AUDIT PLANNING

Introduction
In conducting an audit of financial statements, the overall objectives of the auditor, per ISA 200 are to:
i. obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error. This allows the auditor to express an opinion
on whether the financial statements have been prepared in accordance with the applicable financial
reporting framework; and
ii. report on the financial statements, and communicate as required by the ISAs, in accordance with
the auditor’s findings.
ISA 200 states that the key requirements for the auditor to obtain reasonable assurance and to express an
opinion are:
i. compliance with all ISAs relevant to the audit;
ii. compliance with relevant ethical requirements;
iii. planning and performing an audit with professional scepticism, recognizing that circumstances may
exist that cause the financial statements to be materially misstated;
iv. exercising professional judgment in planning and performing an audit; and
v. obtaining sufficient and appropriate audit evidence to allow him to reduce audit risk to an
acceptably low level

Audit Planning and Strategy – (ISA 300)

ISA 300 states that the objective of the auditor is to plan the audit so that the engagement will be performed
in an effective manner.
Audit Planning involves establishing the overall audit strategy for the engagement and developing an
audit plan. It demands developing both a general strategy and a detailed approach for the expected nature,
timing and extent of the audit. In simple words, developing an overall strategy for the effective conduct and
scope of the examination. Thus, two documents are referred to by the ISA:
• the overall audit strategy (Audit strategy memorandum), and
• the audit plan.
When establishing the overall audit strategy, the following should be considered:
• Characteristics of the engagement;
• Reporting objectives, timing of the audit and nature of communications;
• Significant factors, preliminary engagement activities and knowledge gained on other
engagements; and
• Nature, timing and extent of resources. The audit plan gives specific procedures to be carried out
to implement the strategy and complete the audit.
Objectives and Procedure
The objective of planning an audit is to determine the amount and type of evidence and review required to
assure the auditor that there are no material misstatements of the financial statements. The planning
procedures include:
a. Perform audit procedures to understand the entity and its environment, including its internal control
system.
b. Assess the risk of material misstatement of the accounts.
c. Determine materiality. Materiality for planning purposes is the auditor’s preliminary estimate of
the smallest amount of misstatement that would influence the judgment of a reasonable person
relying on the financial statements.
 d. Prepare the Planning memorandum, the audit plan and audit program containing the auditor’s
response to identified risks.

a. Understanding the entity and its environment (ISA 315)

ISA 315 requires that the auditor should assess risks of material misstatement through understanding the
entity and its environment, including the entity’s internal control. This understanding of the environment
provides a basis for designing and implementing responses to the assessed risks of material misstatement.
Thus, obtaining an understanding of the entity and its environment enables the auditor to:
• Identify and assess the risks of material misstatements in the financial statements
• Design and perform appropriate audit procedures
• Exercise audit judgment whenever that is required, e.g. when setting audit materiality levels.

In relation to the entity, the auditor would want to gain an understanding of the following:
• The industry, regulatory and other external factors, including the applicable financial
reporting framework
• Nature of the entity, including operations, ownership and governance, structure and
financing.
• Entity’s selection and application of accounting policies, including reasons for changes in
accounting policies
• Objectives, strategies and related business risks
• Measurement and review of the entity’s financial performance.
• The entity’s internal control etc.
To obtain an understanding of the entity and its environment, a combination of the following procedures
could be used:
i. Inquiries of management, internal auditors and others within the entity.
ii. Analytical procedures.
iii. Observation and inspection.
iv. Prior period knowledge/information – consider if there has been changes that could affect the
relevance of this information to the current year’s audit
v. Client acceptance or continuance process – evaluate if information obtained during the process is
relevant to current audit.
vi. Discussion by the audit team of the susceptibility of the financial statements to material
misstatement.
vii. Information from other engagements undertaken for the entity: auditor should consider whether
information from these is relevant to identifying risks of material misstatement.

Review Questions
1. In line with ISA 315, an auditor should gain an understanding of the entity and it environment when
planning an audit. What information about the entity should the auditor strive to obtain in order to meet
this requirement?
2. Describe the procedures an auditor should use while trying to obtain an understanding of the entity and
its environment.
b. Assessing Risk of Material Misstatement of the Accounts
To obtain assurance that financial statements are free from material misstatements, the auditor
will need to identify possible areas of risk (sources of misstatements) through risk assessment.
A risk assessment helps the auditor to ensure that key areas more susceptible to material
misstatement are adequately investigated and tested during the audit. This can be achieved
through the following:
• Professional Scepticism and Professional Judgment
• Risk-based approach to auditing
• Assessing the management assertions embodied in financial statements (Audit Objectives).
• Assessing the Risk of Material Irregularity/Misstatements
• Audit Risk Estimation/Evaluation
*N.B
This will be discussed in detail under “Audit Risk and Materiality”

c. Setting Materiality Level (ISA 320 Materiality in Performing and Planning an Audit)
Information is material if its omission or misstatement could influence the economic decisions of users
taken on the basis of the financial statements. The assessment of materiality is always based on the
judgment of the auditor applied to the circumstances of a particular case. Materiality depends on the
size and nature of an item judged, based on the surrounding circumstances. Materiality is a relative
factor. An amount that is material in the financial statements of one company may not be material in
the financial statements of another.
**N.B
This will also be discussed in detail under “Audit Risk and Materiality”

d. Audit Planning Memorandum

Audit Planning Memorandum (APM) refers to the audit plan documentation prepared by the auditors,
containing all of the information obtained and the decision reached in the process of audit planning
Programme. It is a standing arrangement made by the auditor for the continuing engagement of a particular
client. The objectives of APM are to provide formal record of the planning process and the programme,
communicated to the audit team to facilitate the audit process.
1. Contents of Audit Planning Memorandum
The contents of APM can be outlined under four (4) broad categories, including;
i. Background Information of the client, which covers the following:
• A brief historical background of the entity.
• The nature and trend of the enterprise’s business.
• The organizational and management structure of the enterprise.
• Significant accounting policies followed by the entity in the preparation of its financial
statements.
• The terms of reference of the audit assignment.
• The Accounting and Internal control procedures of the entity.
ii. Audit Strategy Memorandum, which contain the following:
• UpThe audit objectives.
• The overall audit approach
• Audit Risk analysis for the various sections of the financial statements and the approaches to
be adopted in respect of each section.
 • Areas requiring special audit attention and the procedures to be applied.
iii. Jobs or Assignment Administration Memorandum, which includes:
• The Partner in charge of the Audit Assignment.
• The Manager in charge of the Audit.
• The Seniors and other staff in charge of the Audit.
• Dates of the audit visits including any interim visits, and final audit visit.
• Dates and details of such events as:
➢ Manager’s field review;
➢ Manager’s final review;
➢ Circularization of Debtors and Creditors;
➢ Confirmation of bank balances.
➢ Stock takes
➢ Cash count.
➢ Management Representation Letter.
➢ Partner’s final review.
➢ Reporting deadline.
➢ The Audit time Budget.
➢ The Audit Procedures.
iv. Audit Programme
This section of the Audit Planning Memorandum usually contains programme for the various
sections of the audit work specified, e.g. compliance and Substantive Audit Procedures.

2. Benefits of Audit Planning Memorandum

i. Assists in the review of audit work.
ii. Shows logical approach adopted in the plan of work
iii. Serves as a guide for future audit planning.
iv. Provides evidence of proper audit planning in case of litigation.
v. It is useful for training audit staff.
vi. It provides evidence of work performed in case of disagreement on scope.
vii. It is a basis for comparison of Audit plan and actual performance.

3. Audit Plan
An audit plan is an overview of the engagement that outlines the nature and characteristics of the client
and its environment and the overall audit strategy. It highlights the preparations made for one specific
audit engagement. A typical audit plan includes details on;
i. Objectives of the audit (e.g. reporting to shareholders, special- purpose audit or reporting to any
other party).
ii. Nature and extent of other services to be performed for the client e.g taxation services.
iii. Timing and scheduling of the audit work – what to do before balance sheet date, on the balance
sheet date or after, including dates for cash count, observing of inventory, third party
confirmations/circularization.
iv. Description of the client company and its environment.
v. Work to be done by the client staff e.g. production/presentation of T/balance, schedules,
reconciliations etc.
vi. Staffing requirements during the engagement.
vii. Discussions among team members about significant risks.
 viii. Target dates for completing major segments of the engagement e.g. consideration of internal
control, audit report, filing of tax returns etc.

***N.B:
Audit plan is drafted before the start of work at the client’s office but may be modified throughout the
engagement as special problems are encountered and areas requiring more or less audit work emerge.
4. Preliminary Engagement Activities
Prior to planning any current engagement, the auditor performs some preliminary engagement activities.
These include:
i. Procedures regarding the continuance of the client relationship and the specific audit engagement.
The auditor needs to find out if there are issues with management integrity that may affect the
auditor’s willingness to continue with the engagement. There is also the need to ensure that there
is no misunderstanding with the client as to the terms of the engagement.
ii. Evaluation of compliance with ethical requirements, including independence.
iii. Establishing an understanding of the terms of the engagement.

****N.B:
Procedures (i) and (ii) occur throughout the performance of the audit as changes in circumstances occur.
5. The Planning Process (Points for Consideration in Audit Planning
It is important that the planning is documented in an APM. The planning process will involve:
i. Review of previous years’ working papers for key issues and problem areas (for a continuing
engagement).
ii. Considering the impact of any changes in legislation, auditing or accounting standards, especially
in relation to their effects on the operations and/or reporting requirements of the enterprise.
iii. Considering the background of the client and any changes in the industry or issues that may affect
the audit work.
iv. Considering changes in the business, its management or ownership. A change in the CEO, CFO, a
new management structure, establishment of a new business line, new branch etc. will result in
significant changes in the circumstances of the company that will affect the audit plan.
v. If there are changes in systems, accounting procedures and policies, review their effect on the audit.
vi. Carry out analytical review of management accounts and note key performance indicators (KPIs).
vii. Decide on the audit approach (substantive, systems-based or risk-based).
viii. Agree on timing of the audit work – interim, final including established deadlines for the
submission of audit report.
ix. Agree on time for availability of draft accounts, supporting schedules, analyses and summaries by
client.
x. Evaluate internal controls and decide on level of reliance to be placed on them.
xi. Consider the use of experts, if necessary, and incorporate in plan.
xii. Plan rotational visits and testing, where many branches exist.
xiii. Work out time budget.
xiv. Plan and arrange staffing requirement and decide on likely fee chargeable.
xv. Organize liaison with the audit committee (if any) and joint auditors, in case of group audits.

6. Benefits of Audit Planning

Adequate planning helps to ensure that:
i. The audit objective is established and achieved.
 ii.Attention is devoted to important areas of the audit, that is, to critical and high risk areas.
iii. Potential problems are identified and resolved on timely basis.
iv. The resources needed for the engagement, including the use of experts, are identified and procured.
v. Works are properly/appropriately assigned to engagement team members.
vi. The audit engagement is properly organized and managed for effectiveness and efficiency.
vii. The direction and supervision of the audit, including the review of the works of team members, are
facilitated.
viii. The co-ordination of the works of joint auditors (in the case of a group audit) and experts are
facilitated.
ix. The audit engagement is completed economically and within time schedule.

7. Audit Strategies
The three broad audit approaches are:
a. Vouching/Substantive Approach: This audit approach involves complete examination of the
transactions of the business together with the documentary evidence of sufficient validity to satisfy
the auditor that the transactions are in order, properly authorized and accurately recorded. The
auditor traces the transactions to their sources in order to ascertain their full origins and meanings.
Generally, vouching audit is useful in:
• Very small organizations with few transactions.
• Organisations where the systems of internal control is weak or non-existent
• Specialised audits which require investigations such as those of trust, estate, church,
mosque, charity etc.
• Checking of non-recurring, material, unusual and extraordinary items.
• When the auditor is put on enquiry.
b. Systems-based Approach: This approach relies on the controls contained in the client’s financial
system to validate accounting records. It is a system to determine what reliance can be placed on
the established controls to ensure that resources are being managed effectively and financial
information provided accurately especially for reporting purposes. The auditor tests the controls by
means of testing a sample of transactions taken to be representative of the types of transactions
checked by the particular control or set of controls the auditor is testing. Two procedures may be
adopted in a system audit:
• Compliance tests which seek evidence that a good and reliable system of control as
established in the organization is being maintained.
• Substantive tests are designed to ensure that the system of controls that have been
established continue to operate at all times confirming the validity, completeness and
accuracy of recorded transactions.
Generally, Systems Audit is useful in the following areas:
• Tests seeking evidence that the internal controls are being applied as prescribed. These are
called compliance tests.
• Once the compliance tests have been completed, further tests may be required to
substantiate the entries in the figures in accounts and the evaluation of financial information
by a study of plausible relationship among both financial and non-financial data.
• When an auditor investigates a system by identifying the control objectives of the system
and evaluating the system’s internal control on paper, the auditor should determine whether
the internal controls that currently exist appear to be adequate.
 c. Risk-based Approach: This approach is adopted for very large organizations or organizations with
excellent internal control system. It is an efficient way of auditing large organizations where errors
or misstatements have to be fairly large to have any impact on the financial statements. The logic
is that errors or misstatements will not arise from wrong recording of transactions but will have
their source in identified areas of risk – either operational risks arising from the nature of the
business or from the complexity of the accounting system. Thus, the auditor in this strategy carries
out a limited amount of testing of transactions and balances and concentrates efforts on analysing
the business risks faced by the organization. The auditor determines, by applying judgment, what
levels of risks pertain to different areas of the client systems and designs appropriate audit tests.
Emphasis of the audit work is directed at areas in which the financial statements are mostly likely
to be misstated materially. In effect, audit costs are likely reduced. The risk that the auditor will
give inappropriate opinion is also reduced.
Assignment
Read up:
1. Deciding on audit strategy
2. Factors to consider in determining audit strategy
3. Steps for preparing audit strategy

Conclusion
This lesson emphasize the importance of thorough audit planning in ensuring the effectiveness and
efficiency of the audit process as well as the determination of the overall audit strategy and in developing
an audit plan. Audit planning follows a defined procedure namely: performing procedures to understand
the entity and its environment, including its internal control system; assessing the risk of material
misstatement of the accounts; preliminary determination of materiality and preparing the planning
memorandum, the audit plan and audit program containing the auditor’s response to identified risks. It also
highlights the need for ongoing communication, flexibility, and adaptability during the audit engagement.
Key steps and considerations in audit planning were also discussed.