Lecture 6 Audit Management; Audit plan, audit control and audit
programme
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Audit Management Audit management involves planning, execution,
control and review of the audit work so as to achieve a high
standard of the audit work.
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Audit plan ISA 300 Planning an audit of financial statements
states that the auditor shall plan the audit so that the engagement
is performed in an effective manner. The audit plan converts the
audit strategy into a more detailed plan and includes the nature,
timing and extent of audit procedures to be performed by engagement
team members in order to obtain sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level.
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The importance of planning Helps auditor to devote appropriate
attention to important areas of the audit. Helps auditor to
identify and resolve potential problems on a timely basis. Helps
auditor to properly organise and manage the audit so it is
performed in an effective manner. Assist in the selection of
appropriate team members and assignment of work to them Facilitate
the direction, supervision and review of work
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Assist in coordination of work done by auditors of components
and experts. Establishes the means of achieving the objectives of
the audit. Makes sure that the audit can be completed on time
Guarantees the required professional standards (ISAs) can be
achieved. The importance of planning
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Guidelines for the Audit Plan The form for audit planning
varies from audit to audit. However planning memorandum makes the
following procedure appropriate; 1. Hold an initial meeting with
client to know about operations of the business. 2. Review previous
years files to find out outstanding matters to be cleared and
consider changes in legislation and accounting practices which
affect the client. 3. Study for review interim accounts as well as
any management accounts available
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4. Agree time table with client 5. Agree significant matters to
be covered in the preparation of the financial statement and
conduct of the audit. e.g. Stocktaking date, confirmation of
balances by 3 rd parties etc. 6. Assess the reliability of the
internal audit work and agree on non-audit matters. Guidelines for
the Audit Plan
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The Form of the Audit Plan 1. An outline approach of the
conduct of the audit 2. Selection of the number of staff and
required grades and special skills 3. Briefing of the audit staff
about the audit work 4. Establishment of time budgets 5. Agreement
on detailed work and remuneration for any non-audit work 6.
Consultation with joint auditors on work allocation and scheduling
of meetings for mutual exchange of information. The guidelines and
the form above forms the planning memorandum which establishes the
framework for audit work
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The Overall Audit Plan The overall audit plan should cover; 1.
Knowledge of the entitys business 2. Risk and materiality 3.
Nature, timing and extent of procedures 4. Co-ordination,
direction, supervision and review 5. Reporting obligation under the
engagement Standards on audit plan includes ISA 220, ISA 300 &
ISA 320
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The overall audit strategy and audit plan; matters of
consideration The overall audit strategy sets the scope, timing and
direction of the audit, and guides the development of the more
detailed audit plan. Characteristics of the engagement Reporting
objectives, timing of the audit and nature of communication.
Significant factors, preliminary engagement activities, and
knowledge gained on other engagements. Nature, timing and extent of
resources
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Characteristics of the engagement Financial reporting framework
Industry-specific reporting requirements Expected audit coverage
Nature of business segments Availability of internal audit work Use
of service organisations Effect of IT on audit procedures
Availability of client personnel and data
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Reporting objectives, timing of the audit and nature of
communication. Entitys time table for reporting Organization of
meetings with management and those charged with governance
Discussion with management and those charged with governance
Expected communication with third parties
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Significant factors, preliminary engagement activities, and
knowledge gained. Determination of materiality Areas identified
with higher risk of material misstatement Results of previous
audits Need to maintain professional scepticism Evidence of
managements commitment to design, implementation and maintenance of
sound internal control Volume of transactions Significant business
and industry developments Significant changes in financial
reporting and other changes
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Nature, timing and extent of resources Selection of engagement
teams Assignment of work to team members Engagement budgeting
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Overall audit strategy example Items to include in the
strategy; Industry-specific FR requirements Number of locations to
be visited Audit clients time table for reporting to its members
Communication between audit team and the client
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Control over Conduct of an Audit After formulating a concrete
plan for the audit work, there is the need to constantly monitor
the progress of the audit work so as to ensure a high quality of
the audit work and proper control over the conduct of the
audit.
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Approaches to control Quality control is a cardinal aspect of
audit management. Proper control could be instituted by adopting
the following approach; 1. Work should be allocated according to
skill, experience, training and proficiency of the staff available.
2. Audit objectives should be made known and explained to the audit
staff. 3. Staff should be advised to refer problem to senior staff.
There should be consultation between staff and partners/managers.
4. There should be adequate supervision and detailed recording of
audit work.
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Review of Control 1. The general quality control measures
operated by the firm. 2. Personnel standards set by the firm as
regards training and criteria for engaging and promoting staff. 3.
The monitoring, evaluating and communicating of current
developments to audit staff. 4. The assessment of the technical
department set up in the firm as a back up of the audit firm. 5. A
second partners review of the controls or review by a review panel,
referred to as live review or by another audit firm (peer reviews)
is advisable.
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Audit Programme The auditor should develop and document the
nature, timing and extent of planned audit procedures required to
implement the overall audit plan in an audit programme document.
Audit Programme is a set of instructions in writing issued to audit
staff involved in the conduct of the audit, which outlines the
step-by-step approach of the audit work to be undertaken. It
directs and guides the audit staff in tackling specific
duties.
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The auditor should prepare a written audit programme setting
forth the procedures that are needed to implement the audit plan.
The programme may also contain the audit objectives for each audit
and should have sufficient details to serve as a set of
instructions to assistants involved in the audit and as a means to
control the proper execution of the work. The audit plan and
related programme should be reconsidered as the audit progress.
Such consideration is based on the auditors review of internal
control, his preliminary evaluation thereof, and the results of his
compliance and substantive procedures. Audit Programme
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Audit programme enhances; The auditors consideration and
understanding of risks of error and the required audit evidence.
Coordination of audit with financial statement preparation. Timing
of tests of controls and substantive procedures Co-ordination of
assistance from the entity Composition of audit team Involvement of
other auditors/experts
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When to compile the programme It is compiled whenever the
auditor starts a new audit, though it should not be as rigid as
future programmes. It can be drawn during the initial visit to the
client and meeting with management so as to gain insight into the
operations of the company. The auditor should draw on experience
from similar operations and should consider the level of
intelligence, skill and experience of audit staff. Auditor should
consider soundness or otherwise of internal control system.
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Advantages of audit programme It acts as a permanent record or
guide to the conduct of the audit work (plan of work). The auditor
can be certain that certain cardinal areas of the audit work are
covered (checklist for important areas). The progress of the work
can be ascertained at any point in time and easy for audit staff to
carry on the work of another. It allows senior staff to control the
audit work. Supervision of audit may reduce It allows for budget
and plan of staff allocations
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Disadvantages of audit programme It tends to stifle initiative
and flexibility on the part of audit staff. Audit staff may rush to
complete a required schedule by placing ticks at programmes not yet
covered hence errors and frauds may not be located. Clients staff
may exploit any loopholes in the conduct of the audit by committing
fraud. Audit assistants may not be able to recommend for amendments
to the programme.
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Minimizing dangers in audit programme Avoid the use of the
standardised audit programme. Audit programme should be drawn for
each particular audit. Audit programme for a new audit should not
be made rigid to follow until the auditor has had considerable
insight into the operations of the company as well as internal
control systems. Audit staff should be encouraged to use their
initiative and discretion as well as adopt flexible attitude to the
conduct of the audit.
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Example of audit programme: Bank Client Account Date. Nature of
test.. Preliminary : Obtain or prepare lead schedules and reference
totals to balance sheet Audit objective: To verify the existence
and title of bank and cash balance Bank; 1. Obtain standard bank
letters for all accounts opened during the year and ensure all
items on the request are answered
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2. Investigate monies held on behalf of third parties. Specify
detailed programme followed. 3. count cash balance using firms
audit procedures 4. obtain cash certificates for cash balances not
counted. 5. Prepare continuation sheets for additional test
necessary to meet this audit objective or specify none. Audit
objective To ensure that all bank and cash balance are properly
stated Example of audit programme: Bank
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6. review or prepare reconciliation for all bank accounts in
accordance with firms audit procedures 7. ascertain whether all
cheques had left the premises prior to the date of reconciliation
8. compare cash book and pay-in-book immediately prior to and after
year-end to ensure dates correspond 9. for accounts maintained in
foreign currency, ensure that the correct rate of foreign exchange
is used. 10. prepare schedule of all inter-bank transfers before
and after balance sheet and verify receipts of amounts in transit.
Example of audit programme: Bank
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Standard Audit Programme for Sales Test a number of recent
transactions relating to sales shown on records completing sales
such as copy goods dispatched notes or completion orders. Obtain
relevant copy sales invoices and check prices charged with
independent evidence such as price lists, tenders, etc. Test check
calculations and additions on copy sales invoice. Test a number of
items with stock records to ensure deductions from stock
particularly items near end of year. Check sales analysis. Test
check postings on sales ledger
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Verify selected number of items with evidence giving rise to
their issue. Check with goods dispatch and ensure that full
numerical sequence is maintained. Verify that all credit notes have
been properly authorized by an official engaged in duties other
than maintaining sales ledger or dealing with cash receipts. Check
extensions, additions and prices in the credit notes with original
invoices enquiring into any difference. Check analysis of credit
notes Where good have been returned, check with stock records.
Check postings to return inwards ledger. Standard Audit Programme
for Sales Returns
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Assignment Design a detailed audit programme for the audit of a
new client for the following accounts; Account Receivables Account
Payables State the audit objective (2) in each case.
