A presentation:
Ram Mohan Johri
Principal Accountant General ( Audit)
Himachal Pradesh
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What are the main reasons for audit planning?
- to enable the auditor to obtain sufficient appropriate evidence
- to help keep audit costs reasonable
- to avoid misunderstandings with the client
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Audit Planning
Addresses the specifics of what, where, who, when and how:
 What are the audit objectives?
 Where will the audit be done? (i.e., scope)
 When will the audit(s) occur? (how long?)
 Who are the auditors?
 Who are the initial interviewees?
 How will the audit be done?
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Audit Planning
 Planning is required for :
 Selection of Audit team with suitable qualifications and experience.
 Assessment of need for specialists.
 Determination of probable time period in which audit is to be carried out for better utilisation of audit resources and coordination among constituent elements.
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Audit Objectives
Transaction-related
1. Existence
2. Completeness
3. Accuracy
4. Classification
5. Timing
6. Posting and summarization
Balance-related
1. Existence
2. Completeness
3. Accuracy
4. Classification
5. Cutoff
6. Detail tie-in
7. Realizable value
8. Rights and obligations
9. Presentation and disclosure
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Audit process
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 Perform risk assessment procedures, including
 Inquiries of management and others within the entity
 Analytical procedures
 Observation and inspection relating to client activities, operations, documents, reports and premises.
 Other procedures, such as inquiries of others outside the company (e.g., legal counsel, valuation experts) and reviewing information from external sources such as analysts, banks, rating organizations, journals.
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 Competitive position
 Organizational structure
 Accounting policies and procedures
 Ownership
 Capital structure
 Product and service lines
 Critical business processes
 Internal control
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Understanding the Client’s Business,
Industry, Regulatory, and Other Factors
 Competitive environment
 Supplier and customer relationships
 Technology developments
 Major laws and regulations
 Economic conditions
 Attractiveness of the industry
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Barriers to entry
Strength of competitors
Bargaining power of suppliers of raw materials and labor
Bargaining power of customers
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Understanding the Client’s Business—
Objectives, Strategies & Business Risks
 Objectives—Overall plans
 Operating and financial strategies—Operational actions to achieve objectives
 Business risks—Threats to achieving objectives
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Understanding the Client’s Business—
Measuring and Reviewing Performance
 Budgets
 Key performance indicators
 Variance analysis
 Segment performance reports
 Balanced scorecard
 External parties
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Understanding the Client’s Business – Internal
Control
 Need knowledge and understanding of how a client’s internal control works:
 What controls exists
 Who performs them
 How various types of transactions are processed and recorded
 What accounting records and supporting documentation exist
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Understanding the Client’s Business—Sources of Information
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Inquiries of management
Industry Accounting and Auditing Guides
Industry Risk Alerts
Trade journals and news stories
Government publications
Prior company annual reports and SEC filings
Prior tax returns
Electronic sources e.g.
web pages for company
Tour of plant and offices
Analytical procedures
The statement of cash flows and obtaining an understanding of the client
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 Auditors’ consideration of internal control is often organized around client’s major transaction cycles
(examples)
 Revenue cycle
 Acquisition cycle
 Conversion cycle
 Payroll cycle
 Investing cycle
 Financing cycle
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 Use professional judgment and based on reasonable person
 Considers both
 Quantitative and qualitative factors
 Materiality used in
 Planning the audit
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At the overall financial statement level
Allocate to individual accounts
 Evaluating audit findings
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3. Assess the Risks of Material Misstatement and Design
Further Audit Procedures
 Overall approach
 What could go wrong?
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How likely is it that it will go wrong?
What are the likely amounts involved?
 Particularly consider
Inherent risks
 Risks of material misstatement due to fraud (fraud risks)
 Design further audit procedures
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 Considerations in identifying fraud risks
 Type
 Significance
 Likelihood that it will result in a material misstatement
 Pervasiveness
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Two types
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Fraudulent financial reporting (management fraud)
Misappropriation of assets (defalcations)
Procedures to assess fraud risks
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Discussion among engagement team
Inquiries of management and other personnel
Risk assessment analytical procedures (to aid in planning the audit)
Considering fraud risk factors
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Incentives
Opportunity
Attitude
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Overall response
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Professional skepticism and audit evidence
Assigning personnel and supervision
Accounting principles
Predictability of auditing procedures
Alterations in audit procedures
 More reliable evidence
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Shifting timing to year end
Increasing sample sizes
Response to the possibility of management override
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Examining journal entries
Review accounting estimates for biases
Evaluating the business rationale for significant unusual transactions
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Consideration of Fraud
Throughout the Audit
 Evaluating the results of audit tests
 Discovery of fraud
 Communication to appropriate level of management
 If fraud involves senior management or material misstatement communicate to audit committee
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 Systems portion
 Deals with client’s internal control
 Evidence of test of controls and assessing control risk
 Substantive test portion
 Deals with financial statement account balances
 Indirect and direct verification of income statement accounts
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It is convenient to think of the audit program as consisting of the three major classes of tests:
Tests of controls and substantive tests of transactions
Analytical procedures
Tests of details and balances
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Phase I
Plan and design an audit approach.
Phase III
Perform analytical procedures and tests of details of balances.
Phase II
Perform tests of controls and substantive tests of transactions.
Phase IV
Complete the audit and issue an audit report.
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Perform initial planning.
Understand the client’s business and industry.
Assess client’s business risk.
Perform preliminary analytical procedures.
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Set materiality and assess acceptable audit risk and inherent risk.
Understand internal control and assess control risk.
Gather information to assess fraud risks.
Develop overall audit plan and audit program.
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Plan to reduce assessed level of control risk?
No
Yes
Perform tests of controls.
Perform substantive tests of transactions.
Assess likelihood of misstatements in financial statements.
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High or unknown
Low Medium
Perform analytical procedures.
Perform tests of key items.
Perform additional tests of details of balances.
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Review for contingent liabilities.
Review for subsequent events.
Accumulate final evidence.
Evaluate results.
Issue audit report.
Communicate with audit committee and management.
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Relationship Between Types of
Tests and Evidence
Type of Evidence
Type of Test
Procedures for I/C
Tests of controls
Substantive T.O.T.
Analytical procedures
Tests of details
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Further audit procedures should include
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Substantive procedures for all relevant assertions
Tests of controls when the auditors’ risk assessment includes an expectation that controls are operating effectively, or when substantive procedures alone are not sufficient
Procedures should be linked with the assessed risks of material misstatement at the relevant assertion level
Overall responses when assessed risks of material misstatement are high
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Heightened professional skepticism
Assigning more experienced staff
Assigning staff with specialized skills
Providing more supervision
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 A trail of evidence that links source documents, journal entries and ledger entries
 Auditor may follow the audit trail in either of two directions related to the direction of testing
 Test for existence or occurrence
 Test for completeness
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Impact of Information Technology on
Audit Testing
Computer assisted audit techniques (CAATS) may be used to test automated controls or data.
Reports produced by IT may be used to test the effectiveness of IT general controls.
Access controls
Program change controls
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Variations in Evidence Mix
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An Example :Objectives of Substantive Programs for Asset Accounts
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Establish the existence of assets
Establish that the company has rights to the assets
Establish the completeness of recorded assets
Verify the cutoff of transactions
Determine the appropriate valuation of the assets and accuracy of related transactions
Determine the appropriate financial statement
presentation and disclosure of the assets
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Relationships among Audit
Objectives,
Risks of
Material
Misstatement, and Audit
Procedures
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procedures applied tests performed conclusions reached information obtained
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Working papers
Their objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS.
Working papers also provide:
- a basis for planning the audit
- a record of the evidence accumulated and the results of tests
- data supporting the audit report
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Impact of Audit
 It is carried out after a period of 3 to 5 years of the conduct of audit.
 It is done to know whether remedial action has been taken in respect of the deficiencies pointed out in audit.
 It is done to know the extent to which recommendations have been implemented.
 It gives useful data about the areas of focus in subsequent audit exercises.
 Complete the audit exercise and helps to access the extent to which it is meaningful.
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