ARMGT203

Audit Planning and Evidence

Gathering Notes
 Audit Planning
• It is predetermination of course of audit activities
• According to ISA 300, auditing planning improves
efficiency and effectiveness in conducting an audit.
• As part of audit planning, an auditor must perform
procedures to understand the client (industry the client
operates, Business of the client, Accounting systems,
regulatory frameworks governing the client, internal
controls).
• During planning stage an auditor determines the audit
strategy and draws the audit plan
• An audit plan must properly document a set of activities,
risks and procedures to be performed.
 Audit Strategy
• It gives a broad overview of how the audit is going
to be carried out in response to risk assessment at
financial statements level
• This is done by determining
a) Scope – activities that are going to be carried out
b) Timing- when the audit is going to be conducted?
c) Direction- Focus areas of the audit
d) Resources- what resources are needed to carryout
the audit?
 Key Considerations in Developing Audit
Strategy (ISA300)
1. Characteristics of the engagement
• What is the financial reporting framework, what are
the industry reporting requirements if any… etc?
2. Assessed risk at financial statement level
• What is the risk of expressing an inappropriate
opinion on financial statements?
3. Reporting objectives and nature of communications
4. Any other significant matters about the engagement
 Audit Plan
• What does it involve?
• An audit plan determines how the audit will be
performed at transaction level in response to
risks of material misstatements at transaction
level
• This is achieved by determining:
1. Nature of audit procedures
• Nature of audit procedures means purpose and
types of procedures
 What is Purpose and what is types of
procedures?
Purpose of procedures- test of control
procedures or substantive procedures or
combination. This sums up to an Audit
Approach
Types of procedures- Inquiry, Inspection of
documents, Inspection of assets
reperformance etc.
 Continued Audit Plan
2. Timing of procedures
• When are real tests to assertions going to be performed?
• For example for high risk areas an auditor may choose to
perform assertion testing procedures towards year end.
3. Extent of procedures
• Refers to frequency or quantity of procedures.
• For example for transactions or balances where there is high
risk of material misstatement an auditor may choose to
perform more procedures and have large sample sizes.
 Audit Plan Continued
• An audit plan must clearly document
 The nature, timing and extent of risk
assessment procedures
 The nature, timing and extent of planned
further procedures at assertion level
 Other planned audit procedures that are
required to be carried out so that the audit
complies with ISAs.
 Audit Approach- What to Consider?

• Necessity
• Possibility
• Desirability
The End
 ARMGT203
EVIDENCE GATHERING (ISA500)
• Audit Evidence is information used by an
auditor in arriving at conclusion on which the
auditor’s opinion is expressed
• Evidence collected by an auditor for the
purposes of making a conclusion on the audit
must be sufficient and appropriate
 Sufficient Audit Evidence
• Sufficiency refers to the quantity of audit evidence
• Audit evidence gathered must be of right quantity
• Sufficiency of audit evidence is influenced by
 Assessed risk – when audit risk is high, an auditor
must collect more evidence than when audit risk
is low.
 Quality of audit evidence – when an auditor
suspects that evidence is of poor quality, he may
collect more evidence.
Appropriateness of Audit Evidence
• Appropriateness refers to quality of audit evidence
• Audit evidence collected must be of right quality
• Relevance and Reliability of audit evidence determines
its appropriateness
a) Relevance- It deals with logical connection with, or
bearing upon, the purpose of the audit procedure and
where appropriate, the assertion in consideration
- A given set of audit procedures may provide audit
evidence that is relevant to certain assertions but not to
others
 Appropriateness Continued…..
b) Reliability- Reliability of audit evidence is influenced by
a number of factors:
a) Effectiveness of internal controls
b) Independence of sources- evidence from independent
outside sources is more reliable than evidence
obtained from management
c) Evidence directly obtained vs indirectly obtained
d) Documentary evidence vs oral evidence
e) Evidence provided in original documents vs evidence
provided in photocopies of scanned documents
 Reliability of Information Produced by a
Management’s Expert
•The preparation of an entity’s financial statements
may require expertise in a field other than
accounting or auditing, such as actuarial
calculations, valuations, or engineering data.
•The entity may engage experts in these fields to
obtain the needed expertise to prepare the
financial statements.
•Failure to do so when such expertise is necessary
increases the risks of material misstatements
 The nature, timing and extent of audit procedures in
relation to information prepared by management
expert, may be affected by such matters as:

• The nature and complexity of the matter to which the

management’s expert relates.
• The risks of material misstatement in the matter.
• The availability of alternative sources of audit evidence.
• The nature, scope and objectives of the management’s
expert’s work.
• Whether the management’s expert is employed by the entity,
or is a party engaged by it to provide relevant services.
• The extent to which management can exercise control or
influence over the work of the management’s expert.
 Continued……
• Whether the management’s expert is subject
to technical performance standards or other
professional or industry requirements.
• The nature and extent of any controls within
the entity over the management’s expert’s work.
• The auditor’s knowledge and experience of the
management’s expert’s field of expertise.
• The auditor’s previous experience of the work
of that expert
 Audit Procedures
• Audit evidence is gathered by performing
1. Risk Assessment Procedures
2. Further Audit Procedures in response to
assessed risk which comprise:
a) Test of controls Procedures
b) Substantive Audit Procedures
 Assertions
• These are characteristics of transactions and balances
that confirms qualitative characteristics of financial
information
• Management put up the assertions by mere preparing
and presenting financial statements
• Auditors test the assertions in their process of
gathering audit evidence
• Assertions are broadly categorised into assertion level
assertions , account balance assertions and
presentation and disclosure assertions
 Transaction Level Assertions
Relate to income and expenses and they include
• Accuracy- full amounts of all transactions were recorded,
without error.
• Classification- all transactions have been recorded within the
correct account in the general ledger.
• Completeness- all business events to which the company was
subjected were recorded.
• Cutoff- all transactions were recorded within the correct
reporting period.
• Occurrence - recorded business transactions actually took
place.
 Account Balance Assertions
• Relate to ending balances and they include
• Completeness- all reported asset, liability, and equity
balances have been fully reported.
• Existence- all account balances exist for assets,
liabilities, and equity.
• Rights and obligations- the entity has the rights to the
assets it owns and is obligated under its reported
liabilities.
• Valuation- all asset, liability, and equity balances have
been recorded at their proper valuations.
 Presentation and Disclosure Assertions
• Relate to the presentation of information within the financial
statements, as well as the accompanying disclosures:
• Accuracy- all information disclosed is in the correct amounts, and
which reflect their proper values.
• Completeness- all transactions that should be disclosed have been
disclosed.
• Occurrence- disclosed transactions have indeed occurred.
• Rights and obligations- disclosed rights and obligations actually
relate to the reporting entity.
• Understandability- information included in the financial
statements has been appropriately presented and is clearly
understandable.
 Audit Procedures
Inspection
• Inspection involves examining records or documents,
whether internal or external, in paper form, electronic
form, or other media, or a physical examination of an asset.
• Inspection of tangible assets may provide reliable audit
evidence with respect to their existence, but not
necessarily about the entity’s rights and obligations
or the valuation of the assets.
• Inspection of individual inventory items may
accompany the observation of inventory counting.
 Continued…Audit Procedures
Observation

• Observation consists of looking at a process or procedure

being performed by others, for example, the auditor’s
observation of inventory counting by the entity’s
personnel, or of the performance of control activities.
• Observation provides audit evidence about the
performance of a process or procedure, but is limited to
the point in time at which the observation takes place, and
by the fact that the act of being observed may affect how
the process or procedure is performed.
 Continued…Audit Procedures
External Confirmation
• An external confirmation represents audit evidence
obtained by the auditor as a direct written response to
the auditor from a third party (the confirming party), in
paper form, or by electronic or other medium.
• External confirmation procedures frequently are
relevant when addressing assertions associated with
certain account balances and their elements.
• However, external confirmations need not be
restricted to account balances only
 Continued…Audit Procedures
Recalculation
• Recalculation consists of checking the mathematical
accuracy of documents or records. Recalculation may be
performed manually or electronically.

Reperformance
• Reperformance involves the auditor’s independent execution
of procedures or controls that were originally performed as
part of the entity’s internal control.
 Continued…Audit Procedures
Analytical Procedures
• Analytical procedures consist of evaluations of
financial information through analysis of
plausible relationships among both financial and
non-financial data.
• Analytical procedures also encompass techniques
such as:
Trend Analysis
Ratio Analysis
 Continued…Audit Procedures
Inquiry
• Inquiry consists of seeking information of
knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
• Inquiry is used extensively throughout the audit in
addition to other audit procedures.
• Inquiries may range from formal written inquiries to
informal oral inquiries.
• Evaluating responses to inquiries is an integral part of
the inquiry process.
 Documentation
• All evidence gathered by auditors is recorded in
working papers.
• Key contents of working papers include name of the
client, name of the audit firm, name of the individual
who performed the procedure, date of performance
of the procedure, conclusion, etc.
• A compilation of evidence in the working papers in
its totality will be considered by an auditor when
making conclusions on an audit to enable him to
express an opinion.
The End