1 AUDIT PL ANNING AND CONTROL PLANNING 1.0 LEARNING OBJECTIVES After studying this chapter, readers should be able to understand: ! The general concept of audit strategy. ! The Importance of audit strategy as an effective plan for an audit. ! Internal control systems, evaluation and assessment. ! Relationship with experts.
! Audit risks and its relative importance to audit. ! Components of audit risks. ! How to assess audit risks.1 INTRODUCTION Auditing has developed over many years, but it was not until the late nineteenth century (with the formation of joint stock companies, the predecessors to present day limited liability companies) that auditing became widely accepted in the United Kingdom and by extension, in other parts of the world. Individual firms of accountants have refined their approach to auditing from time to time and the professional accountancy bodies in various countries have published guidelines to their members on auditing procedures.2 CONCEPTS OF AUDIT STRATEG STRATEG TEGYY Audit strategy is directed to the gathering of relevant and reliable audit evidence in order to support the expression of an opinion on the accounts.
In carrying out an audit assignment, the auditor should: (a) Consider his responsibilities as defined in the terms of engagement; (b) Familiarise himself with the client’s business and organisation; (c) Obtain a preliminary understanding of the principal features of the client’s accounting system and internal control procedures; (d) Determine and record the audit strategy to be adopted; (e) Where it is proposed to carry out a detailed evaluation of all or certain internal controls with a view to placing some reliance on such controls, obtain a more detailed description of the accounting system and internal control procedures and review selected transactions to confirm that he has understood and recorded the system properly; 1 ADVANCED AUDIT AND ASSURANCE (f) Review critically and evaluate those aspects of the client’s accounting system, procedures and internal controls on which he intends to place some reliance; (g) Discuss any weakness in the system with the client in order, inter alia, to ascertain whether they are compensated by some other controls; (h) Test the system to determine whether the controls on which he intends to place reliance were operating during the period; (i) Report apparent weakness and breakdown in internal control to the client in a management letter; and (j) Based on the results of the work described above, carry out a programme of audit work to substantiate the amounts appearing in the accounts and related notes so as to ensure that the accounts show a true and fair view of the state of affairs and the results of the business. The above paragraph summarises the basic procedures that an auditor should carry out in order to express an opinion on the accounts. It should be noted, however, that the procedures and terminology used in practice may vary, even though, the fundamental concept may be the same. Furthermore, the extent to which the auditor places reliance on the work of an internal audit department may significantly affect the nature, timing and extent of his work.3 DETERMINATION OF THE AUDIT STRA DETERMINATION TEG STRATEG TEGYY 1.1 Purpose The purpose of determining an audit strategy is to enable the auditor familiarise himself with the client’s business and organisation as well as to obtain a preliminary understanding of the client’s accounting system.
This will entail the preliminary identification of those internal controls on which he proposes to rely upon. The auditor should then determine and record his audit strategy before commencing any detailed audit work. In doing so, the auditor will need to identify the optimum balance between, on one hand, relying on internal controls and reducing the level of his substantive tests, and on the other hand, placing little or no reliance on internal controls and seeking audit satisfaction from a higher level of validation procedures. The purpose of making this assessment is to enable the auditor to carry out the audit in the most effective and efficient manner.
Determination of the audit strategy requires a high degree of professional judgement. Consequently, the audit assignment should be carried out by an experienced staff, with the involvement of the audit partner. In particular, the determination of the audit strategy for a new client will usually require considerably more time and effort than for existing clients, except where the circumstances of existing clients have changed significantly since the last audit. However, this does not mean that a 2 AUDIT PLANNING AND CONTROL formal determination of the audit strategy is not necessary for existing clients whose circumstances do not change significantly from year to year.
In all cases, a formal record of the audit strategy is essential. The overall strategy should focus on a more efficient and effective audit.2 Audit Plans and Audit Planning Memorandum In order to ensure a high standard of performance, it is important that the auditor should prepare adequately for his work. Planning for an audit, just like every human endeavour, is essential for the smooth performance of the audit work and its successful completion. Planning ahead for an audit work will not only guarantee a valid audit opinion but will also help the auditor to ensure that: (a) The audit objective is established and achieved; (b) The audit is properly controlled and adequately directed at all stages; (c) High risk and critical areas of the engagement are not omitted but that adequate attention is focused on these areas; and (d) The work is completed economically and expeditiously, hence, savings on audit resources.
It is important to distinguish between an audit planning memorandum. Audit plan relates to preparations made by the auditor for one specific audit engagement. While audit planning memorandum is a standing arrangement made by the auditor for the continuing engagement of a particular client. Hence, an audit plan for the audit of one client for one year while audit planning memorandu is a standing plan for the continuing audit of a client from year to year.
Points for Consideration in Audit Planning Audit planning requires a high degree of discipline on the part of the auditor. In order to make the planning more meaningful, the auditor shouldtake into consideration the following matters in relation to the audit engagement: (a) Preliminary Work to be Done in Addition to the Real Audit Work This will include such matters as stocktaking, cash count, debtors’circularisation and review of previous year’s working papers. This will remind the auditor of those matters brought forward from the previous year and any other points to be resolved in the current year or problems anticipated. (b) Changes in Legislation or any Auditing Standards or Guidelines The promulgation of the Companies and Allied Matters Act, Cap.
C 20, LFN 2004, brought with it a lot of changes in accounting 3 ADVANCED AUDIT AND ASSURANCE and auditing requirements of companies. Such legislations whether in respect of all companies or particular industrial group, must be reviewed ahead of the engagement in order to deter- mine their effects on the operations or reporting requirements of the enterprise. (c) Analytical Review of Available Management Accounts and Other Management Information that Relate to the Accounts This will assist in establishing valuable ratios and indicators that will guide the auditor. For instance, the computation of the gross profit percentage compared with that of the previous year will provide a good indicator to the auditor of the accuracy and reliability of sales and cost of sales.
(d) Changes in the Business or Management The appointment of a new Finance Controller and the establishment of a new business line or the creation of a new branch are significant changes in the circumstances of the company which will necessitate changes in the existing audit plans. (e) Changes in the Accounting System The introduction of computers such that when a company introduces significant changes in its operating procedures will require a review and evaluation of the system of internal control. (f) Deadlines Established for the Submission of Audit Report Where a client has set deadlines for its statutory activities such as the annual general meeting, it is important for the auditor to work in line with such programmes. (g) Use of R otational TTesting Rotational esting and V erification Verification In practice, the auditor may not carry out a hundred percent testing or verification of the client’s transactions or segments of the business.
Where rotational testing or verification is adopted, it will be necessary for the auditor to determine ahead of the date of the engagement which aspects of the business should be selected for testing or verification. An example of rotational testing could be applied on the client’s branches to be visited. Points for Consideration in Audit Planning Memorandum Audit planning memorandum should cover the following standing matters which are designed to achieve the desired audit objectives: (a) Terms of Engagement In the case of a new audit engagement, a letter of engagement should be prepared as part of the overall plan of the audit. Even in subsequent visits,the letter of engagement should be reviewed 4 AUDIT PLANNING AND CONTROL in the light of current circumstances to ensure that all aspects of the work undertaken for the client are covered in the letter especially as they relate to taxation, accountancy, staff development and executive search.
(b) Audit Risk Areas The auditor should critically review all the areas of high risk in order to ensure that the planned procedures adequately cover such areas and that competent staff have been assigned to these areas. High risk areas may relate to the nature of the items, such as cash for a retail establishment with numerous collection points and outdoor disbursement locations. Risk may also relate to a high probability of error as in the case of stocks whose quantities are subject to estimation and are susceptible to pilferage. The risk may also relate to the structure of the organisation especially in cases of joint ownership of an organisation, where the owners are not equally represented in the management.
There is therefore the risk of withholding key information from some of the directors. (c) Assets and Liabilities These will require detailed plans since they are of continuing relevance to the financial statements of many years and the relevant vouchers may not be readily accessible. The plans relating to assets should clearly disclose their history such that current movements may easily be ascertained and adequately verified. These will apply mainly to plant and long term loans.
(d) Presence of Internal Auditor Wherever an internal auditor exists in an organisation, the audi- tor should develop suitable plans to review the technical compe- tence of the internal auditor, his degree of independence and scope and quality of his work in order to determine the extent of reli- ance to be placed on his work and to identify the areas of work overlap. (e) The Need for Specialists The auditor should determine ahead of his visit those aspects of the work that may require the services of specialists. This may be internal or external specialists as relates to stocks, specialist valuation for insurance or computer applications. (f) Audit Approach Based on the review of the system of internal control, the auditor should be able to decide on the audit approach to adopt.
This will be based on the extent of reliance to be placed on the system of internal control. 5 ADVANCED AUDIT AND ASSURANCE (g) Timetable A critical aspect of the audit is the timetable. The auditor should establish plans to ensure that for each year, the audit is completed within any stated deadline for submission of the report. (h) Staffing The auditor should plan for adequate number of staff with the required skill for the audit.
The training of audit staff is a long term process which will require that even from the initial appointment of the auditor, he should take steps to train suitable staff in sufficient number to handle the audit of the client.