An audit is a review of the financial statements of a company and is one of the types of Assurance Engagements. The audit report of a company is vital for decision-makers and the engagement is performed with great care following professional auditing and ethical standards.
Planning the Audit Engagement
Planning is the first stage of the audit in which the auditors make preparations for the client’s audit. Audit engagement is usually a very expensive and complex practice. The auditors, therefore, should be fully prepared for the engagement to make sure everything is done in the best possible manner.
The Planning stage in audit ensures that the risk of poor quality audit, which ultimately leads to inappropriate audit opinion, is reduced to a level that is acceptable for the audit engagement. If the audit is planned properly, it’s half done, as the saying goes!
As mentioned, Planning is done in detail to avoid discrepancies in the audit engagement. The Planning stage of the audit consists of many elements. Some are:
Preliminary Engagement Activities
These are simply activities performed before the audit to collect details about the client and to check if the audit firm can perform the engagement. The preliminary engagement activities include:
- performing required procedures regarding the continuance of the client relationship and the specific audit engagement.
- Evaluating compliance with relevant ethical requirements.
- Establishing an understanding of the terms of the engagement.
ISA 300 states that the auditors must perform these activities at the beginning of the audit engagement.
Planning an audit is not just about getting to know your client and assessing the risk involved in the audit engagement. It is much more than that which leads us to the next step in planning the audit.
Audit Strategy | Planning
The audit strategy is an outline of the overall audit. In audit strategy, the auditors draw the whole picture of the audit and focus on the scope, timing, and direction of the audit. It’s an important element of the planning process and helps auditors determine the required resources and external professional help if needed.
The audit strategy also helps auditors to effectively allocate time and team members to each and every part of the audit. It also helps auditors to identify the difficult areas of the engagement and plan things accordingly. ISA 300, A8 states that the audit strategy allows the auditor to determine:
- The resources to deploy for specific audit areas such as experience level and external experts
- The amount of resources to allocate when the resources are to be deployed (i.e. how many team members should be allocated to a particular task)
- How the resources are managed, directed and supervised, including the timings of meetings, debriefs and reviews.
Once the audit strategy is completed, the auditors will now have a rough guideline of how they will carry out the overall audit engagement. However, a much detailed and specific plan is still needed to proceed with the audit engagement.
Audit Plan
The audit plan is an advanced and neater form of audit strategy and addresses how the specific tasks (identified in the audit strategy) will be carried out. That being said, the audit plan is a detailed form of the audit strategy which fills in the complete details of how the auditors will complete the tasks listed in the audit strategy.
Let me give you an example of how the audit strategy and plan would look like in the planning phase of an audit.
For example, tangible non-current assets worth $2 million are listed in the statement of financial position. In the audit strategy, the auditor will point out the need for valuing those assets to check whether they are valued accurately. Whereas in the audit plan, the auditor will get into details like how many assets should be checked, when to check, the valuation criteria to be used, and the need to hire external professional valuers if the assets are of a specialized nature.
Change in the Audit Plan & Strategy
Auditors can amend the audit plan & strategy anytime during the audit. It’s important for the engagement that the plan and strategy in the audit are updated and reflect changes as the audit progresses.
For example, if there’s any expected event or change in operating conditions, the auditor may need to change the overall or part of the audit plan and strategy.
Also, if the auditor finds a piece of information differing from what was provided to them at the time of planning the audit, they may change the audit plan and strategy to incorporate the effect. For example, if an event occurs in the company that questions the going concern of the company or findings of audit procedures indicate the same, the auditors would need to change the overall audit plan & strategy.
Technical Explanation of the Audit Planning
In every audit engagement, the auditors need evidence(s) to support their audit opinion and therefore, evidence is an extremely important element of the audit.
To obtain evidence, the auditors would need relevant procedures in place and that could be achieved by planning the audit engagement in an effective way. Planning, therefore, is the cornerstone of an audit.
An audit is a very complicated engagement. Auditors have to go through the financial statements and verify each and everything included in the statements. They also need to assess the estimations & valuations of managers. Without planning, it would be extremely difficult for the auditors to have an idea of where to start the engagement from and how to complete the engagement timely.
That being said, planning helps auditors to:
- Establish specific procedures that effectively help in obtaining audit evidence
- Complete the engagement timely
- Devote appropriate attention to important areas of the audit
- Identify & resolve potential problems and ethical threats on a timely basis
- Planning helps reduce the risk of giving inappropriate audit opinion
Audit, ultimately, from the perspective of the audit firm is a profit-making activity and therefore should be performed effectively & efficiently. The auditors need to plan it in such a way as to achieve the objectivity of the audit in the planned cost structure. To do so, it’s important to develop a plan that helps them find audit evidence in an efficient manner.
What is ISA 300?
International Standard on Auditing (ISA) 300 is a set of standards for planning audit engagements. That means, everything in that 300 number (315, 320, 325, etc…) is all about things involved in planning.
ISA 300 acts as a guide for auditors to find audit evidence(s) that support their audit opinion. From the preliminary engagement activities to evidence finding techniques, it has everything that an auditor needs in order to plan the engagement.
Basically, ISA 300 is a guideline for auditors and explains the elements of audit planning. It talks about how to identify & perform the preliminary engagement activities, how to make an audit strategy and develop an effective plan, what codes to follow and what procedures to perform in the process of finding audit evidence, and everything else that comes under the roof of planning.
Conclusion
Planning in audit is not merely taking notes of the business activities and obtaining an understanding of the business. It is much more than that. It’s a powerful tool for auditors to plan the engagement in a smart and efficient way. Structured before the audit, the plan is subject to changes later on during the audit and reflects the material events and changes that occur during the audit engagement.
Good planning ensures the completion of the audit timely and effectively. Business areas that need special attention are highlighted in planning and appropriate time and relevant professionals are allocated to gather the required audit evidence.
