Audit Planning Concept

Audit planning is necessary for efficient and effective conduct of an audit. It

should be continuously
followed throughout the course of audit assignment.
According to SA-300 (Planning an audit of financial statement), plans should
be made to cover,
among other things:
(a) Acquiring knowledge of the client’s accounting systems, policies and
internal control procedures;
(b) Establishing the expected degree of reliance to be placed on internal
control;
(c) Determining and programming the nature, timing and extent of the audit
procedures to be performed;
and
(d) Coordinating the work to be performed.
Objectives
The main objectives of audit planning are—
1. to ensure that the auditing work is conducted efficiently and profitably,
and
2. to ensure that high standards of audit work are maintained, so that the
risk of litigation against the
practice for negligence is minimized.

Factors to be considered while planning

In the light of the expected scope of the assignment, the auditor should
prepare his audit plan after taking
into consideration the following factors:
1. The statutory requirement under the assignment
2. The terms and conditions of engagement
3. The nature of timings of reporting
4. The significant audit areas
5. The applicable legal provisions
6. Reliability of accounting and internal control system.

Advantages
As per Standard on Auditing 300 (SA-300), adequate audit planning helps to:
• ensure that appropriate attention is devoted to important areas of the
audit;
• ensure that potential problems are promptly identified;
• ensure that the work is completed expeditiously.
audit Programme
Concept and definition
Before starting an audit, a programme of work is usually drawn up. This is
known as the ‘Audit Programme’.
It is a detailed plan of work, prepared by the auditor, for carrying out an
audit. It is comprised
of a set of techniques and procedures, which the auditor plans to apply to
the given audit for forming an
opinion about the statement of account of an organization.

The preparation of audit programme involves the

following considerations:
(a) Area or extent of work
(b) Allocation of work
(c) Time duration for the completion of the work
(d) Responsibility of the persons, who have been assigned the work for its
timely completion.
Types of audit programme
An audit programme can be of the following two types:
(a) Predetermined audit programme: In this audit programme, all the
procedures of audit must be
outlined in general, even though all procedures may not be relevant in a
particular type of audit. The
purpose of this type of audit programme is to offer either procedural
guideline or to serve as a ‘check off
list. For this reason, this predetermined audit programme has been
considered as ‘Taylor made’ audit
programme.
(b) Progressive audit programme: The progressive form of audit programme
is known as ‘skeleton’
form of audit programme. It sets forth briefly general scope, character and
limitations of audit work.
This type of programme is suitable in those cases where the condition of the
business changes year after
year.

Advantages of an audit programme

1. Assurance of completion of work: It ensures that all necessary work has
been done and nothing
has been omitted.
2. Information about work progress: The auditor is in a position to know
about the progress of the
work done by his assistants.
3. Uniformity of work: A uniformity of the work can be attained, as the same
programme will be
followed at subsequent audits.
4. Simplification of work allocation: It simplifies the allocation of works to
various grades of articled
and audit assistants.
5. Guidance to the staff: It is a kind of guidance to the audit assistant for the
work he has to perform.

against charge of negligence: The auditor can defend himself in case of a

charge of negligence
on the basis of the audit programme.
7. Division of responsibility: Work of the audit can be divided amongst
different juniors who will be
held responsible for their work.
8. Final review of work: An audit programme facilitates the final review of
work before the report is
signed.
9. Helpful to the new employees: For a new employee, the audit programme
is a guide to his duty.
10. Basis of future programmes: It is a useful basis for planning the
programme for the subsequent
years.
Disadvantages of an audit programme
1. Loss of initiative: An efficient clerk loses his initiative, because he has to
follow the programme
which has been fixed in advance.
2. Want of flexibility: Even if the audit programme is well drawn up, it may
not cover everything that
might come up during the course of audit.
3. Rigidity in programme: Each business may have a separate problem of its
own and hence a rigid
programme cannot be laid down for each type of business.
4. Unsuitable for small concerns: Drawing up of an audit programme may be
unnecessary for a small
concern.
5. No scope of changes: The audit programme may be followed mechanically
year after year though
some changes might have been introduced by the client.
6. Concealment of incapacity of staff: Inefficient audit assistants may also
take shelters behind the
programme.
The aforesaid shortcomings can be overcome by obtaining up-to-date
information and encouraging
audit assistants to inform the deviations from the standard and the audit
programme and accordingly the
principal may modify the programme.

Audit working Papers

Audit working papers are the written records kept by the auditor of the
evidence accumulated during the

course of the audit, the methods and procedures followed and the
conclusions reached. They should

include all the information that the auditor considers necessary to

adequately conduct his examination

and provide support for his audit report.

In short, audit working papers are those papers, which contain essential facts
about accounts, which

are under audit.

Purpose of working papers

Working papers are actually the compilation of all evidences, which are
collected by the auditor in

course of his audit. They serve the following purposes:

1. They show the extent of adherence to accounting principles and auditing

standards.

2. They are useful as evidence against the charge of negligence.

 3. They assist the auditor in co-coordinating and organizing the work of
audit assistants.

4. They ensure the possibility of quick preparation of audit report.

5. Through the working papers, the auditor can know the distribution and
accomplishment of work.

6. Measurement of the efficiency of the assistants can be done with the help
of working papers.

7. They can be used as permanent record for future references.

8. They can act as a means to give training to the audit clerk.

9. They provide a means to control the on-going audit work.

10. Working papers assist the auditor in forming an opinion on the financial
statements.

3.5.5 audit files

The file, which is used by the auditor for preserving the written statements of
necessary matters relating to

audit, is called the audit file. It maintains different audit documents, namely
audit notes, audit programme,

audit working papers, etc. The efficient audit filling system strengthens the
integrity of the audit work.

The audit file is generally of two types:

(1) Permanent audit file: In the case of recurring audits, some working paper
files may be classified

as permanent audit files which are updated currently with information of

continuing importance to suc-

ceeding audit.

A permanent audit file normally includes—

(a) Information regarding the legal and organizational structure of the

organization. In case of com-
pany form of organization, this includes the Memorandum and Articles of
Association.

(b) Extracts or copies of important legal documents, agreements and

minutes relevant to the audit.

(c) A record of the study and evaluation of the internal controls relating to
the accounting system.

(d) Copies of audited financial statements for previous years.

(e) Analysis of significant ratios and trends.

Temporary audit file: In the case of single period audit, some working paper
files may be classi-

fied as temporary audit file, which contain information relating primarily to

the audit of a single period.

A temporary audit file usually includes the following:

(a) Draft financial statements being audited.

(b) Schedules supporting the financial statements.

(c) Extracts from relevant minutes.

(d) Audit programme and time budget.

(e) Internal control questionnaire and where applicable, flow charts and notes
on the system of

internal control.

audit manual

Audit manual may be defined as a ‘written internal auditing document.’ Thus,

it provides different

information as to detailed auditing procedures, objectives of auditing,

standard of performance, time

recording procedure, preparation of audit report, etc. The audit manual is

prepared for the general
guidance of the auditors with the objective of planning the procedure of
audit.

Advantages

1. Different information regarding polices of the concern and procedure of

audit is available in the

manual.

2. Information relating to required steps to be followed for conducting

different auditing work can be

collected from the manual.

3. Audit manual provides answers routine questions to the audit staff.

4. Efficient distribution of work among the audit staff can be made possible.

5. Audit manual provides useful information to the new entrants to the

profession.

Disadvantages

1. Different audit procedures as contained in the manual become very

mechanical.

2. Creative thinking on the part of the audit staff is discouraged.

3. If the manuals are not kept up to date, it may, instead of providing useful
guidance, misguide the

working staff.

4. It discourages the individual initiative.

5. The procedure of audit as given in the audit manual may sometime fail to
co-ordinate the activities of

audit staff during the course of audit.

audit memorandum

An audit memorandum is a statement containing all useful information

regarding the business of the

client. It indicates the method of operation, policies to different aspects of

the business as well as all the
conditions in respect of audit.

Audit memorandum is very useful in case of first time audit by the concerned
auditor in an organiza-

tion. While conducting his auditing work, the auditor requires certain
information, which may be

directly related with the method of operation of the business.

Audit memorandum usually contains the following:

1. About the business—its early history and growth.

2. Nature of ownership of the organization.

3. Location of its principal offices and factories.

4. Sources of factors of production—materials, labour, etc.

5. Details about its manufacturing operations.

6. Principal products produced by the concern.

7. Market condition and nature of competition in the market.

Important audit techniques

The technique or strategy which is followed in order to collect proper

evidence in support of the trans-

actions recorded in the books of accounts is termed as ‘Techniques of

Auconditio

Important techniques usually adopted by the auditors include the following:

1. Vouching (of expenses)

2. Verification (of fixed and current assets)

3. Reconciliation (of bank or stock statement)

4. Confirmation (of customers or bank balance)

5. Re-computation (of depreciation and other calculations)

6. Scanning (of legal formalities)

7. Scrutiny (of ledger balances)

8. Inquiry (of propriety aspect).

ProcedureS followed In courSe of audIt

Types of audit evidence

Professor R. K. Mautz in his work Fundamentals of Auditing has rightly

observed that—‘the nature of

financial statement assertions leads to the conclusion that the nature of the
following kinds of evidences

are indicative of the validity of financial statement assertions in varying

degrees depending on the cir-

cumstances of the examination.’

Thus, Professor Mautz cited nine types of audit evidences, which are as
follows:

1. Physical examination by the auditor of the thing represented in the

accounts.

2. Statement by independent third parties:

(a) Oral evidence

(b) Written evidence

3. Authoritative documents:

(a) Prepared outside the enterprise under examination

(b) Prepared inside the enterprise under examination

4. Statements by officers and employees of the concern under examination:

(a) Formal statement

(b) Informal statement.

5. Calculations performed by the auditors

6. Satisfactory internal control procedures

7. Subsequent actions by the concern under examination and by others

8. Subsidiary or detail records with no significant indications of irregularity

9. Interrelationship within the date examined.

Methods of obtaining audit evidence

Standard on Auditing-500 (SA-500) on ‘Audit Evidence’ describes the

methods of obtaining audit

evidence. According to this Standard, the auditor obtains evidence in

performing compliance and sub-

stantive procedures by one or more of the following methods:

(1) Inspection: Inspection consists of examining records, documents or

tangible assets. Inspection of

records and documents provides evidence of varying degree of reliability

depending on their nature and

source and the effectiveness of internal controls over their processing. Four
major categories of docu-

mentary evidences, which provide different degrees of reliability to the

auditor, are—

(a) Documentary evidence originating from and held by third parties,

(b) Documentary evidence originating from third parties and held by the
entity,

(c) Documentary evidence originating from the entity and held by third
parties, and

(d) Documentary evidence originating from and held by the entity.

Inspection of tangible assets is one of the methods to obtain reliable

evidence with respect to their exis-

tence, but not necessarily as to their ownership or value.

(2) Observation: Observation consists of witnessing a process or procedure

being performed by oth-

ers. For example, the auditor may observe the counting of inventories by
client personnel or the perfor-

mance of internal control procedures that leave no audit trail.

Inquiry and confirmation: Inquiry consists of seeking appropriate information

from knowledge-
able persons inside and outside the entity. Inquiries may range from formal
written inquiries addressed

to third parties to informal oral inquiries addressed to persons inside the

entity. Responses to inquiries

may provide the auditor with information, which he did not previously
possess or may provide him with

corroborative evidence.

(4) Computation: Computation consists of checking the arithmetical accuracy

of source documents

and accounting records or performing independent calculations.

Recalculation (or computation) is an evidence-gathering activity that may be

applied in all the audit

stages. However, it is particularly applicable to the substantive testing stage.

The activity of recalcula-

tion refers to the auditor performing mathematical calculations (such as

additions and extensions) and

reconciliation as well as the counting of items. Recalculation primarily

provides evidence as to the

accuracy (of valuation) of an account balance or underlying class of

transacticor

(5) Analytical review: Analytical review consists of studying significant ratios

and trends and investi-

gating unusual fluctuations and items.

Concept of audit Sampling

‘Audit sampling’ means ‘drawing conclusions about an entire set of data by

testing a representative

sample of items’. The set of data which may be a set of account balances
(e.g. debtors, creditors, fixed

assets) or transactions (e.g. all wage payments, all credit notes) is called the
population. The individual
items making up the population are called sampling units.

Reasons for applying sampling technique

The auditor, in considering a particular population, has to consider how to

obtain assurance about it.

Sampling may be the solution. A complete check of all the transactions and
balances of a business is no

longer required by an auditor. The reasons for this are as follows:

1. Economic: The cost in terms of expensive audit resources would be

prohibitive.

2. Time: The complete check would take so long that account would be
ancient history before users

see them.

3. Practical: Users of accounts do not expect or require 100 per cent

accuracy. Materiality is an

important factor in accounting as well as in auditing.

4. Psychological: A complete check would so bore the audit staff that their
work would become

ineffective and errors would be missed.

5. Fruitfulness: A complete check would not add much to the worth of figures
if, as would be

normal, few errors were discovered. The emphasis in auditing should be on

the completeness of

record and the true and fair view.

7.11 audit flow chart

A graphical presentation of different stages of a document, flow of goods or

cash, with the aid of various

symbolic marks, for the purpose of operation and control of audit

organization may be termed as an

‘audit flow chart’. In other words, it can be described as a map of inter-

related operations
Advantages

1. It acts as an effective tool to study internal control system of the

organization. Thus, the weak-

nesses in the internal controls may be revealed by the examination of the

flow chart.

. Identification and location of various responsibility areas of the organization

can be made possible

from this chart.

3. It gives a bird’s-eye view on the happenings of the business operations

and areas, where more con-

trol need be emphasized.

4. It can depict a situation relating to accounting and auditing system in a

concise and simple way.

5. It is an important tool through which the training of audit staffs can be

facilitated.

6. This chart can be introduced by the audit managers as a control device for
their audit operation.

audit tests

Audit tests are of two types—compliance and substantive tests.

(a) Compliance test: A compliance test is a test, which seeks to provide audit
evidence that internal

control procedures are being applied as prescribed.

Example:

(i) Checking for authorization on a credit note. This should confirm that all
credit notes are

suitably authorized before being issued.

(ii) Checking for the casting stamp on a purchase invoice. This should
confirm that all invoices

are cast before being paid.

(b) Substantive test: A substantive test is a test of a transaction or balance
which seeks to provide

audit evidence as to the completeness, accuracy and validity of the

information contained in the account-

ing records or financial statements.

Example:

(i) Circularization of debtors to confirm the accuracy of the balance on the

sales ledger.

(ii) Matching a purchase invoice with the original order and goods received
note to confirm that

the purchase is bonafiaud

delegatIon, SuPervISIon and revIew of audIt work

3.9.1 delegation

An auditor only delegates work/authority to persons with the appropriate

experience and competence.

This applies to all levels of organizations within the audit firm. Thus, a senior
staff member to whom

work/authority has been delegated only further delegates work/authority to

other staff members who

have appropriate experience and competence.

An auditor/staff member delegating work/authority ensures that the person

to whom the work/author-

ity has been delegated completely understands the nature of the work that
the person is required to

perform as well as the limits of any delegated authority.

3.9.2 Supervision

Auditors and audit staff members supervise the work delegated by them to
others so as to minimize the

risk of a lessoning of the standard of care. The more complex the nature of
the work delegated and less
experienced and competent the staff member to whom the work has been
delegated, then the greater the

degree of supervision.

Auditors supervise work while the delegatee is performing it. This contrasts
with the review of work

which auditors carry out after the delegatee has performed the work.

The purpose of supervision is to provide the supervisor with a degree of

assurance that the work of

the delegatee is being performed in accordance with the instructions given

and with the appropriate

standard of care.

3.9.3 review

Work performed by the auditor and his audit staff is reviewed. Work
performed by the auditor (the

engagement partner) is reviewed by a person not personally involved with

the client (the review partner

and/or personnel from quality control). The person that delegated the work
to those staff members usu-

ally reviews work performed by the auditor’s staff member.

ProfeSSIonal SkePtIcISm

Professional skepticism in auditing implies an attitude that includes a

questioning mind and a critical

assessment of audit evidence without being obsessively suspicious or

skeptical. Such an attitude

results, for example, in the auditor asking more questions than usual and
more probing questions,

critically analysing these answers and then studiously comparing this

analysis with other evidence

gathered.

Auditors adopt an attitude of professional skepticism when they evaluate

audit evidence. When the
auditor adopts such an attitude, the auditor does not accept evidences
gathered at its face value; rather,

the auditor evaluates the evidence bearing in mind the possibility that, for
example:

• The evidence may be misleading,

• The evidence may be incomplete or

• The person providing the evidence may be either incompetent or

motivated to provide evidence that

is misleading or incomplete.

The lower the acceptable level of audit risk or the greater the risk of material
misstatement, the greater

the application of an attitude of professional skepticism.

Auditors usually consider evidence gathered through inquiry to provide

evidence that is less than

reliable as the competence and integrity of the person responding may not
be capable of being ascer-

tained with any degree of certainty and/or the inquiree may be motivated to
be less than completely

honest. This is a prime example of where auditors adopt an attitude of

professional skepticism.