Chapter 7 • Audit planning

Audit planning and • Audit documentation

documentation

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 Syllabus learning outcomes 1

• Identify and explain the need for, and importance of, planning an
audit.
• Identify and describe the contents of the overall audit strategy and
audit plan.
• Explain and describe the relationship between the overall audit
strategy and the audit plan.
• Explain the difference between interim and final audit.
• Describe the purpose of an interim audit, and the procedures likely to
be adopted at this stage in the audit.

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 Syllabus learning outcomes 2

• Describe the impact of the work performed during the interim audit on
the final audit.
• Explain the need for, and the importance of, audit documentation.
• Describe the form and contents of working papers and supporting
documentation.
• Explain the procedures to ensure safe custody and retention of
working papers.

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 Overview

Audit planning and

documentation

The need for planning Audit documentation

The audit strategy and

Interim and final audit
the audit plan

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 Chronology of an audit

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 Audit planning 1

• ISA 300 Planning an audit of financial statements

• Why does an audit need to be planned?

So that the audit can be carried out in an effective manner.

• Let's look at the objectives of audit planning…

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 Audit planning 2

Audit planning:
• Helps the auditor devote appropriate attention to important areas of
the audit
• Helps the auditor identify and resolve potential problems on a timely
basis
• Helps the auditor properly organise and manage the audit so it is
performed in an effective manner
• Assists in the selection of appropriate team members and assignment
of work to them
• Facilitates the direction, supervision and review of work
• Assists in co-ordination of work done by auditors of components and
experts

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 Tackling the exam

• You need to learn and understand the reasons why auditors have
to plan the audit because you could be examined on this in the
exam.
• This could come up in either a multiple choice question linked to a
mini-scenario in Section A or as a requirement in a Section B
question (either in a 20-mark or a 30-mark question).

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 Audit planning 3

There are two key planning documents that need to be prepared at the
planning stage of the audit:

• Audit strategy

• Audit plan

We will look at each of these in more detail.

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 Audit planning 4

— General strategy
— Guidance for development of
Audit strategy audit plan

— Instructions to team
— Sets out the audit procedures
Audit plan

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 Audit planning 5

Audit strategy
High level document which sets the scope, timing and direction of the
audit and guides the development of the audit plan.
The overall audit strategy will:
• Identify the characteristics of the engagement that define its scope
• Ascertain the reporting objectives, to determine the timing of the audit
and nature of communications required
• Consider significant factors in directing the team's efforts
• Consider results of preliminary engagement activities and knowledge
gained on other engagements
• Ascertain nature, timing and extent of resources necessary
Let's look at each of these elements in turn.

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 Audit planning 6

Characteristics of the engagement

• Financial reporting framework
• Industry-specific reporting requirements
• Expected audit coverage
• Nature of business segments
• Availability of internal audit work
• Use of service organisations
• Effect of IT on audit procedures
• Availability of client personnel and data

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 Audit planning 7

Reporting objectives, timing of audit and nature of communications

• Entity's timetable for reporting
• Organisation of meetings with management and those charged with
governance
• Discussions with management and those charged with governance
• Expected communications with third parties

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 Audit planning 8

Significant factors, preliminary engagement activities and

knowledge gained on other engagements
• Determination of materiality
• Areas identified as having higher risk of material misstatement
• Results of previous audits
• Need to maintain professional scepticism
• Evidence of management's commitment to design, implementation
and maintenance of sound internal control

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 Audit planning 9

Significant factors, preliminary engagement activities and

knowledge gained on other engagements (continued)
• Volume of transactions
• Significant business developments
• Significant industry developments
• Significant changes in financial reporting framework
• Other significant recent developments

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 Audit planning 10

Nature, timing and extent of resources

• Selection of engagement team
• Assignment of work to team members
• Engagement budgeting

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 Audit planning 11

Consideration of disclosures
Further application guidance was added to ISA 300 in 2015, to highlight
the need for auditors to consider financial statement disclosures at the
planning stage. Considering disclosures early in the audit helps auditors
to identify:
• Changes in the entity’s environment, financial condition or activities
• Changes in the applicable financial reporting framework
• The need to involve an auditor’s expert (eg for disclosures related to
pension)
• The need to discuss matters with those charged with management
(eg changes in the entity’s environment or issues regarding the quality
of the disclosures, as covered under ISA 260)

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 Audit planning 12

Audit plan
The audit plan converts the audit strategy into a more detailed plan.
The audit plan includes the nature, timing and extent of audit procedures
to be performance by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably
low level.

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 Audit planning 13

What should the audit plan include?

• A description of the nature, timing and extent of planned risk
assessment procedures
• A description of the nature, timing and extent of planned further audit
procedures at the assertion level
• Other planned audit procedures required to be carried out for the
engagement to comply with ISAs

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 Audit planning 14

Examples of items included in the audit plan could include

• Materiality and performance materiality figures
• Audit procedures for each account area (eg non-current assets,
inventory, receivables etc)
• Timetable of planned audit work
• Allocation of audit work to specific team members

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 Audit planning 15

Documenting changes
A very important point to note is that the audit strategy and audit plan
must be updated and changed as necessary during the course of the
audit.
For example, materiality for the financial statements as a whole might
need to be amended as a result of new information. Therefore, any
changes to materiality must be documented accordingly.
As well as documenting the changes themselves, the reasons for any
changes must also be documented.

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 Interim vs final audit 1

• The external audit is rarely carried out during one visit. It is very
common to carry out an interim audit followed by a final audit.
• The interim audit usually occurs part way during the period being
audited.
• The purpose of the interim audit is to carry out procedures that would
be difficult to perform at the year end because of time constraints.
• The final audit usually happens after the period end.
• So what happens during each of these visits?

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 Interim vs final audit 2

Interim audit
• Risk assessment
• Documentation of internal control
• Tests of controls
• Some substantive audit procedures
• Identify issues that may have an impact on the amount and type of
work which is required at the final audit

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 Interim vs final audit 3

Final audit
• Substantive procedures
• Third party confirmations
• Analytical procedures
• Subsequent events review
• Going concern review
• Obtaining written representations
• Agreeing the financial statements to the accounting records
Final audit concludes with the auditor issuing a report which contains the
auditor's opinion expressed on the financial statements.

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 Interim vs final audit 4

Planning visit
1 January 31 December

Interim audit Final audit

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 Audit documentation 1

• Audit documentation is the record of audit procedures performed,

relevant audit evidence obtained and conclusions reached.
• Audit documentation may also be referred to as working papers or
workpapers.
• ISA 230 Audit documentation states that audit documentation must be
prepared on a timely basis.

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 Audit documentation 2

Objectives of audit documentation

• It provides evidence of the auditor's basis for a conclusion about the
achievement of the overall objective.
• It provides evidence that the audit was planned and performed in
accordance with ISAs and other legal and regulatory requirements.
• It assists the engagement team to plan and perform the audit.
• It assists team members responsible for supervision to direct,
supervise and review audit work.
• It enables the team to be accountable for its work.
• It allows a record of matters of continuing significance to be retained.
• It enables the conduct of quality control reviews and inspections (both
internal and external).

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 Audit documentation 3

How much needs to be documented?

Working papers need to be sufficiently complete and detailed to provide
an overall understanding of the audit.
ISA 230 provides the following general rule for the extent of working
papers required:
What would be necessary to provide an experienced auditor, with no
previous connection with 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.

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 Audit documentation 4

Factors affecting the form and content of working papers:

• Size and complexity of the audit
• Nature of audit procedures to be performed
• Identified risk of material misstatement
• Significance of audit evidence obtained
• Nature and extent of exceptions identified
• Need to document a conclusion
• Audit methodology and tools used

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 Audit documentation 5

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 Audit documentation 6

• For recurring audits, working papers may be split between

permanent audit files and current audit files.
• Permanent audit files contain information of continuing importance
to the audit.
• Current audit files contain information of relevance to the current
year's audit.

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 Audit documentation 7

Permanent audit files

• Engagement letters
• New client questionnaire
• The memorandum and articles
• Other legal documents such as prospectuses, leases, sales
agreement
• Details of the history of the client's business
• Board minutes of continuing relevance
• Previous years' signed accounts, analytical review and reports to
management
• Accounting systems notes, previous years' control questionnaires

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 Audit documentation 8

Current audit files

• Financial statements
• Accounts checklists
• Management accounts details
• Reconciliations of management and financial accounts
• A summary of unadjusted errors
• Report to partner including details of significant events and errors
• Review notes
• Audit planning memorandum
• Time budgets and summaries
• Representation letter

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 Audit documentation 9

Current audit files (continued)

• Report to management
• Notes of board minutes
• Communications with third parties such as experts or other auditors

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 Audit documentation 10

Current audit files must also contain working papers covering each audit
area (eg inventory, cash, revenue etc) and these should include:
• A lead schedule including details of the figures to be included in the
financial statements
• Problems encountered and conclusions drawn
• Audit programmes
• Risk assessments
• Sampling plans
• Analytical review
• Details of substantive tests and tests of control

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 Audit documentation 11

Standardised audit working papers

Many audit firms use standardised working papers such as checklists
and specimen letters.

Advantages Disadvantages
Increased efficiency Mechanical approach
Less risk of overlooking key Audit judgement may be
procedures compromised

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 Audit documentation 12

Most firms now use automated working paper packages which make
documentation of audit work easier.
Advantages
• The risk of errors is reduced.
• The working papers will be neater and easier to review.
• The time saved will be substantial as adjustments can be made easily
to all working papers, including those summarising the key analytical
information.
• Standard forms do not have to be carried to audit locations.
• Audit working papers can be transmitted for review easily.

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 Audit documentation 13

Safe custody and retention of working papers

• Audit working papers belong to the audit firm, not the client.
• But how long should they be kept for?
• This is a matter of judgement but the ACCA recommends a minimum
of seven years.
• Remember the ethical principle of confidentiality?
• This applies to audit working papers. They shouldn't be disclosed to
the client if disclosure would undermine the independence or validity
of the audit process.
• Information should not be disclosed to third parties without the
permission of the client.

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