“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to”, said the Cat.
“I don’t much care where”, said Alice.
“Then it doesn’t matter which way you walk”, said the Cat.
“…so long as I get somewhere”, Alice added as an explanation.
“Oh, you’re sure to do that”, said the Cat, “if you only walk long enough.”
L. Carroll “Alice’s Adventures in Wonderland”
As is clear from the epigraph, a foreseeable result in any nonlinear process is impossible without planning.
Audit planning is one of mandatory stages, including the determination of the audit strategy and technique, scope of audit, preparation of the general plan, development of the program and certain audit procedures. The higher the quality of the audit planning, the more efficient and foreseeable result can be achieved.
This, however, does not mean that audit planning is something static. On the contrary, planning is a continuous process carried out during the entire audit — from customer acceptance/retention to issuing the report and evaluating the events after reporting date.
First of all, let’s define the global objective of an audit. By virtue of cl. 3 of the International Standard on Auditing 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing”:
ISA 300 “Planning an Audit of Financial Statements” is intended to put these processes in order. It came into effect with respect to the audit of financial statements for the periods beginning on or after December 15, 2009. ISA 300 applies to reaudit engagements and those performed for the first time. The latter are also a subject of a separate standard — ISA 510 “Initial Audit Engagements — Opening Balances”, which provides for additional aspects beyond those specified in ISA 300.
ISA 300 sets forth the auditor’s responsibility to plan an audit of financial statements. ISA 300 contains information about the role, terms of planning and describes how planning helps the auditor.
So, audit planning suggests development of the overall audit strategy as per the engagement and preparation of the audit plan.
Proper planning is useful in conducting the audit of financial statements due to the following reasons:
Audit planning may be divided into the following blocks:
It is a mistake to think that planning is a separate stage of the audit. Planning process is rather of continuous and cyclic nature and in many cases it starts immediately upon (or in connection with) completion of the previous audit engagement and continues up to the start of the current audit engagement. Planning suggests the analysis of the terms of certain works and audit procedures that must be completed before the commencement of the further audit procedures.
For instance, planning includes the need to analyse the following issues before identification and evaluation of risk of material misstatement by the auditor:
Now, let’s discuss each of the above-mentioned stages.
Preliminary work is performed before execution of the audit agreement and includes the following:
When putting this into practice, a client acceptance document is issued, which may provide for issues on the following aspects:
In case of engagement implemented for the first time, one shall also follow ISA 510, the objective of which is to obtain the sufficient audit evidence:
(a) availability or lack of misstatements in opening balances that materially affect the financial statements for the current period;
(b) the relevant principles of accounting policy governing the opening balances are consistently applied in the financial statements for the current period, or changes made thereto are duly accounted for, presented and disclosed pursuant to the applicable concept of the financial statements preparation.
In case the accounts have been audited as of the beginning of the period, the previous audit report must be reviewed (cl. 5 of ISA 510).
As regards the opening balances, the auditor shall obtain the sufficient proper audit evidence of availability (or lack) of misstatements materially affecting the financial statements for the current period by:
(a) establishing whether the closing balances in the previous period have been correctly transferred to the current period or, where necessary, recalculated;
(b) assessing whether the opening balances reflect the corresponding accounting policy principles,
(c) completing one or more of the below procedures:
(i) analysis of working documentation of the previous auditor to obtain evidence on opening balances, if the financial statements for the previous year were audited;
(ii) evaluation of whether the audit procedures performed in the current period provide evidence related to the opening balances;
(iii) performance of specific audit procedures designed to obtain evidence on the opening balances.
Just a few words about the analysis of working documentation of the previous auditor.
In usual circumstances, to start discussions with the current or previous auditor the proposed auditor shall obtain the client’s permission, preferably in writing (6.4.P1 of the Code of Professional Ethics for Auditors).
In case of audit of the accounting (financial) statements, the auditor shall contact the current or previous auditor to obtain available information about all facts or other information, which, in the opinion of the current or previous auditor, the proposed auditor must be aware before making the decision to accept the engagement (6.7.Т. of the Code of Professional Ethics for Auditors).
The extent to which the auditor will manage to obtain the sufficient proper audit evidence as a result of analysis of such documentation will depend on professional competence and independence of the previous auditor.
When developing the overall audit strategy, the auditor shall:
When developing the overall strategy and plan of the audit conducted for the first time, the auditor may consider some additional issues including:
Pursuant to cl. 9 of ISA 300 “Planning an Audit of Financial Statements”, the auditor shall develop an audit plan including the description of:
The audit plan contains the more detailed description, than the overall strategy as it specifies the nature, terms and scope of the audit procedures. Planning is carried out during the entire audit so far as the plan is developed. For instance, the risk evaluation audit procedures are planned at the audit initial stage. However, planning the nature, terms and scope of any subsequent audit procedures depends on the outcome of such risk evaluation procedures. Moreover, the auditor may start the subsequent audit procedures for evaluation of certain types of transactions, account balances and disclosure of information before planning all other subsequent audit procedures.
This topic is worth separate coverage. In this article, it should just be noted that during the external control of activities an irremediable breach occurs, if an individual auditor or audit organization does not obtain the understanding of the component of control procedures in the course of risk evaluation procedures:
(a) through identification of the following means of control designed to mitigate the risk of material misstatement at prerequisite level within a component of control procedures:
(i) means of control mitigating the risk defined as substantial;
(ii) means of control over the accounting records, including the non-standard accounting records used to reflect irregular, unusual transactions or adjustments;
(iii) means of control, the operating efficiency of which the auditor intends to test when determining the nature, terms and scope of substantive testing, including the means of control mitigating the risks, for which the procedures of substantive testing individually do not provide for sufficient proper audit evidence;
(iv) other means of control, which the auditor considers proper to achieve the objectives mentioned in clause 13 of ISA 315(p) with respect to the risks at prerequisite level based on his/her professional judgement;
(b) based on the means of control identified according to clause (a) above, through identification of IT applications and other aspects of IT environment of the organization, which are exposed to risks arising in connection with the use of information technologies;
(c) through identification with respect to such IT applications and other aspects of IT environment, identified according to clause (b) above:
(i) of corresponding risks arising in connection with the use of information technologies;
(ii) of common IT means of control of the organization, which mitigate these risks;
(d) with respect to each mean of control identified when fulfilling clause (a) or (c)(ii) above:
(i) evaluation of whether the mean of control for efficient mitigation of the risk of material misstatement has been developed at prerequisite level or in fact to support the functioning of other means of control;
(ii) establishment of the fact of the mean of control introduction by completing the procedures in addition to submission of requests to the organization employees.
The audit objective is to plan the audit so that it will be performed in an effective manner.
Participation of the engagement manager and other key members of the audit team in audit planning suggests the use of their experience and skills in getting the gist of an issue, which leads to increased effectiveness and efficiency of the planning process. However, no matter how experienced the employees are, in many cases it is impossible to make provision for everything and at once.
Planning is carried out during the entire audit. Development of the overall audit strategy and detailed audit plan are not necessarily separate or consecutive steps. On the contrary, they are closely related as changes in one of these documents may result in the need to introduce corresponding changes in the other one.
Documenting material changes in the overall audit strategy and audit plan as well as resulting changes in the planned nature, terms and scope of audit procedures explain the reasons why these material changes have been introduced and the overall audit strategy and audit plan have been accepted in their final version for the conducted audit. Documents also reflect the corresponding reaction to material changes taking place during the conducted audit (A20 of ISA 300 “Planning an Audit of Financial Statements”).
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