Planning of Financial Audit

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INTRODUCTION

Audit Report

Definition: An audit report is a written opinion of an auditor regarding an entity's financial

statements. The report is written in a standard format, as mandated by generally accepted

auditing standards (GAAS). GAAS requires or allows certain ariations in the report,

depending upon the circumstances of the audit wor! that the auditor engaged in. The

following report ariations may be used"

A clean opinion, if the financial statements are a fair representation of an entity's

financial position.

A qualified opinion, if there were any scope limitations that were imposed upon the

auditor's wor!.

An aderse opinion, if the financial statements were materially misstated.

A disclaimer of opinion, which can be triggered by seeral situations. #or e$ample,

the auditor may not be independent, or there is a going concern issue with the auditee.

The typical audit report contains three paragraphs, which coer the following topics"

%. The responsibilities of the auditor and the management of the entity.

&. The scope of the audit.

. The auditor's opinion of the entity's financial statements.

An audit report is issued to a user of an entity's financial statements. The user may rely upon

the report as eidence that a !nowledgeable third party has inestigated and rendered an

opinion on the financial statements. An audit report that contains a clean opinion is required

by many lenders before they will loan funds to a business. t is also necessary for a publicly

held entity to attach the releant audit report to its financial statements before filing them

with the Securities and *$change +ommission.

TYPES OF AUDIT

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An audit report is an appraisal of a small businesss complete financial status. +ompleted by

an independent accounting professional, this document coers a companys assets and

liabilities, and presents the auditors educated assessment of the firms financial position and

future. Audit reports are required by law if a company is publicly traded or in an industry

regulated by the Securities and *$change +ommission (S*+). +ompanies see!ing funding, as

well as those loo!ing to improe internal controls, also find this information aluable. There

are four types of audit reports.

Unqualified Opinion

-ften called a clean opinion, an unqualified opinion is an audit report that is issued when an

auditor determines that each of the financial records proided by the small business is free of

any misrepresentations. n addition, an unqualified opinion indicates that the financial records

hae been maintained in accordance with the standards !nown as Generally Accepted

Accounting rinciples (GAA). This is the best type of report a business can receie.

Typically, an unqualified report consists of a title that includes the word /independent.0 This

is done to illustrate that it was prepared by an unbiased third party. The title is followed by

the main body. 1ade up of three paragraphs, the main body highlights the responsibilities of

the auditor, the purpose of the audit and the auditors findings. The auditor signs and dates thedocument, including his address.

Qualified Opinion

n situations when a companys financial records hae not been maintained in accordance

with GAA but no misrepresentations are identified, an auditor will issue a qualified opinion.

The writing of a qualified opinion is e$tremely similar to that of an unqualified opinion. A

qualified opinion, howeer, will include an additional paragraph that highlights the reason

why the audit report is not unqualified.

Advere Opinion

The worst type of financial report that can be issued to a business is an aderse opinion. This

indicates that the firms financial records do not conform to GAA. n addition, the financial

records proided by the business hae been grossly misrepresented. Although this may occur

by error, it is often an indication of fraud. 2hen this type of report is issued, a company must


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correct its financial statement and hae it reaudited, as inestors, lenders and other

requesting parties will generally not accept it.

Di!lai"er of Opinion

-n some occasions, an auditor is unable to complete an accurate audit report. This may occur

for a ariety of reasons, such as an absence of appropriate financial records. 2hen this

happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firms

financial status could not be determined.

Advanta#e$ Diadvanta#e and %i"itation of Audit

t is mandatory for public companies to hae statutory financial statements audit. 1any

business sta!eholders hae embraced auditing. So today we will loo! at the adantages of

haing financial statements audit and the disadantages.

&' Advanta#e of Audit

%. Audited accounts are readily accepted by Goernment authorities li!e Ta$ authorities and

+entral ban!s.

&. 3y auditing the accounts *rrors and frauds can be detected and rectified in time.

. Audited accounts carry greater authority than the accounts which hae not been audited.

4. #or accessing finance from financial institutions li!e 3an!s, preious years audited

accounts are ealuated for determining repayment capability.

5. 6egular audit of account create fear among the employees in the accounts department

and e$ercise a great moral influence on clients staff thereby restraining them from commit

frauds and errors.

7. Audited accounts facilitate settlement of claims on the retirement8death of a partner.


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9. n the eent of loss of property by fire or on happening of the eent insured against,

Audited accounts help in the early settlement of claims from the insurance company.

:. n case of ublic +ompany where ownership is separated from management, auditing of

accounts reassure the shareholders that accounts hae been properly maintained, funds are

utili;ed for the right purpose and the management hae not ta!en any undue adantage of

their position.

oining the new partner. ?ast years audited accounts will gie a

general idea about the growth and financial position of the business to the new partner.

(' Diadvanta#e of Audit

%. The payment of audit fees brings e$tra cost burden to the organi;ation.

&. @uring an audit the auditor requires the attention seeral company staff and therefore

causes disruption.


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)' %i"itation of Audit

%. An audit does not assure future iability of the organi;ation audited

&. An audit does not assure the effectieness and efficiency of management.

. Auditors e$press opinion and therefore does not gie total assurance of the true fair

presentation of annual reports.

erformance audits"

Safety, security, information systems performance, and enironmental concerns are

increasingly the sub>ect of audits. There are now audit professionals who speciali;e in

security audits and information systems audits. 2ith nonprofit organi;ations and goernment

agencies, there has been an increasing need for performance audits, e$amining their success

in satisfying mission ob>ecties.

uality audits"

uality audits are performed to erify conformance to standards through reiew of ob>ectie

eidence. A system of quality audits may erify the effectieness of a quality management

system. This is part of certifications such as S- ectie eidence showing conformance to required processes, to assess

how successfully processes hae been implemented, and to >udge the effectieness of

achieing any defined target leels. uality audits are also necessary to proide eidence

concerning reduction and elimination of problem areas, and they are a handson management

tool for achieing continual improement in an organi;ation.

To benefit the organi;ation, quality auditing should not only report nonconformance and

correctie actions but also highlight areas of good practice and proide eidence of

conformance. n this way, other departments may share information and amend their wor!ing

practices as a result, also enhancing continual improement.

-perations audit"

An operations audit is an e$amination of the operations of the client's business. n this audit

the auditor thoroughly e$amines the efficiency, effectieness and economy of the operations

with which the management of the entity (client) is achieing its ob>ectie. The operational

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audit goes beyond the internal controls issues since management does not achiee its

ob>ecties merely by compliance of satisfactory system of internal controls. -perational

audits coer any matters which may be commercially unsound. The ob>ectie of operational

audit is to e$amine Three *'s, namely" *ffectieness B doing the right things with least

wastage of resources. *fficiency B performing wor! in least possible time. *conomy B

balance between benefits and costs to run the operations.

A control selfassessment is a commonly used tool for completing an operations audit.


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FINANCIA% AUDIT

A finan!ial audit is conducted to proide an opinion whether Cfinancial statementsC (the

information being erified) are stated in accordance with specified criteria. Dormally, the

criteria are international accounting standards, although auditors may conduct audits of

financial statements prepared using the cash basis or some other basis of accounting

appropriate for the organi;ation. n proiding an opinion whether financial statements are

fairly stated in accordance with accounting standards, the auditor gathers eidence to

determine whether the statements contain material errors or other misstatements.E%F

The audit opinion is intended to proide reasonable assurance, but not absolute assurance,

that the financial statements are presented fairly, in all material respects, and8or gie a true

and fair iew in accordance with the financial reporting framewor!. The purpose of an audit

is to proide an ob>ectie independent e$amination of the financial statements, which

increases the alue and credibility of the financial statements produced by management, thus

increase user confidence in the financial statement, reduce inestor ris! and consequently

reduce the cost of capital of the preparer of the financial statements.

n accordance with the S GAA, auditors must release an opinion of the oerall financial

statements in the auditor's report. Auditors can release three types of statements other than an

unqualified8unmodified opinion. The unqualified auditor's opinion is the opinion that the

financial statements are presented fairly. A qualified opinion is that the financial statements

are presented fairly in all material respects in accordance with S GAA, e$cept for a

material misstatement that does not howeer perasiely affect the user's ability to rely on the

financial statements. A qualified opinion can also be issued for a scope limitation that is of

limited significance. #urther the auditor can instead issue a disclaimer, because there is

insufficient and appropriate eidence to form an opinion or because of lac! of independence.

n a disclaimer the auditor e$plains the reasons for withholding an opinion and e$plicitly

indicates that no opinion is e$pressed. #inally, an aderse audit opinion is issued when the

financial statements do not present fairly due to departure from S GAA and the departure

materially affects the financial statements oerall. n an aderse auditor's report the auditor

must e$plain the nature and si;e of the misstatement and must state the opinion that the

financial statements do not present fairly in accordance with S GAA.

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#inancial audits are typically performed by firms of practicing accountants who are e$perts in

financial reporting. The financial audit is one of many assurance functions proided by

accounting firms. 1any organi;ations separately employ or hire internal auditors, who do not

attest to financial reports but focus mainly on the internal controls of the organi;ation.

*$ternal auditors may choose to place limited reliance on the wor! of internal auditors.

Auditing promotes transparency and accuracy in the financial disclosures made by an

organi;ation, therefore would li!ely reduce such corporations concealmeant of unscrupulous

dealings.

The purpose of a financial statement audit is to add credibility to the reported financial

position and performance of a business. The Securities and *$change +ommission requires

that all entities that are publicly held must file annual reports with it that are audited.

Similarly, lenders typically require an audit of the financial statements of any entity to which

they lend funds. Suppliers may also require audited financial statements before they will be

willing to e$tend trade credit (though usually only when the amount of requested credit is

substantial).

Audits hae become increasingly common as the comple$ity of the two primary accounting

framewor!s, Generally Accepted Accounting rinciples and nternational #inancial 6eporting

Standards, hae increased, and because there hae been an ongoing series of disclosures of

fraudulent reporting by ma>or companies.

The primary stages of an audit are"

%. Planning and risk assessment . noles gaining an understanding of the business and the

business enironment in which it operates, and using this information to assess whether there

may be ris!s that could impact the financial statements.

&. Internal controls testing . noles the assessment of the effectieness of an entity's suite of

controls, concentrating on such areas as proper authori;ation, the safeguarding of assets, and

the segregation of duties. This can inole an array of tests conducted on a sampling of

transactions to determine the degree of control effectieness. A high leel of effectieness

allows the auditors to scale bac! some of their later audit procedures. f the controls are

ineffectie (i.e., there is a high ris! of material misstatement), then the auditors must use

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other procedures to e$amine the financial statements. There are a ariety of ris! assessment

questionnaires aailable that can assist with internal controls testing.

. Substantive procedures. noles a broad array of procedures, of which a small sampling

are"

• Analysis. +onduct a ratio comparison with historical, forecasted, and industry results

to spot anomalies.

• Cash. 6eiew ban! reconciliation, count onhand cash, confirm restrictions on ban!

balances, issue ban! confirmations.

• Marketable securities. +onfirm securities, reiew subsequent transactions, erify

mar!et alue.

• Accounts receivable. +onfirm account balances, inestigate subsequent collections,

test yearend sales and cutoff procedures.

• Inventory. -bsere the physical inentory count, obtain confirmation of inentories

held at other locations, test shipping and receiing cutoff procedures, e$amine paid

supplier inoices, test the computation of allocated oerhead, reiew current

production costs, trace compiled inentory costs to the general ledger.

• Fixed assets. -bsere assets, reiew purchase and disposal authori;ations, reiew

lease documents, e$amine appraisal reports, recalculate depreciation and

amorti;ation.

• Accounts payable. +onfirm accounts, test yearend cutoff.

• Accrued expenses. *$amine subsequent payments, compare balances to prior years,

recompute accruals.

• Debt . +onfirm with lenders, reiew lease agreements, reiew references in board of

directors minutes.


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• Revenue. *$amine documents supporting a selection of sales, reiew subsequent

transactions, recalculate percentage of completion computations, reiew the history of

sales returns and allowances.

• xpenses. *$amine documents supporting a selection of e$penses, reiew subsequent

transactions, confirm unusual items with suppliers.

An audit is the most e$pensie of all the types of e$amination of financial statements. The

least e$pensie is a compilation, followed by a reiew. @ue to its cost, many companies

attempt to downgrade to a reiew or compilation, though this is only an option if it is

acceptable to the report recipients. ublicly held entities must hae their quarterly financial

statements reiewed, in addition to the annual audit.

AUDIT PLANNING (SA 300)

Introduction!

lanning an audit inoles establishing the oerall audit strategy for the engagement and

deeloping an audit plan. The ob>ectie of auditor is to plan the audit so that it will be

performed in an effectie manner. -nce the oerall plan can be deeloped to address arious

matters identified in the oerall audit strategy, considering the need to achiee the audit

ob>ecties through efficient use of auditors resources. Auditor should consider arious

matters in deeloping the oerall plan li!e"

• Terms of *ngagement,

• Dature and Timing of reports,

• Applicable legal and statutory requirements,

• Accounting policies adopted by the client,

• dentification of significant audit areas,

• Setting 1ateriality leels etc. and more.

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Auditor needs to obtain leel of !nowledge of clients business that will enable them to

identify eents, transactions and practices that, in their >udgment, may hae a significant

effect on financial information. Audit plan is more detailed

than oerall audit strategy that includes the nature, timing and e$tent of audit procedures to

be performed by engagement team members. *ngagement partner and other !ey members of

engagement team shall be inoled in planning the audit, including planning and

participating in the discussion among engagement team members so as to enhance

effectieness and efficency of planning process.

Auditor shall plan nature, timing and e$tent of direction and superision of engagement team

members and reiew of their wor!. Audit planning ideally commences at the conclusion of preious years audit, and along with related programme, it should be reconsidered for

modification as the audit of their compliance and substantie procedures progress. #or an

initial audit, auditor may need to e$pand the planning actiities because the auditor does not

ordinarily hae preious e$perience with the entity that is considered when planning

recurring engagement.

For preparing the Audit Plan the auditor has to do the "ollo#ing Preliminary Planning

Activities

Audit plan

#rom 2i!ipedia, the free encyclopedia

Audit plannin# is a ital area of the audit primarily conducted at the beginning of audit

process to ensure that appropriate attention is deoted to important areas, potential problems

are promptly identified, wor! is completed e$peditiously and wor! is properly coordinated.

CAudit planningC means deeloping a general strategy and a detailed approach for the

e$pected nature, timing and e$tent of the audit. The auditor plans to perform the audit in an

efficient and timely manner.

Definition

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An Audit plan is the specific guideline to be followed when conducting an audit.E&F it helps

the auditor obtain sufficient appropriate eidence for the circumstances, helps !eep audit

costs at a reasonable leel, and helps aoid misunderstandings with the client.

t addresses the specifics of what, where, who, when and how"

• 2hat are the audit ob>ectiesH

• 2here will the audit be doneH (i.e. scope)

• 2hen will the audit(s) occurH (how longH)

• 2ho are the auditorsH

• Iow will the audit be doneH

*enefit of Audit Plan

• t helps the auditor obtain sufficient appropriate eidence for the circumstances

• t helps !eep audit costs at a reasonable leel.

• t helps aoid misunderstandings with the client.

• ensure that potential problems are promptly identified

• t helps to !now the scope of audit program by an Auditor.

Pro!e of Audit Plannin#

t includes following procedures

• Jnowledge of client's business

• @eelopment of audit strategies or oerall plan (who, when and how)

• reparation of audit programme

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( AD+ANTA,ES OF AUDIT PRO,RA--E

t proides the assistant carrying out the audit with total and clear setof instructions of

the wor! generally to be done.

t is essential, particularly for ma>or audits, to proide a totalperspectie of the wor!

to be performed.

Selection of assistants for the >obs on the basis of compatibilitybecomes easier when

the wor! is rationally planned, defined andsegregated.

2ithout a written and predetermined programme, wor! is necessarilyto be carried

out on the basis of some Kmental plan. n such asituation there is always a danger of

ignoring or oerloo!ing certainboo!s and records. nder a properly framed

programme, the dangeris significantly less and the audit can proceed systematically.

The assistance, by putting their signature on programme, accepts theresponsibility for

the wor! carried out by them indiidually and, ifnecessary, the wor! done may be

traced bac! to the assistant.

The principal can control the progress of the arious audits in hand bye$amination of

audit programmes initiated by the assistants deputedto the >obs for completed wor!.

t seres as a guide for audits to be carried out in the succeedingyear.

A properly drawn up audit programme seres as eidence in theeent of any charge of

negligence being brought against the auditor. tmay be of considerable alue in

establishing that he e$ercisedreasonable s!ill and care that was e$pected of

professional auditor.

)'.') DISAD+ANTA,ES OF AUDIT PRO,RA--E

The wor! may become mechanical and particular parts of theprogramme may be

carried out without any understanding of the ob>ect ofsuch parts in the whole audit

scheme.


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The programme often tends to becomes rigid and infle$ible followingset grooesL the

business may change in its operation of conduct, but theold programme may still be

carried on. +hanges in staff or internal controlmay render precaution necessary at points different from those originallydecided upon.

nefficient assistants may ta!e shelter behind the programme i.e.,defend deficiencies

in their wor! on the ground that no instructions in thematter is contained therein.

A hard and fast audit programme may !ill the initiatie of efficient andenterprising

assistants.

All these disadantages may be eliminated by imaginatie superision ofthe wor! carried on

by the assistantsL the auditor must hae a receptieattitude as regards the assistantsL the

assistants should be encouraged toobsered matters ob>ectiely and bring significant matters

to the notice ofsuperisor8principal.

Undertandin# t/e Entit0 and it Enviour"ent

-btaining the required !nowledge of the business is a continuous and cumulatie process of

gathering and assessing the information and relating the resulting !nowledge to audit

eidence and information at all stages of audit. #or e$ample, although information is gathered

at the planning stage, it is ordinarily refined and added to in later stages of the audit as the

auditor and the members of his audit team learn more about the business.

#or continuing engagements, the auditor would update and reealuate information gathered

preiously, including information in the prior years wor!ing papers. The auditor would also

perform procedures designed to identify significant changes that hae ta!en place since the

last audit, and document the same.

Undertandin# of A!!ountin# pro!e and Control environ"ent

The auditor obtains an understanding of the accounting system sufficient to identify and

understand"


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• 1a>or classes of transactions in the entitys operations

• Iow such transactions are initiated

• Significant accounting records, supporting documents and specific accounts in the

financial statements and

• The accounting and financial reporting process, from the initiation of significant

transactions and other eents to their inclusion in the financial statements.

The auditor should obtain an understanding of the control enironment sufficient to assess

managements attitudes, awareness and actions regarding internal controls and their

importance in the entity. Auditors oerall understanding of the entitys internal control

systems sufficient to deelop the audit plan.

Aein# Audit Ri1

Audit ris! has defined as, the ris! that the auditor gies an inappropriate audit opinion when

financially statements are material misstated. The auditor has to assess the ris! for

determining the e$tend of audit to be done or e$tend of sampling to be done, for preparing theaudit plan.

A"ter such above assessing such parameters auditor should summaries the audit plan by #ay

o" audit programme #hich should set "orth the procedure needed to implement the audit plan$

%he audit plan may contain the audit ob&ectives "or each area and should have su""icient

details to serve as a set o" instructions to the assistants involved in the audit$

%he auditor may #ish to discuss elements o" his overall plan and certain audit procedures

#ith the client to improve e""iciency o" the audit and to coordinate audit procedures #ith

#ork o" the client's personnel$ %he overall audit plan and the audit programme( ho#ever(

remains auditor's responsibility$

AUDIT DOCUMENTATION (SA 230)

Audit @ocumentation *mergence of concept


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n audit, the auditor is e$pected to maintain the systematic trac! of records to proide a high

leel of assurance on the reliability of financial statements. The auditor proides a positie

opinion, which essentially states that based on the wor! performedL the financial statements

comply with releant accounting standards and principles. The leel of testing procedures to

obtain the eidence necessary to support such an opinion needs to be high. t is essential for

the auditor to design audit plan in such a manner that the audit procedures brings into light all

material and releant factors that go in as part of the audit and finally finds its place in the

Audit 6eport. -ral e$planations are not sufficient to document auditors wor! or conclusions.

Auditors should document audit eidence that contradicts or is inconsistent with audit

conclusions. The audit wor!ing papers constitute the lin! between the auditors report and the

clients record. Thus the concept of Audit @ocumentation came into emergence.

Audit @ocumentation @efinition M 1eaning

• As per SA &= issued by the +A

Audit documentation is the wor!ing papers prepared and obtained by the auditor and retained

by him in connection with performance of an audit.

• As per nternational Standard on Auditing B &= (6eised)

Audit @ocumentation is the record of audit procedures performed, releant audit eidence

obtained, and conclusions the auditor reached.

Audit do!u"entation2 A Pra!ti!al Approa!/2 Audit documentation has to proide the

principal support for the representations in the auditors report and to assist in the planning,

performance, and superision of the audit engagement. The most fundamental aspect of

documentation is preparation or acquisition of wor!ing papers by the auditor in connection

with performance of his audit. The ob>ectie of wor!ing papers is to record the audit wor!

from one year to another. Thus the auditor should proide for the entire following essential

features.

S!ope and E3tent of 4or1in# Paper:

• The wor!ing papers can contain the following information"


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%. +lients Dame

&. Type of engagement

. Dature of business

4. nternal control system of the client

5. 6eliance on internal control 1easures

7. Iow the !nowledge of business was obtainedH

9. +larifications obtained from the client.

• The auditor should sufficiently document the matters to gie e$perienced auditors

who were not preiously inoled in the audit a clear understanding of the wor!

performed, the eidence obtained and the conclusions reached. 3asically the

subsequent matters should be coered.

%. The nature, timing, and e$tent of the audit procedures performed to comply

with SA s and applicable legal and regulatory requirements,

&. The results of the audit procedures and the audit eidence obtained

#orm and +ontent of 2or!ing apers"

• The arious aspects of the business enironment may affect the process of audit. So

the auditor should loo! after such things. As per the guidelines issued by the SA &=

the form or content of the wor!ing papers are affected by arious matters such as

%. The nature of the audit engagement

&. The form of auditors report

. The nature and comple$ity of the clients business

4. The nature and condition of clients records and degree of reliance on internal

controls


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5. The need in particular circumstances for direction, superision and reiew of

wor! performed by assistants.

7. *$tent of >udgment required in performing the wor! and ealuating the results,

for e$ample, accounting estimates require greater >udgment and

commensurately more e$tensie documentationL

• #urther, the wor!ing papers should record the

%. Audit plan

&. The nature of audit

. The timing and e$tent of auditing procedures performed

Significant 1atters to be included in 2or!ing apers"

• 2hen preparing audit wor!ing papers, the auditor of an entity may also find it helpful

and efficient to record arious aspects of the audit together on a single wor!ing paper,

with crossreferences to supporting wor!ing papers where appropriate. *$amples of

matters that may be documented together in an audit include the understanding of the

entity and its internal control,

%. The oerall audit strategy and audit plan,

&. 1ateriality,

. Assessed ris!s,

4. Significant matters noted during the audit, and conclusions reached.

5. Significance of the eidence obtained to the assertion being tested

a.rocess of Audit @ocumentation

The documentation process goes handinhand with the Audit process. Thus in connection of

aboe points considered, the actual process of documentation can be diided into three

categories as follows"


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a. reaudit @ocumentation

b. Audit ongoing documentation

c. ostaudit @ocumentation

a' Pre2audit Do!u"entation2 -ain Feature

reaudit documentation mainly comprise of the acquisition of the papers necessary for the

Audit purpose such as

• Appointment letter from the appointing body

• +orrespondence letters with the preious auditors

• Sharing responsibilities with the other auditors.

b. Audit ongoing @ocumentation 1ain features

The main groups of documentation actiities, which are to be completed during the audit

process, are follows"

• reparation of Audit program

• #illing of important documents

• +orrespondence letters with the management

c. ostaudit @ocumentation 1ain #eatures

The post audit documentation is equally important as it benefits the auditors of subsequent

year. The postaudit actiities include"

• ?etter of reappointment of auditors

• Dotice of AG1, etc.

d. Significance of Audit @ocumentation"


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%. Aid in eer 6eiew"

The term /6eiew0 is defined as /sub>ect to a formal inspection or appraisal and

reassessment of the matter in question0.

Thus, peer reiew for chartered accountants would mean ealuation of a colleagues wor!

professionally. eer reiew applies only to practicing +hartered Accountants as Audit and

practicing +hartered Accountants can perform assurance wor! only.

Peer revie5 i !ondu!ted 5it/ an idea to u##et i"prove"ent in t/e reportin# ervi!e

provided unli1e auditin# and inveti#ation 5/i!/ are !ondu!ted 5it/ a fo!u to

!o""ent on t/e trut/fulne of t/e finan!ial and a!!ountin# re!ord'

This leads to strengthening of the audit process and methodology deployed, including

documentation of wor!ing papers as the basis for arriing at conclusions on critical matters.

@ocumentation is the main focus for eer 6eiew. The e$perienced auditor with the help of

documentation can ery well conduct the audit eer 6eiew if the @ocumentation is good.

&. Aid in legal and professional requirements"

The nstitute of +hartered Accountants of ndia has specified certain professional and

technical ethics, which eery +hartered Accountant is required to follow. These ethics are

defined by codes of conduct and the standards issued by +A. 2hereer the nstitute feels

that any +A does not follow these ethics, prosecution is initiated against him and if he is

found guilty, the disciplinary actions are ta!en.

n prosecution cases the @ocumentation proes to be one of the important eidence.

• Specific urposes M -b>ectie of Audit @ocumentation"

a. Assisting auditors to plan M perform audit

b. Assisting those responsible to direct, superise and reiew the wor! performed

c. roiding and demonstrating the accountability of those performing the wor! e.g.

(compliance with applicable standards)


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d. Assisting quality control reiewers to understand and assess how the engagement team

reached and supported the significant conclusions

e. *nabling internal and e$ternal inspection teams and peer reiewers to assess compliance

with professional, legal and regulatory standards and requirements and

f. Assisting successor auditors and article assistant

• mportance of Audit @ocumentation"

The audit documentation constitute important eidence of matters considered by the auditor

during the course of the audit, some of which may not find a place in his report submitted to

the shareholders or the directors, for the reason that on the basis of an e$planation gien to

him by the management, he, on being satisfied, decided to drop them. As such,

%. Audit notes can be an important defense for the auditor in the eent of an

action for negligence in the discharge of his duties being subsequently brought

against him.

&. The wor!ing papers proide guidance to the audit staff with regard to the

manner of chec!ing the schedule.

. The auditor is able to fi$ responsibility on the staff member who signs each

schedule chec!ed by him

4. t acts as eidence in the court of law when a charge of negligence is brought

against the auditor.

5. t acts as the process of planning for the auditor so that he can estimate the

time that may be required for chec!ing the schedules.

7. roide a source of information for nonaudit purpose2or!ing papers can

sere as a repository of information that may assist in nonaudit tas!s. Audit

wor!ing papers often proide conenient summari;ations of auditee data and

may be useful in ways unrelated to the original audit assignment. #or e$ample,

models of the management control framewor! may be helpful to auditees as planning input for system design changes or as a training deice for their staff.


22/43

Also, the wor! done by auditors may be useful as input to other studies such as

those performed by program ealuators.

9. Ielps in uality +ontrolB roper Audit @ocumentation definitely helps in

uality improement as well as uality control. f the significant matters are

properly documented, it will definitely help in the reporting matters with the

utmost accuracy.

Auditor6 ri#/t and reponi7ilitie:

As specified in the SA &=, the auditor should adopt reasonable procedures for custody and

confidentiality of his wor!ing papers and should retain them for a period of time sufficient to

meet the needs of his practice and satisfy any associated legal or professional requirements of

record retention.

Sometimes, the clients and the other auditors see! access to their audit wor!ing papers. At

that point, the auditor should be aware of his rights as specified in SA &= as follows"

%. The paragraph % therein says, /2or!ing apers are the property of the

Auditor0. Ioweer the auditor may at his discretion, ma!e portions of or e$tracts from are wor!ing papers aailable to his client and other auditors.

&. t is proided in paragraph %4 that the /Auditor should adopt reasonable

procedures for custody and confidentiality of his wor!ing papers0

. art % of the second schedule to the +hartered Accountants Act, %


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To 5/at e3tent /ould an audit 7e planned8

According to SA ==, the nature and e$tent of planning actiities will ary according"

iF Si;e and comple$ity of the entity,

iiF The auditors preious e$perience with the entity, and

iiiF +hanges in circumstances that occur during the audit engagement.

4/en to plan

As is common in planning for any other actiity, it should be noted that lanning is not a

discrete phase of an audit, but rather a continual and iteratie process that often begins shortly

after (or in connection with) the completion of the preious audit and continues until the

completion of the current audit engagement. Ioweer, in planning an audit, the auditor

considers the timing of certain planning actiities and audit procedures that need to be

completed prior to the performance of further audit procedures. #or e$ample, the auditor

plans the discussion among engagement team members"

iF The analytical procedures to be applied as ris! assessment procedures,

iiF The obtaining of a general understanding of the legal and regulatory framewor!

applicable to the


24/43

iiiF *ntity and how the entity is complying with that framewor!,

iF The determination of materiality,

F The inolement of e$perts, and

iF The performance of other ris! assessment procedures

rior to identifying and assessing the ris!s of material misstatement and performing further

audit procedures at the assertion leel for classes of transactions, account balances, and

disclosures that are responsie to those ris!s.

Preli"inar0 En#a#e"ent A!tivitie

Audit planning is preceded by performance of the following actiities before beginning of the

current audit engagement"

iF erform procedures regarding the continuance of the client relationship and the specific

audit engagement

iiF *aluate compliance with ethical requirements, including independence

iiiF *stablish an understanding of the terms of the engagement

The purpose of performing these preliminary engagement actiities is to help ensure that the

auditor has considered any eents or circumstances that may adersely affect the auditors

ability to plan and perform the audit engagement to reduce audit ris! to an acceptably low

leel. erforming these preliminary engagement actiities helps to ensure that the auditor

plans an audit engagement for which"

iF The auditor maintains the necessary independence and ability to perform the

engagement.

iiF There are no issues with management integrity that may affect the auditors willingness

to continue the engagement.

iiiF There is no misunderstanding with the client as to the terms of the engagement.


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Plannin# A!tivitie

These inole"

iF *stablishment of the -erall Audit Strategy

iiF @eelopment of an Audit plan

Overall audit trate#0

The oerall audit strategy sets the scope, timing and direction of the audit, and guides the

deelopment of the more detailed audit plan. The establishment of the oerall audit strategy

inoles"

aF @etermining the characteristics of the engagement that define its scope, such as the

financial reporting framewor! used, industryspecific reporting requirements and the

locations of the components of the entityL

bF Ascertaining the reporting ob>ecties of the engagement to plan the timing of the audit

and the nature of the communications required, such as deadlines for interim and final

reporting, and !ey dates for e$pected communications with management and those

charged with goernanceL and

cF +onsidering the important factors that will determine the focus of the engagement teams

efforts, such as determination of appropriate materiality leels, preliminary identification

of areas where there may be higher ris!s of material misstatement, preliminary

identification of material components and account balances, ealuation of whether the

auditor may plan to obtain eidence regarding the effectieness of internal control, and

identification of recent significant entityspecific, industry, financial reporting or other

releant deelopments.

n deeloping the oerall audit strategy, the auditor should consider the results of preliminary

engagement actiities and, where practicable, e$perience gained on other engagements

performed for the entity.


26/43

The following are e$amples of matters the auditor may consider in establishing the oerall

audit strategy for an engagement.

S!ope of t/e Audit En#a#e"ent

The auditor may consider the following matters when establishing the scope of the audit

engagement"

The financial reporting framewor! on which the financial information to be audited

has been prepared, including any need for reconciliations to another financial

reporting framewor!.

ndustryspecific reporting requirements such as reports mandated by industry

regulators.

The e$pected audit coerage, including the number and locations of components to be

included.

The nature of the control relationships between a parent and its components that

determine how the group is to be consolidated.

The e$tent to which components are audited by other auditors.

The nature of the business segments to be audited, including the need for speciali;ed

!nowledge.

The reporting currency to be used, including any need for currency translation for the

financial information audited.

The need for a statutory audit of standalone financial statements in addition to an

audit for consolidation purposes.

The aailability of the wor! of internal auditors and the e$tent of the auditors

potential reliance on such wor!.

The entitys use of serice organi;ations and how the auditor may obtain eidence

concerning the design or operation of controls performed by them.


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The e$pected use of audit eidence obtained in prior audits, for e$ample, audit

eidence related to ris! assessment procedures and tests of controls.

The effect of information technology on the audit procedures, including the

aailability of data and the e$pected use of computerassisted audit techniques.

The coordination of the e$pected coerage and timing of the audit wor! with any

reiews of interim financial information and the effect on the audit of the information

obtained during such reiews.

The discussion of matters that may affect the audit with firm personnel responsible for

performing other serices to the entity.

The aailability of client personnel and data.

Reportin# O79e!tive$ Ti"in# of t/e Audit and Co""uni!ation Required

The auditor may consider the following matters when ascertaining the reporting ob>ecties of

the engagement, the timing of the audit and the nature of communications required"

The entitys timetable for reporting, such as at interim and final stages.

The organi;ation of meetings with management and those charged with goernance to

discuss the nature, e$tent and timing of the audit wor!.

The discussion with management and those charged with goernance regarding the

e$pected type and timing of reports to be issued and other communications, both

written and oral, including the auditors report, management letters andcommunications to those charged with goernance.

The discussion with management regarding the e$pected communications on the

status of audit wor! throughout the engagement and the e$pected delierables

resulting from the audit procedures.

+ommunication with auditors of components regarding the e$pected types and timing

of reports to be issued and other communications in connection with the audit of

components.


28/43

The e$pected nature and timing of communications among engagement team

members, including the nature and timing of team meetings and timing of the reiew

of wor! performed.

2hether there are any other e$pected communications with third parties, including

any statutory or contractual reporting responsibilities arising from the audit.

Dire!tion of t/e Audit

The auditor may consider the following matters when setting the direction of the audit"

2ith respect to materiality"

o Setting materiality for planning purposes.

o Setting and communicating materiality for auditors of components.

o 6econsidering materiality as audit procedures are performed during the course

of the audit.

o dentifying the material components and account balances.

Audit areas where there is a higher ris! of material misstatement.

The impact of the assessed ris! of material misstatement at the oerall financial

statement leel on direction, superision and reiew.

The selection of the engagement team (including, where necessary, the engagement

quality control reiewer) and the assignment of audit wor! to the team members,

including the assignment of appropriately e$perienced team members to areas where

there may be higher ris!s of material misstatement.

*ngagement budgeting, including considering the appropriate amount of time to set

aside for areas where there may be higher ris!s of material misstatement.


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The manner in which the auditor emphasi;es to engagement team members the need

to maintain a questioning mind and to e$ercise professional s!epticism in gathering

and ealuating audit eidence.

6esults of preious audits that inoled ealuating the operating effectieness of

internal control, including the nature of identified wea!nesses and action ta!en to

address them.

*idence of managements commitment to the design and operation of sound internal

control, including eidence of appropriate documentation of such internal control.

Nolume of transactions, which may determine whether it is more efficient for the

auditor to rely on internal control.

mportance attached to internal control throughout the entity to the successful

operation of the business.

Significant business deelopments affecting the entity, including changes in

information technology and business processes, changes in !ey management, and

acquisitions, mergers and diestments.

Significant industry deelopments such as changes in industry regulations and new

reporting requirements.

Significant changes in the financial reporting framewor!, such as changes in

accounting standards.

-ther significant releant deelopments, such as changes in the legal enironment

affecting the entity.

The process of deeloping the oerall audit strategy helps the auditor to ascertain the nature,

timing and e$tent of resources necessary to perform the engagement. The oerall audit

strategy sets out clearly"


30/43

iF The resources to deploy for specific audit areas, such as the use of appropriately

e$perienced team members for high ris! areas or the inolement of e$perts on

comple$ mattersL

iiF The amount of resources to allocate to specific audit areas, such as the number of team

members assigned to obsere the inentory count at material locations, the e$tent of

reiew of other auditors wor! in the case of group audits, or the audit budget in hours

to allocate to high ris! areasL

iiiF 2hen these resources are deployed, such as whether at an interim audit stage or at !ey

cutoff datesL and

iF Iow such resources are managed, directed and superised, such as when team briefing

and debriefing meetings are e$pected to be held, how engagement partner and manager

reiews are e$pected to ta!e place (for e$ample, onsite or offsite), and whether to

complete engagement quality control reiews.

-nce the oerall audit strategy has been established, the auditor is able to start the

deelopment of a more detailed audit plan to address the arious matters identified in the

oerall audit strategy.

T/e Audit Plan

The audit plan is more detailed than the oerall audit strategy and includes the nature, timing

and e$tent of audit procedures to be performed by engagement team members in order to

obtain sufficient appropriate audit eidence to reduce audit ris! to an acceptably low leel.

@ocumentation of the audit plan also seres as a record of the proper planning and

performance of the audit procedures that can be reiewed and approed prior to the

performance of further audit procedures.

The audit plan includes"

iF A description of the nature, timing and e$tent of planned ris! assessment procedures

sufficient to assess the ris!s of material misstatement,


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iiF A description of the nature, timing and e$tent of planned further audit procedures at the

assertion leel for each material class of transactions, account balance, and disclosure.

The plan for further audit procedures reflects the auditors decision whether to test the

operating effectieness of controls, and the nature, timing and e$tent of planned

substantie proceduresL and

iiiF Such other audit procedures required to be carried out for the engagement in order to

comply with SAs (for e$ample, see!ing direct communication with the entitys

lawyers).

T/e & Step in Plannin# an Audit

The tep in plannin# an audit include ( Planning Procedures)"

%. Bai! di!uion 5it/ t/e !lient about the nature of the engagement and the client's

business and industry are performed first, and the auditor meets the !ey employees, or new employees of a continuing client. The oerall audit strategy or the timing of the audit

may be discussed, but don't discuss specific audit procedures.

&. Revie5 of audit do!u"entation from preious audits performed by the accounting

firm or a predecessor auditor (if the latter ma!es these audit documentation aailable) will

assist in deeloping an outline of the audit program.

. A1 a7out re!ent develop"ent in the company such as mergers and new product

lines which will cause the audit to differ from earlier years.

4. I nteri" finan!ial tate"ent are analy;ed to identify accounts and transactions that

differ from e$pectations (based on factors such as budgets or prior periods). The

performance of such anal0ti!al pro!edure is "andator0 in the planning of an audit to

identify accounts that may be misstated and that desere special emphasis in the audit

program.


32/43

5. N on2audit peronnel of the accounting firm who hae proided serices (such as ta$

preparation) to the client should be identified and consulted to learn more about the client.

7. S taffin# for the audit should be determined and a meeting held to discuss the

engagement.

9. T i"in# of the arious audit procedures should be determined. #or e$ample, internal

control testing needs to be performed early in the engagement, inentory counts need to

be performed at or near the balance sheet date and the client representation letter cannot

be obtained until the end of the audit fieldwor!.

:. Outide aitan!e needs should be determined, including the use of a pe!ialit as

required (a ta$ practitioner or an information technology (T) professional) and the

determination of the e$tent of inolement of the internal auditors of the client.


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. -a9or P/ae of Audit ;of Finan!ial State"ent<

P/ae2&' Audit Plannin#

Audit planning inoles deeloping an oerall strategy for performing the audit. @uring

planning auditors establish an understanding with their client as to the nature of serices to be

proided and the responsibilities of each partyOthis is ordinarily accomplished through use

of an engagement letter. n addition, they deelop an oerall audit strategy, an audit plan, and

an audit program.

lanning continues throughout the entire audit as the auditor accumulates sufficient

appropriate audit eidence to support the audit opinion.

hase&. -btain an nderstanding of the +lient and ts *nironment Encluding nternal

+ontrolF

Auditors must attain a sufficient bac!ground to assess the ris! of material misstatement of the

financial statements and to design the nature, timing, and e$tent of further audit procedures.

6is! assessment procedures are used here and include inquiries of management and others

within the entity, analytical procedures, obseration and inspection, and other procedures.

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34/43

-btaining an understanding of the nature of internal control is an essential part of this

understanding, as it allows the auditor to identify areas that may be misstated and to design

other procedures based on characteristics of the e$isting system.

hase. Assess 6is!s of 1isstatement and @esign #urther Audit rocedures

Auditors use the information collected while obtaining their understanding of the client and

its enironment to identify classes of transactions (transaction classes), account balances, and

disclosures that might be materially misstated. Assessing the ris!s of misstatement (the ris!

assessment) is performed both at the oerall financial statement leel and at the releant

assertion leel and includes considering"

• 2hat could go wrongH

• Iow li!ely it is that it will go wrongH

• 2hat are the li!ely amounts inoledH

6is! assessment proides the auditors with eidence on potential ris!s of material

misstatement. The ris!s of material misstatement are composed of inherent and control ris!sfor releant assertions. nherent ris! is the susceptibility of a releant assertion to material

misstatement, assuming that there are no related controls. nherent ris! arises for a ariety of

reasons including the business ris! faced by management, the possibility of material

misstatement due to fraud, and significant measurement uncertainty in accounting estimates

and in nonroutine transactions.

Control ri1 i t/e ri1 t/at a "aterial "itate"ent !ould o!!ur in a relevant aertion

and not 7e prevented or dete!ted on a ti"el0 7ai 70 t/e entit06 internal !ontrol .

After analy;ing the design and implementation of internal control, the auditors must decide

whether the system appears adequate to preent or detect and correct material misstatements.

#or e$ample, if the auditors beliee that internal control is wea! for an important area (that is,

control ris! is high), they will assess the ris! of material misstatement as high. -n the other

hand, if the system seems capable of preenting or detecting and correcting misstatements,

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the auditors may conclude that internal control may be strong. 3ut in this case they must

determine that it is strong by performing tests of controls.

3ased on the assessed ris!s of misstatement for arious transactions, account balances, and

disclosures, and on arious requirements to perform certain audit procedures regardless of the

indiidual company ris! assessment, the auditors will design and perform further audit

proceduresOtests of controls and substantie procedures.

P/ae2=' Perfor" Tet of Control

Tests of controls are performed to determine whether !ey controls are properly designed and

operating effectiely.

To illustrate a test of a control, consider the control actiity in which the accounting

department accounts for the serial sequence of all shipping documents before preparing the

related >ournal entries. The purpose of this control is to ensure that each shipment of

merchandise is recorded in the accounting records (i.e., to ensure the completeness of

recorded sales and accounts receiable).

hase5. erform Substantie roceduresOGeneral

Substantie procedures (also referred to as substantie tests) are used to /substantiate0

account balances. Substantie procedures restrict detection ris!, the ris! that audit

procedures will incorrectly lead to a conclusion that a material misstatement does not e$ist in

an account balance when in fact such a misstatement does e$ist.

2hile tests of controls, as noted aboe, proide eidence as to whether controls are operatingeffectiely, substantie procedures proide eidence as to whether actual account balances

are proper. The auditors reliance on substantie procedures to achiee an audit ob>ectie

may be deried from (%) substantie analytical procedures, and (&) tests of details of account

balances, transactions, and disclosures as they are described in more detail below"

• Su7tantive pro!edure>Anal0ti!al pro!edure. Analytical procedures used as

substantie procedures are used to obtain eidential matter about particular assertions

related to account balances or classes of transactions. n these tests auditors gather


36/43

eidence about relationships among arious accounting and nonaccounting data such

as industry and economic information. 2hen une$pected changes occur (or e$pected

changes do not occur) in these relationships, an auditor obtains an e$planation and

inestigates.

• Su7tantive pro!edure>Tet of detail of a!!ount 7alan!e$ trana!tion and

di!loure. The ob>ectie of these tests is to detect misstatements in the financial

statementsOmore specifically, misstatements of releant assertions relating to

transactions, account balances, and disclosures. The details supporting financial

statement accounts are tested to obtain assurance that material misstatements do not

e$ist. Sending confirmations for yearend receiable accounts is an e$ample of a

substantie test of details.

P/ae2?' Co"plete t/e Audit

Auditors perform a number of procedures near the end of the audit. #or e$ample, eidence is

aggregated and ealuated for sufficiency.

Analytical procedures are performed (again) to assist the auditor in assessing conclusions

reached and for ealuating oerall financial statement presentation.

#inal decisions are made as to required financial statement disclosures and as to the

appropriate audit report.

hase9. Audit 6eport

A standard unqualified audit report is issued by +As when their e$amination and the resultsthereof are satisfactory. This standard unqualified report is modified as the audit e$amination

deiates from normal, or as the financial statements fail to comply with generally accepted

accounting principles (GAA).


37/43

C/an#e to Plannin# De!iion Durin# t/e Coure of t/e Audit

As planning is not static. the oerall audit strategy and the audit plan should be updated and

changed as necessary during the course of the audit. t is ac!nowledged by SA == that as a

result of une$pected eents, changes in conditions, or the audit eidence obtained from the

results of audit procedures, the auditor may need to modify the oerall audit strategy and

audit plan, and thereby the resulting planned nature, timing and e$tent of further audit

procedures. nformation may come to the auditors attention that differs significantly from the

information aailable when the auditor planned the audit procedures. #or e$ample, the

auditor may obtain audit eidence through the performance of substantie procedures that

contradicts the audit eidence obtained with respect to the testing of the operating

effectieness of controls. n such circumstances, the auditor reealuates the planned audit

procedures, based on the reised consideration of assessed ris!s at the assertion leel for all

or some of the classes of transactions, account balances or disclosures.

A@TDG

Plannin# for t/e Dire!tion$ Superviion and Revie5

SA == requires the auditor to plan the nature, timing and e$tent of direction and superision

of engagement team members and reiew of their wor!.

The nature, timing and e$tent of the direction and superision of engagement team members

and reiew of their wor! ary depending on many factors, including"


38/43

iF The si;e and comple$ity of the entity,

iiF The area of audit,

iiiF The ris!s of material misstatement, and

iF The capabilities and competence of personnel performing the audit wor!.

The auditor should plan the nature, timing and e$tent of direction and superision of

engagement team members based on the assessed ris! of material misstatement. As the

assessed ris! of material misstatement increases, a gien area of the audit, the auditor ordinarily increases the e$tent and timeliness of direction and superision of engagement

team members and performs a more detailed reiew of their wor!. Similarly, the auditor

should plan the nature, timing and e$tent of reiew of the engagement teams wor! based on

the capabilities and competence of the indiidual team members performing the audit wor!.

n audits of small entities, an audit may be carried out entirely by the audit engagement

partner (who may be a sole practitioner). n such situations, questions of direction and

superision of engagement team members and reiew of their wor! do not arise as the audit

engagement partner, haing personally conducted all aspects of the wor!, is aware of all

material issues.

The audit engagement partner (or sole practitioner) neertheless needs to be satisfied that the

audit has been conducted in accordance with SAs. #orming an ob>ectie iew on the

appropriateness of the >udgments made in the course of the audit can present practical

problems when the same indiidual also performed the entire audit. 2hen particularlycomple$ or unusual issues are inoled, and the audit is performed by a sole practitioner, it

may be desirable to plan to consult with other suitablye$perienced auditors or the auditors

professional body.

Do!u"entation of t/e plannin# a!tivitie


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SA == requires the auditor to document the oerall audit strategy and the audit plan,

including any significant changes made during the audit engagement.

The documentation of the oerall audit strategy records the !ey decisions considered

necessary to properly plan the audit and to communicate significant matters to the

engagement team. #or e$ample, the auditor may summari;e the oerall audit strategy in the

form of a memorandum that contains !ey decisions regarding the oerall scope, timing and

conduct of the audit.

The documentation of the audit plan is sufficient to demonstrate the planned nature, timing

and e$tent of ris! assessment procedures, and further audit procedures at the assertion leel

for each material class of transaction, account balance, and disclosure in response to theassessed ris!s. The auditor may use standard audit pr!ra"s r audit #"p$%tin #&%#'$ists

Ioweer, when such standard programs or chec!lists are used, the auditor appropriately

tailors them to reflect the particular engagement circumstances.

The documentation of any significant changes to the originally planned oerall audit strategy

and to the detailed audit plan includes the reasons for the significant changes and the

auditors response to the eents, conditions, or results of audit procedures that resulted in

such changes. #or e$ample, the auditor may significantly change the planned oerall audit

strategy and the audit plan as a result of a material business combination or the identification

of a material misstatement of the financial statements. A record of the significant changes to

the oerall audit strategy and the audit plan, and resulting changes to the planned nature,

timing and e$tent of audit procedures, e$plains the oerall strategy and audit plan finally

adopted for the audit and demonstrates the appropriate response to significant changes

occurring during the audit.

The form and e$tent of documentation depend on such matters as the si% and #"p$%*it+ ,

t&% %ntit+- "at%ria$it+, the %*t%nt , t&%r d#u"%ntatin- and t&% #ir#u"stan#%s , t&%

sp%#i,i# audit %n!a!%"%nt

Co""uni!ation 5it/ T/oe C/ar#ed 5it/ ,overnan!e and -ana#e"ent


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The auditor may discuss elements of planning with those charged with goernance and the

entitys management. These discussions may be a part of oerall communications required to

be made to those charged with goernance of the entity or may be made to improe the

effectieness and efficiency of the audit. Such discussions ordinarily include the oerall audit

strategy and timing of the audit, including any limitations thereon, or any additional

requirements. @iscussions with management often occur to facilitate the conduct and

management of the audit engagement (for e$ample, to coordinate some of the planned audit

procedures with the wor! of the entitys personnel). t is cautioned that although these

discussions often occur, the oerall audit strategy and the audit plan remain the auditors

responsibility.

t is important to note that when discussions of matters included in the oerall audit strategy

or audit plan occur, #ar% is r%.uir%d in rd%r t nt #"pr"is% t&% %,,%#ti/%n%ss , t&%

audit #or e$ample, the auditor considers whether discussing the nature and timing of

detailed audit procedures with management compromises the effectieness of the audit by

ma!ing the audit procedures too predictable.

A@TDG

Additional Conideration in Initial Audit En#a#e"ent

The auditor should perform the following actiities prior to starting an initial audit"

iF erform procedures regarding the acceptance of the client relationship and the specific

audit engagement

iiF +ommunicate with the preious auditor, where there has been a change of auditors, in

compliance with releant ethical requirements.

The purpose and ob>ectie of planning the audit are the same whether the audit is an initial or

recurring engagement. Ioweer, for an initial audit, the auditor may need to e$pand the

planning actiities because the auditor does not ordinarily hae the preious e$perience with

the entity that is considered when planning recurring engagements. #or initial audits,


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additional matters the auditor may consider in deeloping the oerall audit strategy and audit

plan include the following"

iF nless prohibited by law or regulation, an arrangement to be made with the preious

auditor, for e$ample, to reiew the preious auditors wor!ing papers.

iiF Any ma>or issues (including the application of accounting principles or of auditing and

reporting standards) discussed with management in connection with the initial selection

as auditors, the communication of these matters to those charged with goernance and

how these matters affect the oerall audit strategy and audit plan.

iiiF The planned audit procedures to obtain sufficient appropriate audit eidence regarding

opening balances ESA 5%=, /nitial *ngagementsO-pening 3alances0F.

iF The assignment of firm personnel with appropriate leels of capabilities and

competence to respond to anticipated significant ris!s.

F -ther procedures required by the firms system of quality control for initial audit

engagements (for e$ample, the firms system of quality control may require the

inolement of another partner or senior indiidual to reiew the oerall audit strategy

prior to commencing significant audit procedures or to reiew reports prior to their

issuance).


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Tip for Auditor on do!u"entation @ 5or1in# paper

)eneral guidelines "or the preparation o" #orking papers are!

a) +larity and nderstanding As a preparer of audit documentation, step bac! and read your

wor! ob>ectiely. 2ould it be clear to another auditorH

2or!ing papers should be clear and understandable without supplementary oral e$planations.

2ith the information the wor!ing papers reeal, a reiewer should be able to readily

determine their purpose, the nature and scope of the wor! done and the preparers

conclusions.

b) +ompleteness and Accuracy B As a reiewer of documentation, if you hae to as! the audit

staff basic questions about the audit, the documentation probably does not really sere the

purpose.

2or! papers should be complete, accurate, and support obserations, testing, conclusions,

and recommendations. They should also show the nature and scope of the wor! performed.

c) ertinence B ?imit the nformation in wor!ing papers to matters that are important and

necessary to support the ob>ecties and scope established for the assignment.

d) ?ogical Arrangement B #ile the 2or!ing papers in a logical order.

e) ?egibility and Deatness B 3e neat in your wor!. 2or!ing papers should be legible and as

neat as practical. Sloppy wor! papers may lose their worth as eidence. +rowding and

writing between lines should be aoided by anticipating space needs and arranging the wor! papers before writing.


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f) Safety Jeep your wor! papers safe and retrieable

g) nitial and @ate ut your initials and date on eery wor!ing paper

h) Summary of conclusions Summari;e the results of wor! performed and identify the

oerall significance of any wea!nesses or e$ceptions found.

Epilo#ue

t is clear from the aboe discussion that the roper @ocumentation creates more

opportunities to offer new serices. t helps in improing the writing and communication

s!ills of auditors and assistants. t acts as a reminder to clients of what has been done for

them thus helping the auditors.

n general it is opined that this concept of Audit @ocumentation proides organi;ational

fle$ibility to enable the professional e$pertise and entrepreneurial initiatie to combine,

organi;e and operate in a fle$ible, innoatie and efficient manner. t is needless to say that

such a measure is >ustified in the conte$t of global economic trends that facilitates

inestments and proision of serices to flow across borders for the practicing members of

KThe nstitute of +hartered Accountants of ndia.

Documents

Planning of Financial Audit