - Designed to provide Audit Evidence

Following are few types of audit evidences:
• Documentary examination,
• Physical examination,
• Statements and explanation of management, officials and employees,
• Statements and explanations of third parties,

16
• Arithmetical calculations by the auditor,
• State of internal controls and internal checks,
• Inter-relationship of the various accounting data,
• Subsidiary and memorandum records,
• Minutes,
• Subsequent action by the client and by others.

6. Audit Planning & Materiality

6.1 Materiality
Materiality refers to a limit to decide what is important and what is not important.
Materiality is an important consideration for an auditor to evaluate whether the
financial statements reflect a true or fair view or not.
It has the following benefits:

• It helps the auditor to focus on important areas in the audit.

• It enables the auditor to select audit procedures.
• It enables to support the audit opinion at an acceptably low degree of audit
risk.

6.2 SA 320
SA 320 on “Materiality in Planning and Performing an Audit” requires that an
auditor should consider materiality and its relationship with audit risk while
conducting an audit. There is an inverse relationship between Audit risk and
materiality levels when the level of risk is low the materiality levels are high and
vice versa.

As per SA 320

• It is the auditor’s responsibility to apply the concept of materiality in planning

and performing the audit of financial statements.
• The auditor’s determination of materiality is a matter of professional
judgement.
• Any error or misstatement is considered to be material if it is likely to affect the
decision making of users of financial statements.

17
• The auditor’s preliminary assessment of materiality related to specific account
balances and classes of transactions helps the auditor decide such questions
as what items to examine and whether to use sampling and analytical
procedures.
• Concept of materiality is used in audit
▪ At the planning stage.
▪ At the execution stage.
▪ In evaluating the effect of identified misstatements on the audit.
▪ In evaluating the effect of uncorrected misstatements on the audit.
▪ In forming an opinion on financial statements.

6.3 Materiality level and types of materiality levels

The auditor should have the understanding of the following for deciding the
materiality level.

• Understand the business.

• Understand how financial statements are prepared.
• Understand that many estimates are used for the financial statements and
these estimates may be different from actual.
• Understand what users may consider as material or important.

Types of Materiality

Specific or Statutory materiality Amount driven materiality

Nature of account is more important The amount is important but is subject to

than the amount (Substance over form) circumstances and size of the company

6.4 Areas of Statutory materiality

The following have to be verified completely irrespective of the amounts involved

• Share capital

18
• Reserves and surplus
• Statutory items
• Taxation and
• Legal expenses.

6.5 Key aspect of setting up materiality levels

6.5.1 Phases of Materiality computation

• Overall materiality - computed on the basis of size of the company, which is set
based on a benchmark which could be profit, turnover or net assets.
• Planning materiality – Computed on the basis of audit risk
• Summary of difference. (Dealt in SA 450)

6.5.2Determining materiality and performance materiality

When establishing the overall audit strategy, the auditor shall determine
materiality for the financial statements as a whole.

If, in the specific circumstances of the entity, there is one or more particular
classes of transactions, account balances or disclosures for which misstatements
of lesser amounts in aggregate exceeds the overall materiality (in such a way that
it influences the economic decisions of users), then he should determine levels for
such classes of transactions, account balances or disclosures.

Planning materiality = Adjusted overall materiality after considering the company

specific risk.

Once planning materiality is determined, the overall materiality becomes

redundant.

6.5.3 Use of Benchmarks in Determining Materiality for the Financial

Statements as a Whole

Determining materiality involves the exercise of professional judgment.

A percentage is often applied to a chosen benchmark as a starting point in

determining materiality for the financial statements as a whole.

19
Factors that may affect the identification of an appropriate benchmark include the
following:

▪ The elements of the financial statements (e.g. Assets, liabilities, equity etc.)
▪ Items on which the attention of the users of the particular entity’s financial
statements tends to be focused (e.g. Profit, revenue or net assets)
▪ The nature of the entity, where the entity is at in its life cycle,
▪ the industry and economic environment in which the entity operates
▪ The entity’s ownership structure and the way it is financed.
▪ The relative volatility of the benchmark.

In relation to the chosen benchmark, relevant financial data ordinarily include

• Prior periods’ financial results and financial positions
• The period to-date financial results and financial position
• Budgets or forecasts for the current period
• Significant changes in the circumstances of the entity
• Relevant changes of conditions in the industry or economic environment.

6.5.4 Revision in Materiality levels

Materiality levels for financial statements as a whole or materiality level or levels

for particular classes of transactions, account balances or disclosures may be
subject to change due to

• Change in circumstances that occurred during the audit,

• Availability of new information, or
• Change in the auditor’s understanding of the entity and its operations
If the materiality level is lowered, he has to determine if whether the nature,
timing and extent of the further audit procedures remain appropriate.

6.6 Factors to be documented with regard to the materiality

The audit documentation shall include the following amounts and the factors
considered in their determination:

• Materiality for the financial statements as a whole

• The materiality level or levels for particular classes of transactions, account

20
 balances or disclosures
• Performance materiality and
• Any revision as the audit progresses.
6.7 Inclusions in an Audit plan

Audit plan includes a description of

Nature, Timing and Extent of

Other planned audit

Planned risk Audit procedures at the
procedures to ensure
assessment procedures assertion level
compliance with SA’s

21