Professional Documents
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Chapter
8
ISA-300
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
1 Introduction
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
Documentation
The audit plan
Additional Considerations in
Initial Audit Engagements
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.
3 Objective:
The objective of the auditor is to plan the audit so that it will be performed in an effective
manner.
Need, Purpose or Benefits of Planning
a) Identifying the important areas that require more attention
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) Allocating work to assistants in such a manner that they would be best utilised
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) Identify the need for expert and co-ordination of work of others.
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
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
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
procedure, the timing and extent are decided, it will be easy for an auditor to perform the audit
accounting to the plan
Nature and extent of planning activities will vary according to the;
a. changes in circumstances that occur during the audit engagement
b. audit evidence obtained from the results of audit procedures
c. unexpected events
d. size and complexity of the entity
e. the auditor’s previous experience with the entity
3 Requirements:
3.1 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 that the all members shall plan and then participate in
discussions.
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.
(a) The entity’s timetable for reporting, such as at interim and final stages.
(b) The organization of meetings with management and those charged with governance to
discuss the nature, extent and timing of the audit work.
(c) 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.
(d) 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 .
(e) 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.
(f) Whether there are any other expected communications with third parties, including any
statutory or contractual reporting responsibilities arising from 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 .
3.5 Direction, Supervision and Review
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 risks of the material misstatement
iv. capabilities and competence of personnel performing the audit work
c. The auditor plan the nature, timing and extent of direction and supervision of engagement
team members based on the assessed risk of material misstatement.
d. As the assessed risk of material misstatement increases, the auditor ordinarily increases
the extent and timeliness of direction and supervision of engagement team members and
performs more detailed review of their work.
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.
4 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.
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
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.
5 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 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.
In developing an overall audit plan, the following matters should receive the careful
consideration of the auditor:
(a) The terms of the auditor’s engagement
(b) The statutory responsibilities of the auditor.
(c) The nature and timing of reports or other communications with the client that are
expected under the engagement.
(d) The client’s accounting policies.
(e) Deviations from accounting policies followed by the client in the past.
(f) The effect of new accounting or auditing pronouncements – both national and
international – on the audit.
(g) The identification of significant audit areas.
(h) The setting of materiality levels for audit purposes
(i) Conditions requiring special attention, such as the possibility of material error or
fraud.
(j) The nature and extent of audit evidence to be obtained.
(k) The involvement of other auditors and experts in the audit.
6 Additional Considerations in Initial Audit Engagements
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:
PLANNING AN AUDIT OF FINANCIAL STATEMENTS