Audit Short Notes - Chapter 2

Chapter 2 - Audit Strategy, Audit Planning and

●​ Will help the auditor in maintaining the necessary independence
and ability to perform the engagement.
Audit Programme
SA 210 - AGREEING THE TERMS OF AUDIT ENG.
●​ Establishing an understanding of terms of engagement with the
SA 300 - Planning an Audit of Financial Statements
client
Objective of Auditor

●​ Audit is performed in efficient and effective manner ●​ to ensure there are no misunderstandings with the client as to
the terms of the engagement.
Involvement of Key Engagement Team Members

●​ EP and other key members of ET shall be involved in planning Planning activities

●​ Advantage - Discuss the factors that are going to impact the nature and extent
○​ Draws on their experience & insight of planning activities
○​ Enhances the effectiveness and efficiency of audit The nature and extent of planning activities will vary according to
the
Discussion of elements of planning with management ●​ Size and complexity of the entity,
●​ May be done to facilitate the conduct and management of audit ●​ key ET members' previous experience with the entity, and
●​ Overall audit strategy and audit plan remains auditor’s ●​ changes in circumstances that occur during the audit
responsibility engagement.
●​ Care is required in order not to compromise the effectiveness of
audit Audit Strategy

🔥
Meaning

Benefits of Planning in the Audit of FS ●​ Sets scope, timing and direction of the audit, & guides the
●​ Appropriate attention to important areas development of audit plan

●​ Identify and resolve potential problems ●​ OAS is the basis of an audit plan.
●​ Properly organize and manage the audit
●​ Selection of ET members How would the audit strategy be helpful to the auditor?🔥
The process of establishing OAS assists the auditor to determine,
●​ Direction, supervision and review of ET and their work
●​ Coordination of work done by auditors of components and subject to the completion of the auditor’s RAP, such matters as: -
experts. ●​ Nature of Resources - Resources to deploy for specific audit
areas (Experienced team members for high risk areas,
involvement of experts)
●​ Extent of Resources - Amount of resources to allocate to
specific audit areas
○​ Inventory count at key location - More resources.
○​ High risk areas - More resources.
○​ Extent of review required in case of group audit.
●​ Time of Resources - When these resources are to be deployed
(interim audit stage or at key cut-off dates)
●​ Management of Resources - How such resources are managed,
directed and supervised
○​ Timing of team briefing and debriefing meetings
○​ Engagement partner and manager reviews (on-site or
Preliminary Activities (PA)
off-site)
SA 220 - INTEGRITY
○​ Decision on conducting engagement quality control reviews
●​ Performing procedures regarding the continuance of client
relationship
●​ Will help auditor in ensuring - no issues with management
Factors to be considered for establishing overall audit strategy

Characteristics and Scope

🔥
integrity that may affect the auditor's willingness to continue Identify characteristics of engagement that define its scope
the engagement ●​ AFRF applicable to entity
SA 220 - ETHICAL REQUIREMENTS ●​ Nature of Business segment
●​ Evaluating compliance with ethical requirements including ●​ Industry specific reporting requirement
independence. ●​ Expected use of audit evidence obtained in previous audit (issues
within previous year’s inventory management)

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 Audit Short Notes - Chapter 2

RO – Reporting Objectives ●​ The NET of planned FAP at assertion level - SA 330

Ascertain reporting objectives to plan timing and nature of ○​ Planning the nature, timing and extent of specific further
communication. Examples - audit procedures depends on the outcome of those risk
●​ Entity’s timetable for reporting assessment procedures.
●​ Organising meetings with MGMT to discuss scope and timing ●​ Other planned audit procedures (O-AP) required to be carried
●​ Discussion with MGMT regarding type and timing of reports out so that engagement complies with SAs
●​ Communication regarding audit status (update on progress)
●​ Internal team communication Change in OAS and AP

○​ How the audit team will communicate internally. The auditor shall update and change the overall audit strategy and the
○​ Timings of meetings and review audit plan as necessary during the course of the audit as a result of -
●​ Unexpected events
ETE ●​ Changes in conditions, or
●​ The auditor directs the team to significant matters using ●​ Audit evidence obtained from results of audit procedures
professional judgment. Identifying material transactions, ​
balances, disclosures sets an audit strategy Examples
●​ The auditor need to consider where efforts should be directed, ●​ Revised consideration of assessed risks.
this will help in developing overall audit strategy ●​ Information comes to the auditor’s attention that differs
significantly from the information available when the auditor

Factors that an auditor should consider in directing the engagement planned the audit procedures.

team's efforts ●​ performance of substantive procedures may contradict the audit

●​ Volume of transactions evidence obtained through tests of controls
○​ Reliance on IC to be placed or not
●​ Significant industry developments Relationship between OAS and AP

○​ as changes in industry regulations and new reporting ●​ Overall audit strategy deals with scope, timing, and direction of
requirements. Audit
●​ Changes in the financial reporting framework ●​ Audit plan includes nature, extent and timing of RAP, and
○​ such as change in AS further audit procedures and other audit procedures as required

●​ Other significant relevant developments, by SAs.

○​ changes in the legal environment affecting the entity ●​ Audit strategy is broad while audit plan is detailed
●​ Audit strategy is the basis of audit plan or we can say that audit
Preliminary engagement activities other engagements (PEA/OE) plan is made on the basis of audit strategy
Results of preliminary engagement activities and knowledge gained ●​ They are not sequential or discrete.
on other engagements ●​ They are closely interrelated to each other. Change in one will
●​ Results of previous audits lead to change in another.
●​ Previous evaluation of IC
●​ Communication of Deficiencies in IC and action on those. Direction, Supervision and Review

●​ The auditor shall plan the NET of direction and supervision of ET

Nature, timing and extent of resources members and the review of their work.
Ascertain the nature, timing and extent of resources necessary to ●​ Factors
perform the engagement. ○​ Area of the audit
●​ Selection of ET and assignment of audit work to team members ○​ Assessed risks of material misstatement (ROMM)
is a significant factor in establishing overall audit strategy. ○​ Capabilities and competence of individual team members
●​ Experienced team members and more time are allocated to performing the audit work
areas where ROMM is high ○​ Size and complexity of the entity.

Audit Plan

The audit plan is more detailed than the overall audit strategy that
Documentation 🔥
●​ Overall audit strategy
includes the nature, timing and extent of audit procedures to be ○​ record of the key decisions
performed by ET members. ■​ considered necessary to properly plan the audit and
●​ The NET of planned RAP - SA 315 ■​ to communicate significant matters (of audit
○​ Planning of the auditor's risk assessment procedures strategy) to ET (Hum OAS ki documentation mein key decision

occurs early in the audit process.

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 Audit Short Notes - Chapter 2

🔥
ko record karte hai taaki audit ache se plan ho paaye aur Evolving one audit programme- Not Practicable for All
Significant matters ET ko communicate ho paaye)
businesses
●​ Audit Plan ●​ All businesses are not same
○​ record of the proper planning of the audit procedures ●​ Vary in
○​ that can be reviewed and approved prior to their ○​ Nature
performance ○​ Size
●​ significant changes made during the audit engagement to the ○​ Capital Raised
overall audit strategy or audit plan, and reasons for such ○​ Internal Controls
changes. ○​ Applicability of Law and Regulations
○​ explains why significant changes were made ●​ Because of above factors
○​ and the overall strategy and audit plan finally adopted for ○​ Scope of Services Differ
the audit. ○​ not possible to develop one
○​ It also reflects appropriate response to significant changes
occurring during the audit. Assistant to keep an open mind 🔥
Planning is a Continuous Process 🔥
●​ Planning is not a discrete phase of an audit, but rather a
●​ Consider
○​ Nature
○​ size
continual and iterative process
○​ composition of business
○​ begins shortly after completion of previous audit and ○​ internal control reliability, and
○​ continues until completion of current audit engagement. ○​ scope of work.
●​ However Planning includes consideration of timing of certain ●​ A standard audit programme should cover the minimum
activities and audit procedures.
essential work required.

●​ Planning includes need to consider certain matters, prior to the ●​ As the audit progresses, the programme may be altered to
identification and assessment of ROMM include situations which were left out originally, but are found
○​ Analytical procedures to be applied as RAP relevant and drop unnecessary work.
○​ Obtaining a general understanding of legal and regulatory ●​ Assistants engaged in the job should be encouraged to keep an
framework applicable to entity and how the entity is open mind beyond the programme given to him.

complying with that framework ●​ Assistants should be instructed to note and report significant
○​ Determination of materiality matters coming to his notice, to his

○​ Involvement of experts seniors/partners/proprietor of the firm​

○​ Performance of other RAP

Additional Consideration in Initial Audit Engagements

Periodic review of Audit Programme

●​ Purpose
🔥
●​ Purpose and Objective Same ○​ Ensures the programme remains adequate for obtaining
●​ Need to expand the planning activities Why? - No Previous necessary knowledge and evidence about transactions.
Experience.
●​ Without periodic review
●​ Performing procedures required by SA 220 regarding the ○​ Changes in business policy may go unnoticed.
acceptance
○​ Audit work may be carried on an obsolete programme.
●​ Communicating with the predecessor auditor - where there has ○​ Audit may be considered negligently conducted, leading to
been a change of auditors. legal consequences for the auditor.
●​ Other procedures required by the firm's system of quality ●​ Retaining and enhancing utility
control for initial audit engagements ○​ by keeping the programme as also client’s operations and
●​ For example, review of the overall strategy by senior partner IC under periodic review so that inadequacies or
before starting the audit redundancies of the programme may be removed
​ ●​ Structure of the Audit Programme
Audit Programme
○​ Includes a task list and relevant instructions (e.g., extent
Meaning

An audit programme consists of of checking, sampling plan).

●​ a series of verification procedures ●​ Execution and Flexibility​
●​ to be applied to FS and accounts of a given company ○​ Assistants must follow the programme unless officially
●​ for the purpose of obtaining SAAE modified by the principal.
●​ to enable the auditor to express an informed opinion on FS ○​ Some perceive the programme as rigid, but periodic
reviews ensure it stays up to date.

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 Audit Short Notes - Chapter 2

○​ Assistants should be encouraged to observe key accounting ●​ Acceptance of responsibility by assistants by putting their
functions of the client. signature. Also, work done can be traced back to assistant
●​ Progress can be controlled by the Principal. Helpful in managing
Constructing an Audit Programme multiple audits at a time
●​ The auditor may or may not rely on IC for conducting the audit. ●​ Guide for audits in succeeding year
●​ The auditor normally has flexibility w.r.t timing of Audit ●​ Serves as evidence in case of charge of negligence. Exercised
procedures except in a few cases - reasonable skill and care.
○​ observing the taking of inventories by client personnel or
○​ verifying the securities and cash balances at the year-end​ Disadvantages of Audit Programme

●​ Mechanical work without understanding:

constructing an audit programme 🔥

Points to be kept in mind by the auditor for the purpose of

●​ Stay within the scope and limitation of the assignment.

○​ may become mechanical
○​ may be carried out without understanding objective
●​ Rigidity and Lack of Adaptability
●​ Must be Written with procedures required to implement audit ○​ may fail to adapt to changes in the business's operations or
plan IC
●​ Evidence (Best for necessary satisfaction and Reasonably ●​ Shelter for inefficient Assistants
Available) ○​ On the ground that no instruction in the matter is
●​ Steps and Procedures (Use only relevant audit techniques) contained therein.
●​ Include - Audit Objective Area-wise and sufficient details and ●​ May kill the initiative of enterprising assistants
clear instruction for assistants for proper execution ○​ A hard and fast audit programme can do this.
●​ Consider Possibilities of Error - Include looking for potential
mistakes or misrepresentations in the data Extract of Sample audit programme pertaining to sales of an entity

●​ Coordinate procedures to be applied on related items Name of concern XXX

Financial year 20XX-XX
Audit Programme- Designed to provide Audit Evidence

●​ Audit Programme designed to provide evidence by describing Prepared by Name of person with date
procedures & techniques. Reviewed by Name of person with date
●​ In most of the assertions much of the evidence be drawn and Approved by Name of person with date
each one should be considered and weighed to ascertain its
weight to prove or disprove the assertion S.No Nature of Procedure Extent of Basis of Done
●​ Best evidence for a given depends on Professional judgment Check sample by
○​ For cash in hand, the best evidence is ‘count’. (a) Vouch few sales invoices from copies
○​ For investment pledged with a bank, banker’s certificate. available in record of the concern
(b) Trace these invoices into the account
books of the concern.
Variety of fields for Audit Evidence

●​ Documentary examination
●​ Physical examination (c) Verify a few invoices with e-way bills
●​ Management Explanation generated on the e- way bill portal.
●​ Third Party Explanations (d) Trace a few sales invoices into the stock
●​ Arithmetical Calculations records to ensure that sold quantities
●​ State of IC have been reduced from stocks.
●​ Relationship among financial and non financial data (e) Trace also few sales invoices into
●​ Subsidiary and Memorandum records accounts of buyers
●​ MoM
●​ Subsequent action by client
Short Forms

Advantages of Audit Programme

EP Engagement Partner
●​ Clear set of instructions ET Engagement Team
●​ Total perspective of work OAS Overall audit strategy
●​ Selection of assistants AP Audit Plan
●​ Danger of overlooking reduced, which is high in “mental
RAP Risk assessment Procedures
unwritten plan
SAAE Sufficient Appropriate Audit Evidence

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 Audit Short Notes - Chapter 2

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