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An overview of Audit Planning

Prabhat Nigam

| Updated: Mar 10, 2022 | Category: Internal Audit

Audit Planning

While planning for an audit, it requires establishing an overall audit strategy for engaging and developing an audit plan. The auditor’s role is to devise a strategy so that audit can be done in an effective manner. Once the auditor has developed the overall plan and identified various matters to be addressed in the overall audit strategy, the auditor needs to efficiently deploy the existing resources in order to address various matters that have been identified while developing the overall audit strategy.

What is Audit Planning (SA 300)?

Audit Planning is found in the Accounting Standard 300 where the auditor’s responsibility is towards planning for an audit of financial statements. It is generally focused towards recurring audit. It also prescribes for initial audit engagement.

Factors that should be taken into account during audit planning

An audit must take into account the following matters during the phase of audit planning:

  • Nature and Timing of Reports
  • Accounting policies adopted by the client
  • Applicable statutory and legal requirements
  • Identification of significant audit areas
  • Terms of Engagement
  • Setting Materiality levels etc and more

It is necessary that the auditor has acquainted itself with the nature of client’s business which will give him better insight in identifying the events, transactions and practices which in their judgement will have significant impact on the financial information.

An audit plan is always more detailed than the overall audit strategy. The audit plan includes the nature, timing and extent of audit procedures which are to be performed by the engagement team members.

Audit Planning involves the participation of Engagement Partner and the other key members of the engagement team. These people will also be involved in the discussions related to the audit planning in order to increase the efficiency and effectiveness of the planning process.

The responsibility of the auditor during the this phase is to direct and supervise the nature, timing and extent of direction of engagement team members and also to review their work from time to time.

The ideal phase for audit planning begins after the conclusion of previous year’s audit. This process should always be reconsidered for modification as the audit of their compliance and substantive procedures progress.

Preliminary Activities before conducting Audit Planning

When an auditor is engaging for audit with an entity for the first time, then he has to expand the scope of planning activities because he does not have any previous experience with such entity. In order to successfully undertake the task of Audit Planning, an auditor needs to do the following preliminary activities:

 A deep understanding of the business of the entity

An auditor needs to develop a deep understanding the business and related environment of the entity. This is not done in one go at the planning stage but it is a continuous and cumulative process where the information is gathered and assessed and then matched with the audit evidence and information at all the stages of audit. For instance, though information is gathered at the planning stage, but it keeps getting refined and added in the later stages of the audit as the auditor and other members of the audit learn more and more about the business gradually.

In case of continuing engagements, the auditors try to re-evaluate and update the information gathered by them previously and all the information present in the previous year’s working papers. Another responsibility on the part of the auditor[1] is to identify the significant changes that took place since the last audit and document the same.

Familiarity with entity’s Accounting process

In the task of audit planning, it is necessary that the auditor get familiarised with the accounting system of the entity so that he can identify and understand the following:

  • How are the transactions being initiated by the entity
  • What are the major classes of transactions taking place in the entity’s operations
  • The important accounting records and their supporting documents along with specific accounts in the financial statements
  • The process of accounting and financial reporting right from the stage of initiation of important transactions and other events to the stage of inclusion in the financial statements.

For the purpose of audit planning, the auditor must also develop familiarity with the control environment of the entity to assess the management’s attitudes, awareness and actions regarding the internal controls and their importance in the entity. It is important for an auditor to have an understanding of the entity’s internal control systems which are necessary to develop the audit plan.

Assessing the risk of Auditing

An audit risk can be defined as the risk undertaken by the auditor for giving an inappropriate audit opinion because of the misstated financial statements. The auditor has to undertake the risk for determining the extent of audit to be done or extent of sampling to be done in the preparation of audit plan.

Once the auditor is able to assess the abovementioned parameters, he should summarise the audit plan with the help of an audit programme which should set forth the procedure needed to implement the audit plan. It must be noted that the audit plan should contain the audit objectives for every area and also sufficient details which will serve as a set of instructions to the assistants involved in the audit.

Conclusion

For properly executing the audit planning, the auditor may want to discuss certain details of the audit plan and other audit procedures with the client in order to improve the efficiency of the audit plan and coordinate audit procedures with work of client’s employees. However, the overall audit plan and audit programmed is the sole responsibility of the auditor.     

Prabhat Nigam

Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.



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