Audit Planning PDF

Audit Planning For efficient and effective conduct of an audit; Audit planning is necessary. The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. The first steps in the audit planning have the goals of: a) Developing time budget b)...

Audit Planning For efficient and effective conduct of an audit; Audit planning is necessary. The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. The first steps in the audit planning have the goals of: a) Developing time budget b) Assigning audit staff personnel. c) Scheduling dates for interim and yearend audit procedures. A time budget lays down the number of hours expected to complete the work. The budgeted time can be broken down category wise or activity wise. Example: he may decide to spend 60 hours of work on cash and 100 hours of work on inventories and 20 hours for report preparation etc. The staff assignment should be according to: a) Capacity b) Availability c) Rotation amongst clients d) Opportunity for on-the-job training. A good audit plan shall be based on: a) Knowledge of the accounting system in the organization and its policies and internal control procedures. b) Reliability of the internal control system c) Programming of the nature, timing and extent of the audit procedures to be performed. d) Good co-ordination of the work. Plan should be made to cover, among other things: a) Acquiring knowledge of the clients accounting systems, policies and internal control procedures; b) Establishing the expected degree of reliance to be placed on internal control. c) Determining and programming the nature, timing and extent of the audit procedures to be performed and d) Co-ordination the work to be performed.  During audit, if a need is felt for revising the audit plan, auditor should not hesitate to do so. Developing the Audit plan: a) The statutory responsibilities under the assignment b) The term of the engagement c) The nature and timings of reports d) The prevailing accounting policies in the organization. e) The significant audit areas. f) Reliability of accounting and control system. g) The nature and extent of audit evidences to be obtained. h) The involvement of experts. i) The involvement of other auditors like branch auditor. j) The allocation of work to be undertaken between joint auditors and the procedure for its control and review. Advantages of Audit plan: a) Ensures that appropriate attention is developed to important areas of the audit. b) Ensures that potential problems are promptly identified. c) Ensures that the work is completed on time. d) Utilize the assistants properly. Audit programme Represents an outline of procedure to be followed to support an opinion on financial statements. It is auditor’s plan of action. Should be flexible Must be chalked out in such a manner that if there any be any need for revision that may be carried out without difficulty. Advantages: Every essential part of the audit can be duly carried on and there is less chance of its being overlooked or omitted. The auditor may easily know about the progress of the work done at any point time simply by looking at the programme. Easy division of work Serves as a guide to the juniors Ready check list Supervision and control become easy Auditors can work more efficiently The responsivity for mistake or negligence can be clearly made out. Uniformity in the work May be used as evidence. Disadvantages: Juniors may lose interest as it becomes mechanical as they have to do what they are asked to do. It may amount to rigidity in the work. Procedures used may not be appropriate to the circumstances of the client. They may fail to take in to account any special circumstances. Audit Working Papers: Audit working papers support the work that the auditor performs for providing assurance that he conducts the audit in accordance with all the applicable standards on auditing (SA’s).They constitute all the audit evidence that an auditor obtains. Also, it contains various procedures that he applies to indicate that the audit is performed by him.The auditor and his audit team members prepare the audit working papers while performing the audit. Working papers are connecting link between the client’s records and audited financial statements. Types of Audits Working Papers 1. Permanent Audit File 2. Current Audit File Permanent Audit File They are updated with information regarding legal & organizational structure of the entity. This file contains all the papers & documents which have a long-term use. They can be referred to on a repetitive engagement from year to year. Contents of Permanent Audit File Following types of working papers are kept & maintained in the permanent file Certified copies of the Memorandum of Association, Articles of Association in case of companies & Partnership Deed in the case of Partnership Firm. Extracts of minutes from the minute book of shareholders, directors. Copies of all the important agreements & contracts & other documents. Current Audit File They contain information relating primarily to the audit of single period. All the papers which pertain to the year under audit are filed in current file. Contents of Current Audit File The current file normally contains all the papers that pertains to the year under audit. It includes the following The audit programme for the year. The internal control questionnaire issued to client & replies. Important adjustments or journal entries having a bearing on the final accounts. The working Trial balance. Bank reconciliation statements, all schedules, confirmation letters & replies. Audit notes. Record of work done. Schedule of depreciation, computation of tax liability, computation of dividend. Manuscript copies of current year’s final accounts together with all annexure. The manuscript working copy of the auditor’s report. Lien on Working Papers Ownership: The working papers are the property of the Auditor. The Auditor may at his discretion, make portions of or extracts from his working papers available to his clients. Custody: The Auditor should take proper measures for custody & confidentiality of his working papers. Retention Period: The working papers should be retained for a period sufficient to meet the needs of his practice & satisfy any legal or professional requirement of record retention. Working papers should be requires to retain at least 7 years (earlier 10 years) from the date of auditor’s report. Audit Note Book Audit Note Book is a register maintained by the audit staff to record important points observed, errors, doubtful queries, explanations and clarifications to be received from the clients. It also contains definite information regarding the day-to-day work performed by the audit clerks. In short, audit note book is usually a bound note book in which a large variety of matters observed during the course of audit are recorded. The note book should be maintained clearly, completely and systematically. It serves as authentic evidence in support of work done to protect the auditor against any legal charge initiated against him for negligence. Contents of Audit Note Book: A list of the account books normally used and maintained. Names of the principal officers, their duties and responsibilities. Nature of business carried on and important documents relating to the constitution of business like: Memorandum of Association, Articles of Association, Partnership deed etc., Extracts of minutes. Copy of audit programme. Accounting methods, internal control and internal check system in operation. Routine queries like missing receipts and vouchers etc. Details of errors and frauds discovered during the course of audit. Details of all important information to be used as reference for future audits.  Date of commencement and completion of audit. Advantages of Audit Note Book 1. Facilitates Audit Work: It facilitates the work of an auditor as all important details about the audit are recorded in the note book which the audit clerk cannot remember everything at all the time. It helps in remembering and recalling the important matters relating to the audit work. 2. Preparation of Audit Report: Audit note book helps in providing required data for preparing the audit report. An auditor examines the audit note book before preparing and finalizing the audit report. 3. Serves as Documentary Evidence: Audit note book serves as documentary evidence in the court of law when a suit is filed against the auditor for his negligence. 4. Serves as a Guide: When an audit assistant is changed before the completion of audit work, audit note book serves as a guide in completion of balance work. It also acts as a guide for carrying on subsequent audits. 5. Evaluating Work of Audit Staff: It helps to assess the work performed by the audit staff and helps in evaluating their level of efficiency. 6. Fixation of Responsibility: Audit note book helps in fixing responsibility on concerned clerk who is responsible for any undetected errors and frauds in the course of audit.  7. No Dislocation of Audit Work: An audit note book contains all important details about audit hence any change in the audit staff will not disturb or dislocate the audit work. Disadvantages of Audit Note Book 1. Fault-finding Attitude: It leads to development of a fault-finding attitude in the minds of the staff. 2. Misunderstanding: Very often maintenance of audit note book creates misunderstanding between the client’s staff and the audit staff. 3. Improper Preparation: Since it serves as evidence in the court of law, it needs to be prepared with great caution. When the note book is prepared without due care it cannot be used as evidence against the auditor for negligence. 4. Adverse Effects on Subsequent Audits: Since audit note book is used in performing subsequent audits, any mistakes in the note book may have adverse impacts on the next audit. Audit Planning memorandum An audit-planning memorandum is a summary of the audit strategy. This sets out; 1. The outline audit approach; 2. How, by whom and when each item in the financial statements will be audited; 3. Timing requirements to be met for each item; 4. Staff usage with time budgets for each set of audit work Contents of an Audit-planning Memorandum The nature of information contained in an audit-planning memorandum will vary from one audit to the other, but generally may include; 1. A summary of the terms of engagement to lay out the nature and scope of the work; 2. Job timetable giving the provisional dates of the timing of the audit e.g., date of planned commencement of the audit.  3. Record of any changes in the client since the last audit e.g., changes in the nature of the client’s business, change in management structure; 4. Details of the planning decisions such as areas identified as having weak internal controls requiring more detailed audit work, areas where the advice of an expert is needed etc. 5. Extent of reliance expected on internal audit. The objects of the memorandum are to record relevant general information about the concern which may be of practical use to him while conducting the audit. It is necessary to know about the: organization Its personnel Its methods of operation Policies about sales Advertisement Investments Depreciations Reserves etc. If it is a first audit it will have to be prepared thoroughly so as to cover various aspects about the concern. If audit has been carried on earlier, only changes if any, in the various items should be noted. Sometimes the auditor just talks to the officer of the concern and collects all the information and does not keep anything in writing, but it is always advised to prepare such a memorandum. According to Eric L. Kohlar, an audit memorandum, in the event of the first audit, should contain the following points: ❖ Ownership and control ❖ A brief history of the net worth Accounts. ❖ Principal kinds of products ❖ Nature of the product in which the products are sold. ❖ Price conditions and trends of sales. ❖ Advertising methods ❖ Location of plants and offices  ❖ Sources of raw materials and trends in prices. ❖ Books of Accounts, nature of and where kept. ❖ How this year is different from the previous year, new products new equipment, changes in cost, financial problems. ❖ How next year will differ from this year: changes in production, plan, cost management. ❖ Purpose of investment. ❖ Special problems raised by the management: opinion of internal controls, accounting policies, costing methods, accuracy of internal reporting. ❖ Tax returns ❖ Preparation of government reports. Procedural review in new Audit: Procedural review means “A study of the structural and operating characteristics of the organization under examination.” He should know beforehand about the nature of the business, its management and methods of operation. If the nature of the concern is technical, with which he is not familiar, he must familiarize himself with all those technical details. In case of company, it is essential to know the top management and how it operates. For this organizational and functional chart may be obtained and studied if there are any. If that is not available, he should prepare a chart himself. He should also try to be familiar with the policy of the BODs in delegating authorities and how efficiently the management controls the staff. He should enquire about the adequacy and reliability of internal control. Division of work between senior and junior clerk: For the efficient and economic conduct of audit, it is desirable that the work may be carried on by two or more audit clerks. However, the number of persons required would depend upon the amount and character of the work to be done. Usually, the work is divided between junior and senior audit clerks who work under a principal auditor. Organization of a large audit firm may consist of principals, auditors, assistants, and office staff. The senior partners, junior partners, managers or supervisors work as principals. The distinction between the juniors and seniors for this purpose need not be made by age but by the skill and experience in their profession. Seniors should delegate some work to one or more juniors but should have supervision over them. The job of seniors: ✓ The contact between the principal and the client should be through the seniors. ✓ The principal should convey all the important matters to his seniors. ✓ Nature and order of the work to be decided by the senior. ✓ Instructions on working papers prepared by him. ✓ Uniformity in procedure. ✓ Should personally enquire the matters like calculation of stocks, adequacy of reserves, depreciation etc. ✓ Should study the important documents such as partnership deed, MOA, AOA and the minutes etc. ✓ Responsible for negligence. The job of juniors: ✓ Work directly under the senior. ✓ Should carry instructions given by the senior. ✓ Should try to grasp the transactions well before passing them and should seek guidance from senior. ✓ Should avoid discussions with the staff of the client and cooperate with his senior wholeheartedly.