Chapter 2 - Audit Strategy, Audit Planning and Audit

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Chapter 2 - Audit Strategy, Audit Planning and Audit Programme

SA 300 “Planning an Audit of Financial Statements”

Benefits of Planning in the Audit of Financial Statements

Planning an audit involves
● establishing the overall audit strategy for the engagement and
● developing an audit plan.

Planning Process- Elements of Planning

The elements of planning can be categorized as under: -
I. Preliminary engagement activities
II. Planning activities

Preliminary Activities
The auditor shall undertake the following activities at the beginning of the current audit engagement
a. Performing procedures required by SA 220 , “Quality Control for an Audit of Financial Statements”
regarding the continuance of the client relationship and the specific audit engagement;
b. Evaluating compliance with ethical requirements, including independence, as required by SA 220 ;
and
c. Establishing an understanding of the terms of the engagement, as required by SA 210.
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Planning activities
Planning activities involve: -
a. Establishing the overall audit strategy
b. Developing an audit plan
c. The auditor shall update and change the overall audit strategy and the audit plan as necessary
during the course of the audit.
d. The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and the review of their work.

Audit Strategy
What is Audit Strategy
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the
more
detailed audit plan.

How would the audit strategy be helpful to the auditor?

• Resources Deployment: Identifying the resources to allocate to specific audit areas, such as
using experienced team members for high-risk areas or involving experts for complex matters.
• Resources Allocation: Deciding how much resources to assign to different audit tasks, like the
number of team members for inventory counts at significant locations or the extent of review required
for other auditors’ work in group audits.
• Timing of Deployment: Establishing when to deploy resources, such as during an interim audit or
at key cut-off dates.
• Management and Supervision : Organizing how resources are managed, directed, and
supervised, including planning team briefings, reviews by the engagement partner and manager, and
debriefing meetings.

Establishment of Overall Audit Strategy

In establishing the overall audit strategy, the auditor shall (POINTS TO BE KEPT IN MIND WHILE DEVELOPING
OVERALL AUDIT STRATEGY)
CS - characteristics and scope
RO - reporting objectives
ETE - Factors that are significant in directing the engagement team's elorts
PEAOE - results of preliminary engagement activities and knowledge gained on other engagements
NET - R- nature, timing and extent of resources
a. Identify the characteristics of the engagement that define its scope;
b. Ascertain the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required.

c. Consider the factors that, in the auditor’s professional judgement, are significant in
directing the engagement team’s efforts;
d. Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the entity is
relevant; and
e. Ascertain the nature, timing and extent of resources necessary to perform the engagement.

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The factors the auditor must consider while establishing the audit strategy are crucial for shaping the
approach to an engagement. Here’s a concise summary, highlighting key points:

1. Identify the characteristics of the engagement that define its scope:

• Scope of the engagement is vital for forming an effective audit strategy.

• Characteristics include:
• Applicable financial reporting framework.
• Business segments to be audited, including any need for specialized knowledge.
• Industry-specific reporting requirements by regulators.
• Audit evidence from previous audits.

2. Ascertain the reporting objectives of the engagement:

• Helps plan timing of audit procedures and the nature of communications required.
• Factors include:
• Entity’s reporting timetable.
• Organizing meetings with management to discuss audit scope and timing.
• Discussions on expected reports to be issued, including the auditor’s report.
• Expected communications on the audit’s progress.
• Engagement team communication plan, including review of work performed.

3. Consider factors significant in directing the engagement team’s

efforts:

• Directing efforts toward significant matters ensures an efficient audit.

• Examples include:
• Volume of transactions influencing reliance on internal controls.
• Industry developments, such as new regulations or reporting requirements.
• Changes in financial reporting frameworks (e.g., new accounting standards).
• Legal environment changes affecting the entity.

4. Consider results of preliminary engagement activities and knowledge

gained from past engagements:

• Reviewing preliminary activities and previous engagements can refine audit strategy.
• Considerations include:
• Results from previous audits, particularly regarding the effectiveness of internal control and
any deficiencies.

5. Ascertain the nature, timing and extent of resources necessary to perform the
engagement.

• Select the engagement team: Assign experienced members to areas with higher ROMM
• Allocate resources: Focus more time and audit hours on high-risk areas.
• Plan timing: Deploy resources at critical stages, like interim audits or key cut-off dates.

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Audit Plan
Description of Audit Plan
As per SA 300 “Planning an Audit of Financial Statement” the audit plan shall be include a description of
❖ The nature, timing and extent of planned risk assessment procedures, as determined under SA 315.
❖ The nature , timing and extent of planned further audit procedures at the assertion level, as
determined under SA 330.
❖ Other planned audit procedures that are required to be carried out so that the engagement
complies with SAs. (Obtaining written representations from management)

● Planning of the auditor’s risk assessment procedures occurs early in the audit process.
● However, planning the nature, timing and extent of specific further audit procedures
depends on the outcome of those risk assessment procedures.

Relationship between Audit Strategy and Audit Plan

Changes to planning decisions During the Audit

● The auditor shall update and change the overall audit strategy and the audit plan as necessary
during the course of the audit.
○ As a result of unexpected events,
○ changes in conditions, or
○ the audit evidence obtained from the results of audit procedures,
● the auditor may need to modify the audit plan & planned nature, timing and extent of
further audit procedures, based on the revised consideration of assessed risks.
● This may be the case when information comes to the auditor’s attention that differs significantly
from the information available when the auditor planned the audit procedures.
● For example, audit evidence obtained through the performance of substantive procedures may
contradict the audit evidence obtained through tests of controls.

Direction, Supervision and Review

The auditor shall
● plan the nature, timing and extent of
● direction and supervision of engagement team members and
● the review of their work.
The nature, timing and extent of the direction and supervision of engagement team members and review
of their work vary depending on many factors, including:
● The size and complexity of the entity.
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● The area of the audit.

● The assessed risks of material misstatement
● The capabilities and competence of the individual team members performing the audit work.

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Documentation of Audit plan

Planning is a Continuous Process

Planning is not a discrete phase of an audit, but rather a continual and iterative process
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after (or in connection with) the completion of the previous audit and continues until the
completion of the current audit engagement.
Planning However includes consideration of the timing of certain activities and audit procedures that need to
be completed prior to the performance of further audit procedures. For example, planning includes the need
to consider, prior to the auditor’s identification and assessment of the risks of material misstatement, such
matters as
1. The analytical procedures to be applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory framework applicable to the entity
and how the entity is complying with that framework.

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3. The determination of materiality.

4. The Involvement of experts.
5. The performance of other risk assessment procedures. Audit program

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Audit Programme

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Meaning
An audit programme consists of
- a series of verification procedures
- to be applied to the financial statements and accounts of a given company
- for the purpose of obtaining sufficient evidence
- to enable the auditor to express an informed opinion on such statements.

One Audit Programme – Not Practicable For All Businesses

● All businesses are not same
● They vary in nature, size, capital raised and on other parameters also
● Some might have a formal and working internal control, while some may not have internal control at
all.
● Applicability of di9erent laws and regulation also differentiate the scope of services to be given by
auditor
● Because of the reasons for variations mentioned above it is not possible to develop one audit
program applicable to all businesses under all circumstances.
● Every audit programme must have details of the nature of work to be done as per the nature, size
and other parameters of the business. .This will help in saving time and special matters and
situations will not be overlooked.

Framing an Audit Programme

● To start with, an auditor having regard to the nature, size and composition of the business and the
dependability of the internal control and the given scope of work, should frame a programme
which should aim at providing for a minimum essential work which may be termed as a standard

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programme.
● As experience is gained by actually carrying out the work, the programme may be altered to take
care of situations which were left out originally, but are found relevant for the particular concern.
● Similarly, if any work originally provided for proves beyond doubt to be unnecessary or irrelevant, it
may be dropped.
● The assistant engaged in the job should be encouraged to keep an open mind beyond the
programme

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● given to him.
● He should be instructed to note and report significant matters coming to his notice, to his seniors
or to the partners or proprietor of the firm engaged for doing the audit.

Periodic Review of The Audit Programme

Audit programme must be periodically reviewed, to check its effectiveness in the light of changing
circumstances.

Objective of review - Cover new aspects and remove not required one, keep AP up-to-date.
● The ultimate objective of periodic review is to cover the new aspects of the client’s business and
remove the
not required or non-value adding part so as to keep the audit programme up-to-date.

If not reviewed- Obsolete | Negligence on the part of the auditor | May face legal consequences
● If it is not reviewed, it may become obsolete and as a result entire audit may become ine7ective
also this will be considered as negligence on the part of the auditor and they may have to face
legal and regulatory consequences for the same

Constructing an Audit Programme

● While developing an audit programme, the auditor may conclude that relying on certain internal
controls is an effective and efficient way to conduct his audit.
● However, the auditor may decide not to rely on internal controls when there are other more efficient
ways of obtaining sufficient appropriate audit evidence.

The auditor should also consider

● the timing of the procedures,
● the coordination of any assistance expected from the client,
● the availability of assistants, and the involvement of other auditors or experts.

Further, the auditor normally has flexibility in deciding when to perform audit

procedures. However, in some cases, the auditor may have no discretion as to

timing,
- for example, when observing the taking of inventories by client personnel or verifying the
securities and cash balances at the year-end.
For the purpose of programme construction, the following points should be kept in mind:
1. Stay within the scope and limitation of the assignment.
2. Prepare a written audit programme setting forth the procedures that are needed to implement the
audit plan.
3. Determine the evidence reasonably available and identify the best evidence for deriving
the necessary satisfaction.
4. Apply only those steps and procedures which are useful in accomplishing the verification purpose
in the specific situation.
5. Include the audit objectives for each area and sufficient details which serve as a set of
instructions for the assistants involved in audit and help in controlling the proper execution of the

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work.
6. Consider all possibilities of error.
7. Co-ordinate the procedures to be applied to related items.

Advantages of Audit Programme

The advantages of an audit programme are:
a. It provides the assistant carrying out the audit with a total and clear set of instructions of the work
generally to be done.
b. It is essential, particularly for major audits, to provide a total perspective of the work to be performed.

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c. Selection of assistants for the jobs on the basis of capability becomes easier when the work is
rationally planned, defined and segregated.
d. Auditing without a written programme risks overlooking records; a structured programme
reduces this danger.
e. The assistants, by putting their signature on programme, accept the responsibility for the work
carried out by them individually and, if necessary, the work done may be traced back to the
assistant.
f. The principal can control the progress of the various audits in hand by examination of audit
programmes initiated by the assistants deputed to the jobs for completed work.
g. It serves as a guide for audits to be carried out in the succeeding year.
h. A properly drawn up audit programme serves as evidence in the event of any charge of
negligence being brought against the auditor. It may be of considerable value in establishing that
he exercised reasonable skill and care that was expected of a professional auditor.

Disadvantage
a. The work may become mechanical and particular parts of the programme may be carried out
without any
understanding of the object of such parts in the whole audit scheme.
b. The programme often tends to become rigid and inflexible following set grooves; the business may
change in its operation of conduct, but the old programme may still be carried on. Changes in staff
or internal control may render precaution necessary at points different from those originally decided
upon.
c. Inefficient assistants may take shelter behind the programme i.e. defend deficiencies in their
work on the ground that no instruction in the matter is contained therein.
d. A hard and fast audit programme may kill the initiative of efficient and enterprising assistants.

Quality Control For Audit Work Delegation and Supervision of Audit Work
An audit is a complex task involving number of people at different levels.
Auditor will have to depend on
● Assistants
● Technical Experts
● Other auditors
In the case of assistants, the auditor has to direct, supervise and review the work delegated to them.
In the case of other auditors and experts, the auditor has to obtain reasonable assurance that the work
performed by them is adequate for the purpose of the auditor.
The objective of the auditor is to implement quality control procedures at the engagement level that provides
the auditor with reasonable assurance that
● The audit complies with the professional standards and the regulatory and legal requirements
● The Auditor’s report is issued as appropriate in the circumstance.
The responsibility to express an opinion on financial statements and it’s accountability will always be of
the auditor

Variety of fields for Audit Evidence (While studying cover it with Audit Evidence Chapter)
An auditor picks up evidence from a variety of fields and it is generally of the following broad types:
a. Documentary examination,
b. Physical examination,
c. Statements and explanation of management, officials and employees,
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d. Statements and explanations of third parties,

e. Arithmetical calculations by the auditor,
f. State of internal controls and internal checks,
g. Inter-relationship of the various accounting data,
h. Subsidiary and memorandum records,
i. Minutes,
j. Subsequent action by the client and by others.