Discuss the work that an external auditor should do in planning
Executive Summary
The external auditor of the company is required to plan the audit engagement by creating an audit strategy to guide the auditor and the plan itself. Planning the audit engagement is vital for a number of reasons. Its primary objective would be to achieve its objectives meaning the audit efficiency and effectiveness. An audit plan involves planning of risk assessment procedures and further audit procedures to gain adequate appropriate audit evidence. Throughout the audit engagement if the auditor found out that the audit plan need to be updated, altered then the auditor might consider revising the audit plan if and when required. Changing the audit plan could include change in the scope timing of planned audit procedure. (ISA 300 – Planning an Audit of Financial Statements, n.d.)
Introduction
Financial auditing is the process of examining an organizations (or individual’s) financial records to determine if they are accurate and in accordance with any applicable rules (including accepted accounting standards), regulations, and laws. (Wiley, 2013)
Define audit plan
Audit plan details the specific procedures to be carried out to implement the strategy and complete the audit. (Burke, nd)
ISA 300 requires the external auditor to plan the audit engagement thoroughly. This consists of setting up an audit strategy which then devise a plan in the light of the strategy developed. From the time the audit engagement progress, the auditor might feel that there is a need to update, extend or alter the planned procedures.
Proper planning plays a vital role in providing an effective audit engagement. Therefore some of the main importance of audit planning could be that it helps the auditor to dedicate right amount of time and effort for the most important areas of the audit. Moreover, planning could act as a tool to recognize and resolve potential problems on a time. Furthermore, developing a proper audit plan leads to properly organized, supervised and directed audit work so that audit engagement takes place effectively and efficiently. And also this would help the auditor to choose the right team members and proper assignment of work to them. (ACCA, April 2015 )
There are mainly three benefits of planning an external audit. Firstly, it helps the auditor to obtain sufficient appropriate evidence for the circumstance in order to carry out the audit effectively and efficiently. Secondly, it helps to keep the cost of the audit at a reasonable level. Finally, it avoids misunderstandings with the client since the client would also know how the audit would be taking place. (Burke, nd)
Preliminary Engagement Activities
It is important for the auditor to carry out some activities at the beginning of the current audit engagement. As Per ISA 300, Planning an Audit of Financial Statements, these preliminary activities are as follows
• Carry out procedures regarding the acceptance and continuance of client relationships and the specific audit engagement
• Evaluate ethical requirements, including independence, and, for initial audits, communicate with previous auditors
• Establish an understanding of the strategy and terms of the engagement
The main objective of conducting these preliminary activities is to ensure that the auditor has taken into account any event or circumstance that may adversely affect the auditor’s ability to plan and carryout the audit engagement with an acceptably low level of audit risk. This would have a guarantee that the auditor plans an audit engagement for which the auditor maintains the required independence and ability to perform the audit and that there is no issue with the management integrity which would affect the auditor’s willingness to accept the audit. Additionally this would also ensure that there is no misunderstanding with the client on the strategy and terms of engagement (ISA 300 – Planning an Audit of Financial Statements, n.d., pp. 3-4)
Planning Activities
The extent to which planning activities need to be carried out depends on the size and complexity of the company to which the audit engagement is based. Moreover, the auditor’s past experience within the company and the changes in circumstances that occur during the audit also affect the depth of the planning activities required. (Audit Planning, 2010)
Planning the audit engagement includes developing an overall audit strategy, developing an audit plan based on the audit strategy which might take in to consideration factors like planned risk assessment procedures, planes responses to material misstatement, etc… (Audit Planning, 2010)
The auditor should develop an audit strategy that sets timing and direction of the audit and guides the development of the audit. (ISA 300 – Planning an Audit of Financial Statements, n.d., p. 4). The overall audit strategy should contain some important matters like the financial reporting framework, expected audit coverage, industry specific reporting requirements, no of locations to be visited, audit clients timetable for reporting to its members, communication between the audit and the, etc.. (ACCA, April 2015 , p. 138)
Once the audit strategy is being made, the auditor also need to develop an audit plan which would allow the auditor to reduce the audit risk to an acceptably low level. Audit plan consists of a detailed plan of the nature, timing and the extent to which the audit procedures to be performed by the audit team takes place in order to obtain adequate relevant audit evidence to reduce audit risk to an acceptably low level. It also act as a record of the proper planning and performance of the audit process so that it can be reviewed and agreed prior to the performance of further audit procedures. (ISA 300 – Planning an Audit of Financial Statements, n.d., p. 5)
Some important elements to be included in an audit plan by an external auditor as per ISA 300, planning an audit of Financial Statements is as below;
• The details of the nature, timing and extent of planned risk assessment procedures sufficient to assess the risks of material misstatement, as determined under ISA 315, “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”.
• A comprehensive description (or program) of the planned nature, timing and extent of further audit procedures at the assertion level for each material class of transactions, account balance, and disclosure, as determined under ISA 330 “The Auditor’s Procedures in Response to Assessed Risks”.
• Such other audit procedures required to be carried out for the engagement in order to comply with ISAs for instance, seeking direct communication with the entity’s lawyers
References
ACCA. (April 2015 ). Audit and Assurance-Paper F8. London: BPP Leaning Media.
Audit Planning. (2010, December 3). Retrieved from PCAOB: https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_9.aspx
Burke, A. (nd). Introduction to Audit Planning. Retrieved from CPA Ireland: https://www.google.mv/url?sa=t&rct=j&q=&esrc=s&source=web&cd=12&cad=rja&uact=8&ved=0ahUKEwjSrbDm6fzOAhXBuI8KHfzsCkAQFghfMAs&url=http%3A%2F%2Fwww.cpaireland.ie%2Fdocs%2Fdefault-source%2FStudents%2FStudy-Support%2FP1-Auditing%2Fintroduction-to-audit-plannin
ISA 300 – Planning an Audit of Financial Statements. (n.d.). Retrieved from Paka accountants: http://pakaccountants.com/standards/isa/isa300/
Wiley, C. (2013, April). What is Auditing? Retrieved from Accountingedu.org: http://www.accountingedu.org/what-is-auditing.html