Auditing and Assurance Chapter 2: Audit Strategy, Audit Planning and Audit Programme
CA Inter Auditing and Assurance Chapter 2, Audit Strategy, Audit Planning and Audit Programme, Important Solved Questions for May 2021 & November 2021 Exams.
The auditor T of Hand Fab Ltd is worried as to management of key resources to be employed to conduct audit.
How the audit strategy would be helpful to the auditor?
The process of establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditor’s risk assessment procedures, such matters as:
- The resources to deploy for speciﬁc audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters;
- The amount of resources to allocate to speciﬁc audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas;
- When these resources are to be deployed, such as whether at an interim audit stage or at key cut-oﬀ dates; and
- How such resources are managed, directed and supervised, such as when team brieﬁng and debrieﬁng meetings are expected to be held, how engagement partner and manager reviews are expected to take place (for example, on-site or oﬀ-site), and whether to complete engagement quality control reviews.
W, the auditor of SKM Ltd asks its ﬁnance and audit head to prepare audit strategy for conducting audit of SKM Ltd. W, also insist him to draw detailed audit procedures also. On the request of auditor W, complete audit strategy as well as audit procedures are prepared by ﬁnance head of the company. Subsequently, auditor realizes that eﬀectiveness of the audit is compromised and it was his responsibility to prepare the overall audit strategy. Comment.
The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and management of the audit engagement. Although these discussions often occur, the overall audit strategy and the audit plan remain the auditor’s responsibility. When discussing matters included in the overall audit strategy or audit plan, care is required in order not to compromise the eﬀectiveness of the audit.
The approach of W was wrong and he should have prepared overall audit strategy and detailed audit procedures.
“Planning is not a discrete phase of an audit, but rather a continual and iterative process”. Discuss.
As per SA-300, “Planning an Audit of Financial Statements”, 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:
- The analytical procedures to be applied as risk assessment procedures.
- Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.
- The determination of materiality.
- The involvement of experts.
- The performance of other risk assessment procedures.
“The nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors.” Explain.
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.
- The area of the audit.
- The assessed risks of material misstatement
- The capabilities and competence of the individual team members performing the audit work.
“The utility of the audit programme can be retained and enhanced only by keeping the programme and also the client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme may be removed’. Discuss stating clearly the advantages of an audit programme.
The advantages of an audit programme are:
(a) It provides the assistant carrying out the audit with 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.
(c) Selection of assistants for the jobs on the basis of capability becomes easier when the work is rationally planned, deﬁned and segregated.
(d) Without a written and pre-determined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records. Under a properly framed programme, such danger is signiﬁcantly less and the audit can proceed systematically.
(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 professional auditor.
“Determining materiality involves the exercise of professional judgment”. Discuss stating the factors that may affect the identification of an appropriate benchmark. Also give example.
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the ﬁnancial statements as a whole. Factors that may aﬀect the identiﬁcation of an appropriate benchmark include the following:
- The elements of the ﬁnancial statements (Example: Assets, liabilities, equity, revenue and expenses);
- Whether there are items on which the attention of the users of the particular entity’s ﬁnancial statements tends to be focused (Example: For the purpose of evaluating ﬁnancial performance users may tend to focus on proﬁt, revenue or net assets);
- The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates;
- The entity’s ownership structure and the way it is ﬁnanced (Example: If an entity is ﬁnanced solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings) and
- The relative volatility of the benchmark.
Is it necessary to document the audit plan? If so, what all activities in the planning phase needs to be documented? State with Examples.
The documentation of the audit plan is a record of the planned nature, timing and extent of risk assessment procedures and further audit procedures at the assertion level in response to the assessed risks. It also serves as a record of the proper planning of the audit procedures that can be reviewed and approved prior to their performance. The auditor may use standard audit programs and/or audit completion checklists, tailored as needed to reﬂect the particular engagement circumstances.
A record of the signiﬁcant changes to the overall audit strategy and the audit plan, and resulting changes to the planned nature, timing and extent of audit procedures, explains why the signiﬁcant changes were made, and the overall strategy and audit plan ﬁnally adopted for the audit. It also reﬂects the appropriate response to the signiﬁcant changes occurring during the audit.
The following things should form part of auditor’s documentation:
- A summary of discussions with the entity’s key decision makers.
- Documentation of audit committee pre-approval of services, where required.
- Audit documentation access letters.
- Other communications or agreements with management or those charged with governance regarding the scope, or changes in scope, of our services.
- Auditor’s report on the entity’s financial statements.
- Other reports as specified in the engagement agreement (e.g., debt covenant compliance letter).
Whether misstatements of lesser amounts than materiality for the ﬁnancial statements as a whole could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of the financials statements?Explain with examples
When establishing the overall audit strategy, the auditor shall determine materiality for the ﬁnancial statements as a whole. If, in the speciﬁc circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than the materiality for the ﬁnancial statements as a whole could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of the ﬁnancial statements, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures.
Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the ﬁnancial statements as a whole could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of the ﬁnancial statements include the following:
- Whether law, regulations or the applicable ﬁnancial reporting framework aﬀect users’ expectations regarding the measurement or disclosure of certain items. (Example: Related party transactions, and the remuneration of management and those charged with governance)
- The key disclosures in relation to the industry in which the entity operates. (Example: Research and development costs for a pharmaceutical company)
- Whether attention is focused on a particular aspect of the entity’s business that is separately disclosed in the ﬁnancial statements. (Example: A newly acquired business)