Clarified Auditing Standards: Planning an Audit (AU-C 300) – Part 2by
In Part 1, we discussed required and practical pre-planning activities under AU-C Section 300. Part 2 focuses on planning requirements for the standard, along with a listing of practical activities that will result in quality, profitable audit engagements.
Planning Activities Required by AU-C Section 300
Auditors are required to establish an audit strategy that includes the scope, timing, and direction for the audit to guide the development of the audit plan (program). The audit plan should include appropriate risk assessment procedures, analytical procedures, and tests of balances procedures, including audit responses necessary to investigate material risks of misstatement due to error or fraud. The audit strategy and plan should be documented in engagement files.
Practical Considerations: Planning Phase
1. Complete or update basic documentation necessary to demonstrate an understanding of the client’s business and environment, including internal control.
a. Client Acceptance and Continuance Form: This form should include documentation of basic organizational and operational information for use in engagement planning. It should also include information for assessing risk at the financial statement level, such as the integrity of management, use of the financial statements, and any going concern problems or issues.
b. General Ledger Analysis Worksheet: This spreadsheet can be used to centralize documentation of all unusual matters identified when scanning general ledger account activity. Instead of numerous individual account analysis requiring indexing, cross-referencing, and initialing and dating by both the preparer and reviewer, this spreadsheet can centralize the documentation of unusual matters, related inquiries and management responses, and the auditor’s resulting actions.
c. Flowchart or other documentation of the entity’s financial reporting and internal control systems: Accompanied by evidence of the appropriate system’s walk-through procedures using 10 to 15 transactions, this procedure can contribute substantive evidence – when combined with that from the procedures listed above – that may enable the assessment of risk at a level slightly less than high-to-moderate on smaller audits.
d. Documentation of any and all inquiries of management or client personnel.
2. Assess control risk by financial statement classifications, combine with inherent risk documentation, and assess level of risk of material misstatement.
3. Use assessed risk at the financial statement level from a Client Acceptance and Continuance Form and other documentation to establish planning materiality, tolerable misstatement (performance materiality), and the lower limit for individually significant items at the financial statement level.
4. Use assessed risk of material misstatement at the assertion (financial statement classification) level to establish tolerable misstatement (performance materiality) and the lower limit for individually significant items at the financial statement classification level.
5. Design a sampling or nonsampling plan using materiality levels for financial statement classifications.
6. Document planning activities and decisions in a Planning Document.
7. Hold meeting with the in-charge accountant and engagement leader to discuss planning results and finalize audit strategy.
8. Design the audit plan (program).
9. Make work assignments and provide necessary training for staff personnel.
10. Hold planning and brainstorming meeting with all engagement personnel.
11. Prepare planning communication with persons charged with governance.
12. Plan the maximum amount of interim work that is practical before client’s fiscal year-end.
a. Risk assessment procedures.
b. Reading minutes.
c. Substantive tests for property, plant, and equipment; debt; and expenses.
d. Interim analytical procedures (reading general ledger).
e. Cycle counts of perpetual inventories.
f. Receivables confirmations.
g. Examinations of loan files (banks).
h. Site inspections (contractors).
i. Planning activities.
j. Oversee client working paper preparation.
k. Block out audit documentation.
l. Other work.
13. Design highly effective, predictive analytical procedures whenever possible that can generate evidence to evaluate all financial statement assertions for accounts, such as sales and revenues, certain salaries and wages, payroll taxes, depreciation, interest income and expense, etc.
The effectiveness of the auditor’s planning activities contributes directly to the efficiency with which an audit engagement is performed and completed. As we have sometimes learned the hard way, poor planning often results in budget overruns during the completion phase when problem resolution takes more time and is more costly!
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