AUDIT PLANNING -ABOKO

AUDIT PLANNING

[NB: refer to KAG 1: PLANNING AND IAG 4]

In order that an auditor conducts an effective audit in an efficient and timely manner, he should
develop an adequate plan, based upon his knowledge of the clients business.

Areas of coverage of the audit plan

a) Acquiring knowledge of the clients accounting systems, policies and internal control
procedures.
b) Establishing the desired level of reliance on internal control.
c) Determining and programming the nature, timing and extent of the audit procedures to be
performed
d) Coordinating the work to be performed

There ought to be both an overall plan for the expected scope and conduct of the audit, and an
audit programme showing the nature, timing and extent of audit procedures.

Adequate planning ensures that:

a) Proper attention is accorded to important audit areas.
b) Potential problems are promptly identified
c) Work is completed expeditiously
d) Proper utilization of audit assistants is made and
e) There is proper co-ordination of the work done by other auditors and specialists.

The extent of audit planning depends on:

a) Size and complexity of the audit.
b) The auditors previous experience with the client and
c) His knowledge of the client business.

It may be necessary for the auditor to discuss aspects of his overall plan and certain audit
procedures with the client so as to improve audit efficiency and co-ordinate audit procedures
with the work of the client staff. The auditor still remains responsible for the overall audit plan
and the audit.

KNOWLEDGE OF THE CLIENTS BUSINESS:

The main aim is to enable an auditor identify the extents, transactions and practices that in his
judgement may have significant effect on the financial information.

Possible sources of information on client business include:

a) The client annual reports to shareholders
b) Minutes of Annual General Meetings (AGM), Employees General Meetings (EGM),
Board Of Directors (BOD) and other important committee.
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c) Internal management reports for current and prior periods.

d) Prior years audit working papers.
e) Firm’s staff responsible for non audit services to the client.
f) Discussion with client.
g) Client’s policy and procedures manual
h) Trade journal and /or magazines.
i) Consideration of the economy’s status and its effects on client business
j) Visits to clients’ premises and plant facilities

The auditor should pay special attention to matters that require special consideration and decide
if they may affect the work done in the current year.

Discussion with client may cover:

 Changes in management original structure and activities of the client
 Current government regulations affecting the client.
 Client business developments affecting the client.
 Current/impending financial difficulties/accounting problems.
 Existence of related parties.
 New or closed premises/plant facilities
 Recent/impeding changes in technology, production range and production/distribution
methods.
 Changes in system of accounting and internal control

By making use of (if any) these sources, the auditor gains the necessary knowledge about:
 The legal framework within which the client operates- Memorandum Of Association
(MOA), Articles Of Association (AOA), CAs’ etc.
 The nature of business of the client.
 Physical location of the premises/facilities..
 Organizational structure, showing the system of authority flows.
 Previous annual accounts and financial history.
 Names and address of banks, solicitors, lenders etc having major dealing with the client.
 Forms and accounting system- invoices, journals, requisitions etc.
 Copies of important documents- leases, title deeds, log books etc.

Such knowledge, besides forming the basis of his overall audit plan, helps the auditor identify
areas for special audit consideration, evaluate the reasonableness of both accounting estimates
and management representations and to make judgments as to the appropriateness of accounting
policies and disclosures.

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Consideration pertinent in developing an overall audit plan:

 The terms of his engagement, which need to be formally recorded and agreed with the client
in exchange of letters. These terms should include the auditor’s responsibilities imposed
upon him by statute and other professional/regulatory authorities, and the need for annual
reviews
 The effect on the audit of existing or newly issued accounting issued accounting and auditing
standards/guidelines.
 The nature, timing of reports or other communication with the client. Others are expected
under the engagement.
 The accounting policies adopted by the client and changes in those policies.
 The identification of significant audit areas.
 The setting of materiality levels for audit purposes.
 Conditions requiring special attention e.g. possibilities of material, fraud or error or
involvement of related parties.
 The degree of reliance he expects to place on accounting systems and internal control.
 Possible rotation of emphasis on the specific areas.
 The nature and extent of audit evidence to be obtained.
 The number of audit assistants required, the experience and special skills they need to posses
and the timing of their audit visits
 The work of internal auditors and the extent of involvement, if any in the audit.
 The involvement of other auditors in the audit of subsidiaries or branches of the client.
 The consultation required on joint audits between the auditors, to determine the allocation of
work to be undertaken and the procedures for its control and review.
 The involvement of the specialists.
NB: The auditor should document his overall plan.

DEVELOPING THE AUDIT PROGRAMME:

 The auditor should prepare a written audit programme setting forth the audit procedures
required to implement the audit plan.
 The programme may also contain audit objectives for each area and should be sufficiently
detailed as to serve as instructions to the assistants involved in the audit and as a control tool
in work execution.

CONTROLLING

[Refer KAG2 & IAG 7]

The KAG2 guideline gives guidance on controlling the auditors work per KAS1. It is written on
the basis that the audit is carried out by a reporting partner and his staff. The guideline is as
discussed below:

A] Delegation:

Any delegation of work by the reporting partner should be limited to audit staff with appropriate
experience, training, proficiency and independence.
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If the reporting partner decides to delegate, the most important elements of control are the
direction and the supervision of audit staff and the review of their work.

Direction:
 Appropriate directions should be given to staff to which the work is delegated.
 This entails informing them of their responsibilities and the objectives of the procedures they
are to perform.
 It also involves informing them of matters like the nature of the entity’s business and
possible accounting/auditing problems, which may affect the nature, timing and extent of
audit procedures with which they are involved.
 A written programme is an important tool of communicating audit direction.
 Time budgets and planning memoranda are also helpful thereof.

Supervision:
The functions to be carried out by the supervisory staff are:
i Monitoring the progress of the work to determine that:
a) Staffs appear to have the necessary skills and competence to carry out their assigned
tasks.
b) Staffs appear to understand the audit direction
c) The work is being done per the audit programme and other planning documents.
ii To become informed of significant accounting questions raised during the audit, assess their
significance and modify the audit programme if necessary.
iii Resolve any difference of professional judgement between personnel.

Review:
The work done by each staff member should be reviewed by personnel of equal or higher
competence to determine if:

 The work satisfies the firm and professional standards.

 The work done and results thereof has been adequately documented.
 Any significant audit matters remaining unsolved.
 The objectives of the audit procedures have been achieved and the concussions expressed
are consistent with the results of the work performed, and support the auditor’s opinion
on the financial statements.

The major review stages in an audit include:

a) Review of initial plan and audit programmes.
b) Review of the study and evaluation of internal controls including compliance procedures
and modifications, if any made to the audit programme thereof.
c) Review of the documentation of audit evidence obtained and the conclusions drawn there
from.
d) Review the financial information and proposed auditor’s report.

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 These review procedures may be augmented, especially for complex audits, by asking staff
not otherwise involved in the audit to perform additional review procedures.
 The final stages of an audit require special attention. Then, when pressures are greatest,
control of audit work is especially necessary to rule out the possibility of mistakes and
omissions.

Quality control:
 These are policies and procedures adopted by a firm to provide reasonable assurance that all
audits done by the firm conform to KAS1.
 Quality control procedures are objectives and goals.
 Quality procedures are the steps to be taken to accomplish the policies adopted.
 The audit firm should adopt quality policies that incorporate the objectives and should
implement appropriate procedures that provide reasonable assurance of achieving the
objectives.

Objectives of quality control:

1) Personal quality – personnel in the firm should adhere to principles of integrity,
objectivity, independence and confidentiality.
2) Skills and competence – firms’ staff should attain and maintain the skills and
competence required to enable them to fulfill their responsibilities.
3) Assignment – audit work should be assigned to staffs who have the degree of technical
training and proficiency required in the circumstance.
4) Direction and supervision- these should be sufficient at all levels to ensure conformity
with appropriate standards of quality.
5) Acceptance and continuance of clients – prospective clients should be evaluated before
acceptance and the association with existing clients should be periodically reviewed.
6) Inspection- the firm should monitor the effectiveness of its quality control and
procedures.

 A firm’s quality control policies and procedures should be effectively communicated to

personnel.
 The nature and extent of the firms’ quality control procedures depend on the :
1) The size and nature of its practice.
2) Its geographic dispersion.
3) Its organization and
4) Appropriate cost/benefit considerations.

RECORDING

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Refer to KAG3: Recording and IAG9

Definition: Recording refers to the documentation in the form of working papers prepared or
obtained by the auditor and retained by him, in connection with the performance of his audit.

Working papers are necessary because:

 The reporting partner needs to be able to satisfy himself that work delegated by his has
been properly performed.
 They provide for future reference, details of problems encountered, plus evidence of
work done and conclusions drawn thereof to arrive at the audit opinion.
 Their preparation encourages a methodological approach by the auditor.

Form and content:

 Working papers should be sufficiently completed and detailed as to enable an experience

auditor, having no previous connection with the audit, to subsequently ascertain from
them the work done and support the conclusions reached.
 Audit working papers should include a summary of all significant matters arising that may
require the exercise of professional judgement, together with the auditors’ conclusion
thereon.
 If difficult questions of principle or judgement arise, a record should be made of the
relevant information received and summarize both the management’s and his conclusions.
 The auditor’s conclusion may later be questioned by third parties, having the benefit of
hindsight and so must be demonstrably reasonable, given the known facts.
 Often audit efficiency is enhanced by making use of client schedules, analysis and other
write ups. In such circumstances the auditor should satisfy himself that these are properly
prepared.

Examples of audit write ups:

1) Information of permanent significance – MOA, AOA, organizational structure etc.
2) Extracts/copies of important legal documents, agreements and minutes.
3) Audit planning information and audit programme
4) Auditors’ assessment of the entity’s accounting system and, if necessary, his review and
evaluation of the internal control.
5) A record of the nature, timing and extent of audit work done, notes of errors/exceptions
found and actions taken, including conclusions drawn by audit staff doing the various
sections of the work.
6) Records of relevant balances/other financial statement.
7) Copies of communication with the auditors, third parties and specialists.
8) Copies of letters/notes concerning audit matters communicated to/discussed with the client,
include terms of engagement and weakness in internal control.
9) Letters of representations received by the auditor.

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10) A summary of significant points affecting financial statements and audit report, showing how
these points should be dealt with.
11) Copies of financial statements being reported on and the related audit reports.

Standardization of working papers

This may improve efficiency of their preparation and review and proper use may help instruct
staff and facilitate delegation exercise as quality of work is controlled. But they should not be
mechanically followed in conducting/documenting all audit without regard to professional
judgement.

Ownership and custody of working papers:

 The property of the auditors
 He may, at his discretion make portions or extracts from his working papers available to the
client.
 They should not be used as a substitute for client records.
 Reasonable procedures for the safe custody and confidentiality of working papers should be
in place.
 They should be retained for a period of time sufficient to meet the needs of the practice and
legal provisions

A CURRENT FILE:

A current year’s file relates primarily to set of accounts or statements being audited.

Contents of a current file include:

1) A copy of the accounts/statements on which the auditors are reporting, authenticated by
directors’ signatures or otherwise.
2) An index covering all the working papers unless they are cross-referenced to the relevant
items in the accounts.
3) An internal control questionnaire or other records including flowcharts if appropriate
designed to ascertain the adequacy of the system of internal control and an audit
programme supplemented by particulars and dates of the work carried out and precise
details of audit tests and their results.
4) A schedule of each item in the balance sheet, preferably including comparative figures,
showing its make-up and how existence, ownership and value and liabilities have been
verified. These schedules should be cross-referenced to documents arising from external
verification such as bank letters and results of circularization of debtors and attendance at
physical stock taking.
5) A schedule supporting each item in the statutory P&L A/C preferably including figures.
6) A check list concerning compliance with statutory disclosure provisions.
7) A record showing queries raised during the audit and their disposal, with notes where
appropriate for attention the following year. Material queries which cannot be settled
satisfactory by immediate reference to the client may require a qualification of the

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auditors’ report and should be fully documented and support by a note of all discussions
with the client and any explains given.
8) A schedule of important statistics or working ratios, comparative figure being include
where appropriate. Any significant change that need explanations.
9) A record or extract of minutes of meetings of the directors and shareholders.
10) Copies of letters to the client setting out any material weakness or matters with which the
auditors dissatisfied in respect of the accounts or control procedures.
11) Letters of representations i.e. written confirmation by the client of information and
opinions expressed in respect of matters such as stock values and amounts of current and
contingent liabilities.

PERMANENT FILE:
A permanent file deals with matters of continuing importance affecting the company.
Contents of a permanent file include:
1) Memorandum of association, articles of association and other appropriate statutory or legal
regulations.
2) Copies of other documents and minutes of continuing importance.
3) A short description of the type of business carried on and place of business.
4) List of accounting records and responsible officials and plan of the organization.
5) Statements showing a note of any accounting matters and importance such as history of
reserves and bases of accounting adopted e.g. valuation of stock, work in process,
depreciation etc.
6) The clients’ internal accounting instructions and internal audit instructions including where
appropriate stock taking instructions.

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