Pipara & Co LLP

Planning an Audit of Financial Statements

Introduction

Scope of this SA

This Standard on Auditing (SA) deals with the auditor’s responsibility to plan an audit of financial statements. This SA is framed in the context of recurring audits. Additional considerations in initial audit engagements are separately identified. (Ref: Para. A1-A4)

Effective Date
This SA is effective for audits of financial statements for periods beginning on or after 1st April 2008.
Objective
The objective of the auditor is to plan the audit so that it will be performed in an effective manner.
Requirements
Involvement of Key Engagement Team Members
The engagement partner and other key members of the engagement team shall be involved in planning the audit, including planning and participating in the discussion among engagement team members. (Ref: Para. A5)
Preliminary Engagement Activities
  1. The auditor shall undertake the following activities at the beginning of the current audit engagement:
    1. Performing procedures required by SA 2201, “Quality Control for an Audit of Financial Statements” regarding the continuance of the client relationship and the specific audit engagement;
    2. Evaluating compliance with ethical requirements, including independence, as required by SA 2202; and
    3. Establishing an understanding of the terms of the engagement, as required by SA 2103. (Ref: Para. A6-A8)

1 SA 220, paragraph 12-13.

2 SA 220, paragraph 9-11.

3 SA 210, “Agreeing the Terms of Audit Engagements,” paragraphs 9-13.

Planning Activities
  1. The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.
  2. In establishing the overall audit strategy, the auditor shall:
    1. Identify the characteristics of the engagement that define its scope;
    2. Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required;
    3. Consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement team’s efforts;
    4. Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and
    5. Ascertain the nature, timing and extent of resources necessary to perform the engagement. (Ref: Para. A9-A12)
  3. The auditor shall develop an audit plan that shall include a description of:
    1. The nature, timing and extent of planned risk assessment procedures, as determined under SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment”.
    2. The nature, timing and extent of planned further audit procedures at the assertion level, as determined under SA 330 “The Auditor’s Responses to Assessed Risks”.
    3. Other planned audit procedures that are required to be carried out so that the engagement complies with SAs. (Ref: Para. A13)
  4. The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. (Ref: Para. A14)
  5. The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. (Ref: Para. A15-A16)
Documentation
  1. The auditor shall document:
    1. The overall audit strategy;
    2. The audit plan; and
    3. Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes. (Ref: Para. A17-A20)
Additional Considerations in Initial Audit Engagements
  1. The auditor shall undertake the following activities prior to starting an initial audit:
    1. Performing procedures required by SA 220 regarding the acceptance of the client relationship and the specific audit engagement4; and
    2. Communicating with the predecessor auditor, where there has been a change of auditors, in compliance with relevant ethical requirements. (Ref: Para. A21)
Application and Other Explanatory Material
The Role and Timing of Planning (Ref: Para. 1)

A1. Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan. Adequate planning benefits the audit of financial statements in several ways, including the following:

  • Helping the auditor to devote appropriate attention to important areas of the audit.
  • Helping the auditor identify and resolve potential problems on a timely basis.
  • Helping the auditor properly organize and manage the audit engagement so that it is performed in an effective and efficient manner.
  • Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks, and the proper assignment of work to them.
  • Facilitating the direction and supervision of engagement team members and the review of their work.
  • Assisting, where applicable, in coordination of work done by auditors of components and experts.

A2. The nature and extent of planning activities will vary according to the size and complexity of the entity, the key engagement team members’ previous experience with the entity, and changes in circumstances that occur during the audit engagement.

4 SA 220, paragraphs 12-13.

A3. 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.

A4. The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and management of the audit engagement (for example, to coordinate some of the planned audit procedures with the work of the entity’s personnel). 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. For example, discussing the nature and timing of detailed audit procedures with management may compromise the effectiveness of the audit by making the audit procedures too predictable.

Involvement of Key Engagement Team Members (Ref: Para. 4)
A5. The involvement of the engagement partner and other key members of the engagement team in planning the audit draws on their experience and insight, thereby enhancing the effectiveness and efficiency of the planning process5.
Preliminary Engagement Activities (Ref: Para. 5)

A6. Performing the preliminary engagement activities specified in paragraph 5 at the beginning of the current audit engagement assists the auditor in identifying

5 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment”, paragraph 10, establishes requirements and provides guidance on the engagement team’s discussion of the susceptibility of the entity to material misstatements of the financial statements. SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, paragraph 15 provides guidance on the emphasis given during this discussion to the susceptibility of the entity’s financial statements to material misstatement due to fraud.

and evaluating events or circumstances that may adversely affect the auditor’s ability to plan and perform the audit engagement.

A7. Performing these preliminary engagement activities enables the auditor to plan an audit engagement for which, for example:

  • The auditor maintains the necessary independence and ability to perform the engagement.
  • There are no issues with management integrity that may affect the auditor’s willingness to continue the engagement.
  • There is no misunderstanding with the client as to the terms of the engagement.

A8. The auditor’s consideration of client continuance and ethical requirements, including independence, occurs throughout the audit engagement as changes in conditions and circumstances occur. Performing initial procedures on both client continuance and evaluation of ethical requirements (including independence) at the beginning of the current audit engagement means that they are completed prior to the performance of other significant activities for the current audit engagement. For continuing audit engagements, such initial procedures often occur shortly after (or in connection with) the completion of the previous audit.

Planning Activities
The Overall Audit Strategy (Ref: Para. 6-7)

A9. 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.

A10. The Appendix lists examples of considerations in establishing the overall audit strategy.

A11. Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking into account the need to achieve the audit objectives through the efficient use of the auditor’s resources. The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely inter-related since changes in one may result in consequential changes to the other.

Considerations Specific to Smaller Entities

A12. In audits of small entities, the entire audit may be conducted by a very small audit team. Many audits of small entities involve the engagement partner (who may be a sole practitioner) working with one engagement team member (or without any engagement team members). With a smaller team, co-ordination of, and communication between, team members are easier. Establishing the overall audit strategy for the audit of a small entity need not be a complex or time- consuming exercise; it varies according to the size of the entity, the complexity of the audit, and the size of the engagement team. For example, a brief memorandum prepared at the completion of the previous audit, based on a review of the working papers and highlighting issues identified in the audit just completed, updated in the current period based on discussions with the owner- manager, can serve as the documented audit strategy for the current audit engagement if it covers the matters noted in paragraph 7.

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