Chapter 7 Audit Planning and documentation PDF

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Chapter 7: Audit Planning and Documentation NOTES A UD IT S T RAT EGY (asked as 5-mark qtn)

A/S sets out the scope, timing and direction of audit and guides in development of detailed audit plan. A right a/s will result in minimizing audit risk, meeting audit deadlines and efficient use of resources. ISA 300 states that auditor shall document all the factors that he considers important in determining a/s as part of a/s document. This includes: 1. Characteristics of engagement: - FR framework - any industry specific reporting requirements - effect of CAATs on audit procedures - availability of client data and key personnel= - availability of int/a’s work 2. Reporting objectives, timing and nature of communication: The auditor shall ascertain the reporting objectives of engagement in order to plan the audit and nature of communication. - Reporting timetable required by mgt including interim audit and final stage completion - organizing meetings with those charged with governance to discuss key issues arising during the audit - timing of communication with third parties - discussion with mgt regarding reports to be issued - timing of audit team meetings and review work performed 3. Significant factors affecting the audit - determining materiality for FS as whole - need to maintain questioning mind to exercise professional skepticism in gathering and evaluating audit evidence 4. Preliminary engagement and knowledge gained from other engagements: - identifying areas of high risk of m.m - obtaining evidence of mgt’s commitment to design, implement and monitor sound internal controls - significant business and industry developments such as building practices and construction quality - volume to transactions to determine if the work carried out by int/a can be relied upon - results of previous audits 5. Timing, nature and extent of resources - selecting engagement team with necessary skills and industry experience - assigning work to audit team members - setting the budget for audit

AUDIT PL AN

Audit plan converts the a/s into a much-detailed audit plan that includes nature, extent and timing of audit procedures to be performed to obtain sufficient appropriate evidence and reduce the risk of m.m to an acceptable level. The a/p includes the following: i) Description of nature, timing and extent of risk assessment procedures to be performed ii) Description of nature, timing and extent of audit procedures iii) Any other audit procedures to be performed to comply with relevant ISAs Examples of items included in A/S 

Industry-specific financial reporting requirements

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Number of locations to be visited

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Audit client's timetable for reporting to its members

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Communication between the audit team and the client

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Examples of items included in A/P 

Timetable of planned audit work

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Allocation of work to audit team members

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Audit procedures for each major account area (eg inventory, receivables, cash)

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Materiality for the financial statements as a whole and performance materiality

Any changes made during the audit engagement to the overall audit strategy or audit plan, and the reasons for such changes, shall be included in the audit documentation

INTERIM AND FINAL AUDIT Auditors usually carry out their work in more than one sitting. These are referred to as Interim audits and Final audit. Interim audits take place anytime during the period in review while the f/a takes place after ye. Purpose of carrying i/a is to carry out test of controls and some substantive procedures which will be difficult to perform after ye due to time constraints. Benefits: 1. It allows the auditors to do risk assessment and document internal controls 2. Helps identify significant matters that can be discussed with mgt to resolve or develop an effective audit approach to address them 3. Audited accounts can be submitted to SHs earlier 4. Saves time during final audit to gain remaining suff. App. Evidence.

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If auditors obtain evidence that the internal controls are operating effectively during the interim audit, the auditors need to obtain only additional evidence for significant changes to those controls between interim audit and final audit instead of obtaining evidence for the whole year, saving time and resources

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Amount of work needed to be carried out for additional evidence depends upon: o Degree to which the audit evidence was obtained regarding the operating effectiveness of the controls during interim audit o Significant changes to the controls tested during interim period including IT, change in processes and personnel o Length of remaining period o Extent to which auditors tend to reduce substantive procedures based on reliance on int/controls o Significance of assessed risk of material misstatement at assertion level o Control environment

Procedures performed during Interim audit i. Inherent risk assessment and gaining understanding of entity ii.

Recording & evaluating internal controls

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Carrying out test of controls to ensure they’re operating effectively

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Performing substantive testing on transactions/balances to ensure that the books are reliable for preparing FS

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Identifying any other issues that may impact the work to be carried out in final audit

Procedures performed during Final audit i. Substantive procedures to verify balances in SOFP & SOPL ii. Agreeing FS to accounting records iii. Performing tests to ensure conclusions made at int/audit are still valid iv. Analytical procedures relating to figures in FS v. Subsequent even review vi. Going concern review vii. Obtaining written representations viii. Obtaining third-party confirmations ix. Examining any adjustments made during the process of preparing FS

AUDIT DOCUMENTATION Audit documentation is the record of audit procedures performed, evidence obtained and conclusions the auditor reached. They’re also referred to as working papers. Why is it important to document? - Provide details of work done and planning for future references - Enable engagement partner to direct, supervise and review the work carried out by audit team - Enables the team to be accountable for its work - Encourage a methodical approach - Tangible evidence that the audit was planned and performed in accordance with ISAs and legal and regulatory - Enables to conduct quality control review and inspection (internal and external)

For recurring audits, working papers may be split between Permanent audit file and Current audit file. Permanent file contains documents of continuing importance while the Current file contains information relevant to current year audit

General rule for audit documentation: What would be necessary to provide an experienced auditor, with no previous connection to the audit, with an understanding of the work performed, the results of audit procedures, audit evidence obtained, significant matters arising during the audit and conclusions reached.

Permanent audit file - Engagement letters - Memorandums and articles - Other legal documents such as prospectuses, leases, sales agreements - New client questionnaires - Detailed history of client’s business - Board minutes of continuing relevance - Previous years’ signed accounts, analytical review and reports to mgt - Accounting system notes - Corporate by laws - Long term contracts - Lending agreements - System documentation

Current audit file - Risk assessment - Materiality - Planning info - Staffing budgets - Audit programmes - Audit conclusions - Current year FS - Accounts checklist - Mgt accounts - Reconciliation of mgt & financial accounts - Summary of unadjusted errors - Review notes - Audit planning memorandum - Time budgets and summaries - Written representations - Report to mgt - Notes of board meetings - Communication with third parties such as experts or other auditors Current year audit file also includes working papers for each audit area. These includes: - A lead schedule - Problems encountered and conclusions drawn - Audit programmes - Risk assessments - Sampling plans - Analytical review - Details of substantive tests and tests of control

If it is necessary to modify/add new documentation to audit file after it has been assembled, the auditor should document who made the changes, when, by whom were they reviewed and reasons for the changes Standardized and automated working papers Standardized working papers, for example, checklists and specimen letters, may improve the efficiency of audit work but they can be dangerous because they may lead to auditors' mechanically following an approach without using audit judgement. Advantages of standardized working papers: a) Facilitate delegation of work b) Means of quality control Automated working paper packages have been developed which can make the documentation of audit work much easier. These are automatically cross-referenced, adjusted and balanced by the computer. The advantages of automated working papers are as follows: (a) The risk of errors is reduced. (b) The working papers will be neater and easier to review. (c) The time saved will be substantial, as adjustments can easily be made to all working papers, including those summarising the key analytical information. (d) Standard forms do not have to be carried to audit locations. (e) Audit working papers can be transmitted for review via a modem or fax facilities. ACCA recommends a minimum of 7 years to retain working papers while ISA 230 requires a minimum of 5 years from the date of audit report...