AUDIT PLANNING

Module 2
 PREPARATION BEFORE
COMMENCEMENT OF A NEW AUDIT
 An auditor after receiving the appointment letter should
communicate his acceptance/otherwise in writing to the company.
The following steps are necessary to commence the audit work:
1. If it is not a statutory audit, he should find out the exact nature
and scope of his duties i.e., whether he has to audit the
account/prepare accounts also.
2. He should inform his clients to close all the books of account and
keep them ready for verification.
3. He should acquaint himself with the nature of his client business.
4. He should examine the efficiency of the internal control system.
5. He should obtain the names of directors their power duties etc.
6. He should obtain a complete list of all books and documents
maintained by the clients.
7. He should obtain a copy of previous year’s audit report.
8. He should go through various documents like MOA, AOA, prospectus
etc.
COMMENCING AN AUDIT (SA – 300)
Scope of this SA
 This Standard on Auditing (SA) deals with the
auditor’s responsibility to plan an audit of
financial statements. This SA is framed in the
context of recurring audits. Additional
considerations in initial audit engagements
are separately identified.
Objective:
 The objective of the auditor is to plan the
audit so that it will be performed in an
effective manner.
 REQUIREMENTS:
Involvement of Key Engagement Team
Members:
The engagement partner and other key
members of the engagement team shall be
involved in planning the audit, including
planning and participating in the discussion
among engagement team members.
 PRELIMINARY ENGAGEMENT
ACTIVITIES:
The auditor shall undertake the following
activities at the beginning of the current audit
engagement:
(a) Performing procedures required by SA 220,
“Quality Control for an Audit of Financial
Statements” regarding the continuance of the
client relationship and the specific audit
engagement;
(b) Evaluating compliance with ethical
requirements, including independence, as
required by SA 220; and
(c) Establishing an understanding of the terms of
the engagement, as required by SA 210.
 PLANNING ACTIVITIES:
1. The auditor shall establish an overall audit
strategy that sets the scope, timing and
direction of the audit, and that guides the
development of the audit plan.
2. In establishing the overall audit strategy, the
auditor shall:
(a) Identify the characteristics of the
engagement that define its scope;
(b) Ascertain the reporting objectives of the
engagement to plan the timing of the audit and
the nature of the communications required;
(c) Consider the factors that, in the auditor’s
professional judgment, are significant in
directing the engagement team’s efforts;
Continued……
 PLANNING ACTIVITIES:
Continued……
(d) Consider the results of preliminary engagement
activities and, where applicable, whether knowledge
gained on other engagements performed by the
engagement partner for the entity is relevant; and
(e) Ascertain the nature, timing and extent of resources
necessary to perform the engagement. (Ref: Para. A9-A12)

3. The auditor shall develop an audit plan that shall include a

description of:
(a) The nature, timing and extent of planned risk
assessment procedures, as determined under SA 315
“Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its
Environment”.
(b) The nature, timing and extent of planned further audit
procedures at the assertion level, as determined under SA
330 “The Auditor’s Responses to Assessed Risks”.
Continued……
 PLANNING ACTIVITIES:
Continued……
(c) Other planned audit procedures that are required to be
carried out so that the engagement complies with SAs.
(Ref: Para. A13)

4. The auditor shall update and change the overall audit

strategy and the audit plan as necessary during the course
of the audit. (Ref: Para. A14)

5. The auditor shall plan the nature, timing and extent of

direction and supervision of engagement team members
and the review of their work. (Ref: Para. A15-A16)
 AUDIT ENGAGEMENT LETTER
 Meaning - In the interest of both client and
auditor, the auditor should send an
engagement letter, preferably before the
commencement of the engagement, to help
avoid any misunderstandings with respect to
the engagement. The engagement letter
documents and confirms the auditor's
acceptance of the appointment, the
objective and scope of the audit and the
extent of the auditor's responsibilities to
the client.
 A FEW CONTENTS OF AUDIT
ENGAGEMENT LETTER
 The objective of the audit of financial statements.
 Management’s responsibility for the financial statements.
 Management's responsibility for selection and consistent
application of appropriate accounting policies, including
implementation of the applicable accounting standards along
with proper explanation relating to material departures from
those accounting standards.
 Management’s responsibility for preparation of the financial
statements on a going concern basis.
 Management’s responsibility for making judgements and
estimates that are reasonable and prudent so as to give a true
and fair view of the state of affairs of the entity at the end of
the financial year and of the profit or loss of the entity for that
period.
 Management's responsibility for the maintenance of adequate
accounting records and internal controls for safeguarding the
assets of the company and for preventing and detecting fraud
or other irregularities.
 The scope of the audit, including reference to the
applicable legislation, regulations, and the
pronouncements of the Institute of Chartered Accountants
of India.
 The fact that having regard to the test nature of an audit,
persuasive rather than conclusive nature of audit evidence
together with inherent limitations of any accounting and
internal control system, there is an unavoidable risk that
even some material misstatements, resulting from fraud,
and to a lesser extent error, if either exists, may remain
undetected.
 Unrestricted access to whatever records, documentation
and other information requested in connection with the
audit.
 The fact that the audit process may be subjected to a peer
review under the Chartered Accountants Act, 1949.
 DOCUMENTATION AS UNDER
SA-230
 “The auditor should document matters
which are important in providing evidence
that the audit was carried out in
accordance with the basic principles.” The
purpose of this Standard is to amplify the
basic principle outlined above.
 Documentation, for purposes of this
Standard, refers to the working papers
prepared or obtained by the auditor and
retained by him, in connection with the
performance of his audit.
 Scope
 This Standard on Auditing (SA) deals with the auditor’s
responsibility to prepare audit documentation for an
audit of financial statements. It is to be adapted as
necessary in the circumstances when applied to audits of
other historical financial information. The specific
documentation requirements of other SAs do not limit the
application of this SA. Laws or regulations may establish
additional documentation requirements.
Objectives
The objective of the auditor is to prepare
documentation that provides:
 A sufficient and appropriate record of the basis
for the auditor’s report; and
 Evidence that the audit was planned and
performed in accordance with SAs and
applicable legal and regulatory requirements.
 WORKING PAPERS
 Aid in the planning and performance of the
audit;
 Aid in the supervision and review of the audit
work; and
 Provide evidence of the audit work
performed to support the auditor’s opinion.
 WORKING PAPERS
 Working papers should record the audit plan, the
nature, timing and extent of auditing procedures
performed, and the conclusions drawn from the
evidence obtained.

The form and content of working papers are affected

by matters such as:
 The nature of the engagement.
 The form of the auditor’s report.
 The nature and complexity of the client’s business.
 The nature and condition of the client’s records and
degree of reliance on internal controls.
 The needs in particular circumstances for direction,
supervision and review of work performed by
assistants.
 Working papers should be designed and properly organised to meet the
circumstances of each audit and the auditor’s needs in respect thereof. The
standardisation of working papers (for example, checklists, specimen
letters, standard organisation of working papers) improves the efficiency
with which they are prepared and reviewed. It also facilitates the
delegation of work while providing a means to control its quality.
 Working papers should be sufficiently complete and detailed for an auditor
to obtain an overall understanding of the audit. The extent of
documentation is a matter of professional judgement since it is neither
necessary nor practical that every observation, consideration or conclusion
is documented by the auditor in his working papers.
 All significant matters which require the exercise of judgement, together
with the auditor’s conclusion thereon, should be included in the working
papers. To improve audit efficiency, the auditor normally obtains and
utilises schedules, analyses and other working papers prepared by the
client. In such circumstances, the auditor should satisfy himself that these
working papers have been properly prepared. Examples of such working
papers are detailed analyses of important revenue accounts, receivables,
etc.
 In the case of recurring audits, some working paper files may be classified
as permanent audit files, which are updated currently with information of
continuing importance to succeeding audits, as distinct from current audit
files, which contain information relating primarily to the audit of a single
period.
 A PERMANENT AUDIT FILE
NORMALLY INCLUDES
 Information concerning the legal and organisational structure
of the entity. In the case of a company, this includes the
Memorandum and Articles of Association. In the case of a
statutory corporation, this includes the Act and Regulations
under which the corporation functions.
 Extracts or copies of important legal documents, agreements
and minutes relevant to the audit.
 A record of the study and evaluation of the internal controls
related to the accounting system. This might be in the form
of narrative descriptions, questionnaires or flow charts, or
some combination thereof.
 Copies of audited financial statements for previous years.
 Analysis of significant ratios and trends.
 Copies of management letters issued by the auditor, if any.
 Record of communication with the retiring auditor, if any,
before acceptance of the appointment as auditor.
 Notes regarding significant accounting policies.
 Significant audit observations of earlier years.
 THE CURRENT FILE NORMALLY INCLUDES
 Correspondence relating to acceptance of annual reappointment.
 Extracts of important matters in the minutes of Board Meetings and
General Meetings, as are relevant to the audit.
 Evidence of the planning process of the audit and audit programme.
 Analysis of transactions and balances.
 A record of the nature, timing and extent of auditing procedures
performed, and the results of such procedures.
 Evidence that the work performed by assistants was supervised and
reviewed.
 Copies of communications with other auditors, experts and other third
parties.
 Copies of letters or notes concerning audit matters communicated to or
discussed with the client, including the terms of the engagement and
material weaknesses in relevant internal controls.
 Letters of representation or confirmation received from the client.
 Conclusions reached by the auditor concerning significant aspects of the
audit, including the manner in which exceptions and unusual matters, if
any, disclosed by the auditor’s procedures were resolved or treated.
 Copies of the financial information being reported on and the related
audit reports
 OWNERSHIP AND CUSTODY OF
WORKING PAPERS
 Working papers are the property of the auditor.
The auditor may, at his discretion, make portions
of or extracts from his working papers available to
his client.
 The auditor should adopt reasonable procedures
for custody and confidentiality of his working
papers and should retain them for a period of time
sufficient to meet the needs of his practice and
satisfy any pertinent legal or professional
requirements of record retention.

Effective Date
 This Standard on Auditing becomes operative for all
audits relating to accounting periods beginning on or after
July 1, 1985
 MATERIALITY SA 320

Scope
 This Standard on Auditing (SA) deals with the
auditor’s responsibility to apply the concept of
materiality in planning and performing an audit
of financial statements. Explains how
materiality is applied in evaluating the effect
of identified misstatements on the audit and of
uncorrected misstatements, if any, on the
financial statements.

Objective
 The objective of the auditor is to apply the
concept of materiality appropriately in planning
and performing the audit.
 Meaning
 Information is material if its omission or
misstatement could influence the economic decisions
of users taken on the basis of the financial
statements
 Materiality therefore relates to the significance of
transactions, balances and errors contained in the
financial statements. Materiality defines the
threshold or cut-off point after which financial
information becomes relevant to the decision making
needs of the users. Information contained in the
financial statements must therefore be complete in
all material respects in order for them to present a
true and fair view of the affairs of the entity.
 Materiality is relative to the size and particular
circumstances of individual companies.
 MATERIALITY IN THE CONTEXT OF
AN AUDIT
1) Financial reporting frameworks often discuss the
concept of materiality in the context of the preparation
and presentation of financial statements. Although
financial reporting frameworks may discuss materiality
in different terms, they generally explain that:
1) Misstatements, including omissions, are considered to be
material if they, individually or in the aggregate, could
reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements;
2) Judgments about materiality are made in the light of
surrounding circumstances, and are affected by the size or
nature of a misstatement, or a combination of both; and
3) Judgments about matters that are material to users of the
financial statements are based on a consideration of the
common financial information needs of users as a group. The
possible effect of misstatements on specific individual users,
whose needs may vary widely, is not considered.
Continued…..
MATERIALITY IN THE CONTEXT OF
AN AUDIT
Continued…..
2) Such a discussion, if present in the applicable
financial reporting framework, provides a frame of
reference to the auditor in determining materiality
for the audit. If the applicable financial reporting
framework does not include a discussion of the
concept of materiality, the characteristics referred
to in paragraph 2, provide the auditor with such a
frame of reference.
3) The auditor’s determination of materiality is a
matter of professional judgment, and is affected by
the auditor’s perception of the financial
information needs of users of the financial
statements. In this context, it is reasonable for the
auditor to assume that users:
Continued…..
 MATERIALITY IN THE CONTEXT OF
AN AUDIT
Continued…..
a) Have a reasonable knowledge of business and economic
activities and accounting and a willingness to study the
information in the financial statements with reasonable
diligence;
b) Understand that financial statements are prepared,
presented and audited to levels of materiality;
c) Recognize the uncertainties inherent in the measurement
of amounts based on the use of estimates, judgment and
the consideration of future events; and
d) Make reasonable economic decisions on the basis of the
information in the financial statements.
4) The concept of materiality is applied by the auditor both in
planning and performing the audit, and in evaluating the
effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial
statements and in forming the opinion in the auditor’s
report. Continued…..
 MATERIALITY IN THE CONTEXT OF
AN AUDIT
Continued…..
5) In planning the audit, the auditor makes judgments
about the size of misstatements that will be considered
material. These judgments provide a basis for:
a) Determining the nature, timing and extent of risk
assessment procedures;
b) Identifying and assessing the risks of material
misstatement; and
c) Determining the nature, timing and extent of further audit
procedures.

The materiality determined when planning the audit does not

necessarily establish an amount below which uncorrected
misstatements, individually or in aggregate, will always be
evaluated as immaterial.
Continued…..
 MATERIALITY IN THE CONTEXT OF
AN AUDIT
Continued…..
The circumstances related to some misstatements may cause
the auditor to evaluate them as material even if they are
below materiality. Although, it is not practicable to design
audit procedures to detect misstatements that could be
material solely because of their nature, the auditor considers
not only the size but also the nature of uncorrected
misstatements, and the particular circumstances of their
occurrence, when evaluating their effect on the financial
statements.
 REQUIREMENTS
 Determining Materiality and Performance
Materiality when Planning the Audit
 Revision as the Audit Progresses
 Documentation
 AUDIT EVIDENCE SA 500
Information used by the auditor in arriving at
the conclusions on which the auditor’s
opinion is based. Audit evidence includes
both information contained in the accounting
records underlying the financial statements
and other information.
 Scope
 This Standard on Auditing (SA) explains what constitutes
audit evidence in an audit of financial statements, and
deals with the auditor’s responsibility to design and
perform audit procedures to obtain sufficient appropriate
audit evidence to be able to draw reasonable conclusions
on which to base the auditor’s opinion.
 This SA is applicable to all the audit evidence obtained
during the course of the audit.

Objective
 The objective of the auditor is to design and perform audit
procedures in such a way as to enable the auditor to obtain
sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s
opinion.
 Requirements
 Sufficient Appropriate Audit Evidence
 Information to Be Used as Audit Evidence
 Selecting Items for Testing to Obtain Audit Evidence
 Inconsistency in, or Doubts over Reliability of, Audit Evidence

Types of Audit evidence

 Physical evidence – Existence
 Third-party representations – Lawyers letters, confirmations
 Documentary evidence – Any documents
 Computations – Calculations to check accuracy
 Data Interrelationships – Financial and non financial data
 Client representations – Responses oral or written
 Accounting records – Ledgers and journal
METHODS OF OBTAINING AUDIT
EVIDENCE
1. Inspection
2. Observation
3. Inquiry
4. External confirmation
5. Recalculation
6. Re-performance
7. Analytical review
 AUDIT SAMPLING – SA 530
Meaning
 The application of audit procedures to less than 100% of
items within a population of audit relevance such that all
sampling units have a chance of selection in order to
provide the auditor with a reasonable basis on which to
draw conclusions about the entire population.

Scope of this SA
 This Standard on Auditing (SA) applies when the auditor
has decided to use audit sampling in performing audit
procedures. It deals with the auditor’s use of statistical
and non-statistical sampling when designing and selecting
the audit sample, performing tests of controls and tests of
details, and evaluating the results from the sample.
 AUDIT SAMPLING – SA 530
Continued…….
Scope of this SA
 This SA complements SA 500, which deals with the auditor’s
responsibility to design and perform audit procedures to
obtain sufficient appropriate audit evidence to be able to
draw reasonable conclusions on which to base the audit
opinion. SA 500 provides guidance on the means available to
the auditor for selecting items for testing, of which audit
sampling is one means.

Objective
 The objective of the auditor when using audit sampling is to
provide a reasonable basis for the auditor to draw
conclusions about the population from which the sample is
selected.
 REQUIREMENTS
 Sample Design, Size and Selection of
items for Testing
 Performing Audit Procedures
 Nature and Cause of Deviations and
Misstatements
 Projecting Misstatements
 Evaluating Results of Audit Sampling
 AUDIT PROCESS
 Phase-I: Proposal for the Audit
 Audit Proposal
 Assessment of the Proposal
 Acceptance of the Audit Proposal
 Letter of Appointment
 Letter of Engagement
 Phase-II: Planning
 Gathering of Preliminary information regarding nature
of business, flow of activities of the entity
 Broad planning of the Audit canvas
 Evaluation of Accounting System and Internal Control
 Assessment of Audit Risk
 Framing of Audit Programme
Continued…….
 AUDIT PROCESS
Continued…….
 Phase-III: Execution of Audit
 Compliance tests
 Documentation
 Modification of Audit Programme, if required
 Substantive tests
 Documentation
 Clarification, explanation and confirmation
 Analytical Review of the Financial Statements
 Management Representation
 Phase-IV: Reporting
 Formulating Audit Conclusions
 Preparations of draft Audit Report
 Discussion with the Management
 Preparation of final Audit Report
 Dating of the Audit Report
 Signing of the Audit Report
 AUDIT PROCESS
 In order to achieve the audit objectives the
following process must be taken:
1. Formulating an audit plan and laying down
framework for conducting the work and method to
ensure control over the quality of work
2. Examination and evaluation of the nature , extent
and efficacy of the system of internal control.
3. Ascertaining the arithmetical accuracy of the
books of accounts by checking posting, casting,
cross casting, carry forwards, opening and closing
balances etc.
4. Examining the documentary evidence (internal and
external) and the authority in support of the
transaction i.e. vouching
 CHECKING THE VALIDITY OF THE
TRANSACTION
 Provisions affecting the accounts and audit in any Acts or Rules
 Rules and regulations governing the constitution of the
organisations
 Minute books for appropriate sanction of the transactions by
competent authority
 Other legal documents such as prospectus, returns filed
 Contracts and agreements
 Well recognised accounting principles and practices
 Ensure adequate disclosure of information, by conforming to the
legal requirements
 Verification of existence, ownership title and value of assets and
determining the extent and nature of liabilities
 Scrutiny of the accounts to establish reasonableness, consistency
and compliance with the legal requirements
 Application of various detail checks in order to test the overall
reliability of the accounting records
 Determination of the significant accounting ratios and subjecting
the accounts to ratio analysis
 AUDIT PROGRAMME
 It is a detailed plan of applying the audit procedures in the given
circumstances with instructions for the appropriate techniques to be
adopted for accomplishing the audit objective
 It consists of a series of verification procedures to be applied to the
financial statements and accounts of a given company for the
purpose of obtaining sufficient evidence to enable auditor to express
an informed opinion on such statements.
 It is desirable for every auditor to prepare an audit programme for
each audit. It is all the more necessary in the case of bigger audits

 Generally it contain a set of instruction to the assistants about :

▪ The nature, timing and extent of audit procedures to be followed by each
assistant
▪ The related techniques to be applied
▪ The time limit for the completion of each audit procedure
 It is not possible to evolve one standard audit programme for all the
audits
 There should be a periodic review of the audit programme
 AUDIT PROCEDURES
 There are two types of audit procedures for
obtaining audit evidence
1. Compliance procedures – are the tests
designed to obtain reasonable assurance that
those internal controls on which audit reliance
is to be placed are in effect. It is a test about
the frame work of the internal control
2. Substantive procedures - are designed to
obtain audit evidence as to the completeness,
accuracy and validity of the data produced by
accounting system. It is about the financial
data.
 Substantive
tests

Analysis of
Test of details significant ratios
and trends
 Test of Details – the tests of transactions are
checked by means of vouching of each class of
transactions through cash receipts, cash
payments, purchases sales etc. The balances
are tested by checking of opening balances,
scrutiny of debtor’s balances, creditor’s
balances, general ledger balances
 Analytical review – The analysis of financial
information is carried out to find out unusual or
unexplained items or amounts.. It may entail
computations of significant ratios, doing
comparative analysis with previous years
figures, etc.
VERIFICATION AND VALUATION OF
ASSETS AND LIABILITIES
 Definition:
“The verification of assets implies an enquiry into
the value, ownership, title, existence, possession
and the presence of any charge on the assets.” –
Spicer and Pegler

“The auditor must satisfy himself that the assets

really existed at that date of the balance sheet
and were free from any charge and that they have
been properly valued. In verifying the liabilities, he
has to see that all liabilities have been inserted at
their proper figures and that no liability has been
omitted.” – J.R.Batliboi
 OBJECTIVES OF VERIFICATION OF
ASSET:
1. Evidence of existence of the asset as on
that date by physical examination
2. Evidence of ownership of the assets
3. Evidence as to possession of the assets
4. Evidence with regards to proper valuation of
assets
5. Evidence of proper accounting of assets
 OBJECTIVES OF VERIFICATION OF
LIABILITIES:
1. Balances in creditor’s reflect a true position
as to the liabilities of the business
2. All the liabilities of the client’s business
pertaining to our business are disclosed in
the financial statements
3. They are properly valued in accordance
with the Generally Accepted Accounting
Principles
4. They are properly classified and disclosed
DIFFERENCES BETWEEN VALUATION
AND VERIFICATION:

1. Verification is a final work but valuation is

needed to verify
2. Verification is the work of auditor but the
valuation is the work of concerned authority or
board
3. Valuation checks the amount shown in accounts
but verification checks the items shown in the
balance sheet
4. Valuation can be done anytime throughout the
year but verification is done at the end of the
year
5. Valuation is based on evidence but verification
is based on individual check
 DIFFERENCES BETWEEN
VERIFICATION AND VOUCHING:

1. Nature of work
2. Time
3. Basis
4. Valuation
5. Personnel
 VOUCHING:

 “Vouching does not mean merely the

inspection of receipts with the cash book,
but includes the examination of receipts with
the transactions of a business together with
documentary and other evidence of
sufficient validity, to satisfy the auditor that
such transactions are in order to have been
properly authorized and are correctly
recorded in the books.” – De Paula
 OBJECTIVES:
1. To verify that all transactions recorded in
the books of accounts are supported by
documentary evidence.
2. To see that no frauds or errors have been
committed.
3. No unrelated transactions is been added.
4. Authentication of every transaction by the
right authority.
5. Proper date of record of each transaction.
6. Appropriate distinctions between revenue
and capital transactions.
7. Observation of accuracy.
 TYPES OF VOUCHERS:
 Primary voucher
 Collateral voucher
 POINTS TO BE NOTES WHILE
VOUCHING:
1. Vouchers to be addressed to the client-organization
at its normal business address
2. Chronologically numbered and dated.
3. Date of the voucher and entry to be corresponding.
4. All voucher to be duly authorized by the right
official
5. Amount to be shown both in numbers and words
6. Inspected vouchers to be marked
7. Any clarification or explanations needed to be
noted in the audit note book
8. Revenue and capital items to be distinguished
9. Over writing or erasure not to be accepted, unless
counter signed.
Continued…….
 POINTS TO BE NOTES WHILE
Continued…….
VOUCHING:
10. If the voucher in the name of partner or managers or
directors – right treatment to be ensured
11. Collect explanations for the missing vouchers
12. Complete transactions of similar nature in one sitting
13. Auditor while the conduct of vouching not to
entertain the client staff
14. The nature of payment to be in conformity with the
client’s nature of business
15. The amount to be recalculated and re-totaled to
check for errors.
16. Any vouchers issued from external organizations must
bear the right seal, signature and other information.
17. For advance payment and accruals – appropriate
adjustments to be made
Continued…….
 POINTS TO BE NOTES WHILE
VOUCHING:
Continued…….
18. Transactions needing computation and calculation
should be specially vouched.
19. Few petty expenses to be cross-checked with the
concerned registers.
20. Resolutions and minutes related vouchers to be
cross-checked with the title documents
modifications.