PLANNING

APB statement of auditing standard 200 covers Planning.The standard requires
the auditor to plan the audit work so as to perform the audit in an effective
manner.
Planning involves:
(a) Developing a general strategy; and
(b) A detailed approach for the expected nature, timing and extent of the
audit.
The auditor develops the general audit strategy in an overall audit plan to set
the direction for the audit and provide guidance for the development of the
audit programme.
The auditor also develops audit programme which sets out the detailed
procedures required to implement the strategy as part of planning for the audit.

Planning the Work

Planning is necessary for audits of entities of all sizes. The objectives of planning
the audit work, which takes place before the detailed audit work begins, include:
(a) Ensuring that appropriate attention is devoted to the different areas of
the audit;
(b) Ensuring that potential problems are identified; and
(c) Facilitating review’ (Chitty D, 2004).
Planning also assists:
(i) In the proper assignment of work to members of the audit team and
their briefing, and in the co-ordination of work done by other auditors
and experts, so that the audit may be performed in an efficient and
timely manner; and
(ii) In obtaining an understanding of the entity’s affairs and, all members
of the audit team in understanding the nature and scope of the work
they are to carry out before the audit field work starts.
Obtaining knowledge of the organisation’s business is required as an important
part of planning the work. The auditors’ experience with the entity and
knowledge of its business assist in the identification of events, transactions
and practices which may have a material effect on the financial statements.
Planning varies according to the size of the entity and the complexity of the
audit. (Chitty, 2004).
Auditors need to discuss elements of the overall audit plan and certain audit
procedures with:
(a) The entity’s management and staff; and
(b) The audit committee (where such a committee is in place) in order to
improve the effectiveness of the audit and to co-ordinate audit
procedures with work of the entity’s personnel, including internal
auditors.
The overall audit plan and the detailed audit procedures to be performed,
however, remain the auditors’ responsibility. When such discussions occur, care
is required not to compromise the independence and validity of the audit.

The Overall Audit Plan

The standard requires the auditor to develop and document an overall audit
plan describing the expected scope and conduct of the audit.
The amount of detail in the record of the overall audit plan is to be sufficient to
guide the development of the detailed audit procedures to be performed.
However, the precise form and content of the overall audit plan, and the
formality with which it considers matters affecting the scope of the audit and
the audit work to be undertaken, vary depending on the:
(a) Size of the entity;
(b) Complexity of the audit;
(c) Need for member of the audit team to be briefed; and
(d) Specific methodology and technology the auditors use.
Matters for auditors to consider in developing the overall audit plan may include:

Knowledge of the Entity’s Business

The following are to be considered:
(a) General economic factors and industry conditions affecting the entity’s
business;
(b) Important characteristics of the entity, its business, principal business
strategies, its financial performance and its reporting requirements,
including changes since the previous audit;
(c) The operating style and control consciousness of directors and
management; and
(d) The auditors’ cummulative knowledge of the accounting and internal
control systems and any expected changes in the period.

Risk and Materiality

The following are to be considered:
(a) The setting of materiality for audit planning purposes;
(b) The expected assessments of risks of error and the identification of
significant audit areas;
(c) Any indication, including the experience of past years, that misstatements
that could have a material effect on the financial statements might arise
because of fraud or for any other reason; and
(d) The identification of complex accounting areas including those involving
accounting estimates.

Nature, Timing and Extent of Procedures

The following are to be considered:
(a) The relative emphasis expected to be placed on tests of control and
substantive procedures;
(b) The effect on the audit of the use of information technology by the entity
or the auditors;
(c) The work of any internal audit function and its expected effect on external
audit procedures;
(d) Procedures which need to be carried out at or before the year end; and
(e) The timing of significant phases of the preparation of the financial
statements.

Co-ordination, Direction, Supervision and Review

Auditors should note the following:
(a) The involvement of other auditors, including other offices of the same
firm, in the audit of components, for example, subsidiary undertakings,
branches and divisions;
(b) The involvement of, and communication with, experts, other third parties
and internal auditors;
(c) The number of locations; and
(d) Staffing requirements.

Other matters include:

(a) Any regulatory requirements arising from the decision to retain the
engagement;
(b) The possibility that the going concern basis may be inappropriate;
(c) The terms of the engagement and any statutory responsibilities; and
(d) The nature and timing of reports or other communication with the entity
that are expected under the engagement (Chitty, 2004).

Changes to the Audit Work Planned

The audit work planned should be reviewed and, if necessary, revised during
the course of the audit. That review should cover the following:
(a) Changes in conditions, or unexpected results of audit procedures, may
require changes to the overall audit plan or the planned audit
procedures;
(b) Changes to the planned audit procedures are documented so that there
is an accurate record of the nature, timing and extent of the audit
procedures performed; and
(c) A record of changes to the overall audit plan may be necessary to explain
the general strategy finally adopted for the audit.

Knowledge of the Business (KOB)

APB statement of auditing standard 210 covers “Knowledge of the business”
(KOB).

Obtaining the Knowledge

• Prior to Acceptance of an Engagement

Prior to acceptance of an engagement, auditors obtain a preliminary knowledge
of the industry and of the ownership, directors, management and operations of
the entity to be audited, sufficient to enable them to consider their ability to
undertake the audit.
Knowledge obtained prior to acceptance of an engagement generally includes:
(a) Knowledge from previous relevant experience;
(b) Knowledge from enquiries of predecessor auditors;
(c) Specific rules or regulations pertaining to the industry;
(d) Accounting standards applicable to the industry;
(e) An initial perception of the viability of the business; and
(f) The perceived integrity of the directors and management.
Auditors also require sufficient knowledge to enable them to assess whether
there is a requirement for staff with specialist audit expertise (for example
computer audit specialists) or other experts. (Chitty, 2004)

• Following Acceptance of an Engagement

Following acceptance of an engagement, the auditor should:
(a) Obtain further and more detailed knowledge and information sufficient
to enable them to plan the audit and develop an effective audit
approach;
(b) Obtain the required knowledge at the start of the engagement.
Obtaining the required knowledge of the business is a continuous and
cummulative process of gathering and assessing the information and
relating the resulting knowledge to audit evidence and information at
all stages of the audit; and
(d) Information obtained as the audit progresses enable auditors to update
and augment that knowledge, and may require them to reassess it.

• Updating Knowledge for Succeeding Periods

In succeeding periods, auditors should:
(a) Consider the information gathered previously; and
(b) Perform procedures designed to identify significant changes that have
taken place since the last audit.

Sources of Knowledge

Auditors can obtain knowledge of the industry and the entity from a number of
sources including:
(a) Previous experience with the entity and its industry;
(b) Visits to the entity’s premises and plant facilities;
(c) Discussion with people within the entity (for example directors, internal
auditors, computer personnel and senior operating personnel);
(d) Discussion with other auditors and with legal and other advisors who
have provided services to the entity or within the industry;
(e) Discussion with knowledgeable people outside the entity (for example
economists, industry regulators);
(f) Publications related to the industry (for example government statistics,
surveys, texts, trade journals, reports prepared by banks and securities
dealers, financial newspapers);
(g) Legislation and regulations that significantly affect the entity;
(h) Documents produced by the entity (for example minutes of meetings,
material sent to shareholders or filed with regulatory authorities,
promotional literature, prior years’ annual and financial reports, budgets,
internal management reports, interim financial reports, management
policy manuals, manuals of accounting and internal control systems,
charts of accounts, job descriptions, marketing and sales plans); and
(i) Professional literature giving industry-specific guidance.

Using the Knowledge

Understanding the business and using this information appropriately assists
auditors in:
(i) Assessing risks and identifying problems;
(ii) Plannng and performing the audit effectively and efficiently; and
(iii) Evaluating audit evidence.
Auditors make judgements about many matters throughout the course of the
audit where knowledge of the business is important, for example:
(a) Considering risks pertaining to the entity’s business activities and the
directors’ response thereto;
(b) Identifying areas where special audit considerations and skills may be
necessary;
(c) Developing the overall audit plan and the audit programme;
(d) Considering the complexity of the entity’s information systems and any
effect on the audit approach;
(e) Determining a materiality level and assessing whether the materiality
level chosen remains appropriate;
(f) Assessing inherent risk and control risk;
(g) Assessing audit evidence to establish its appropriateness and the
validity of the related financial statement assertions;
(h) Evaluating accounting estimates and representations by the directors
or management;
(i) Recognising conflicting information (for example contradictory
representations);
(j) Recognising unusual circumstances (for example undisclosed related
party transactions, possible fraud or non-compliance with law or
regulations, or unexpected relationships of statistical operating data
with reported financial results);
(k) Making informed enquiries and assessing the reasonableness of answers;
and
(l) Considering the appropriateness of accounting policies and financial
statement disclosures. (Chitty, 2004)
The audit engagement partner must ensure that the audit team obtains such
knowledge of the business of the entity being audited as may reasonably be
expected to be sufficient to enable it to carry out the audit work effectively.
Such knowledge may be transmitted initially by:
(a) Means of the overall audit plan;
(b) An audit briefing meeting; and
(c) Subsequently during the course of the audit.
The audit engagement partner also ensures that the audit team:
(a) Understands the need to be alert; and
(b) Shares additional information.

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