CHAPTER 2

AUDIT STRATEGY,
AUDIT PLANNING
AND AUDIT
PROGRAMME

LEARNING OUTCOMES

After studying this chapter, you would be able to -

♦ Understand the Audit Planning and its benefits.
♦ Learn about Planning sProcess and its Elements.
♦ Learn about establishing overall strategy and developing audit
plan in detail.
♦ Learn about audit programme.
♦ Gain the knowledge of control of quality of audit work w.r.t
delegation and supervision of audit work.
♦ Practicality of above concepts by studying through examples
and case studies.

© The Institute of Chartered Accountants of India

 2. AUDITING AND

CHAPTER OVERVIEW

Planning an audit involves:

Establishing the overall audit strategy

Developing an audit plan

The auditor should plan his work to enable him to

conduct an effective audit in an efficient and timely
manner.

Plans should be based on

knowledge of the client's
business

Plans should be further developed and

revised as necessary during the course of
the audit.
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND AUDIT

By now, Sameer had grasped basic nature of auditing. It was crystal clear to him that
objective of an audit of financial statements is to express an opinion on the same. He
could easily visualize that a complex process like audit needs to be performed
methodically. “Carrying out an audit ought to be a logical and systematic process leading
from one step to another. Performing a complex process effectively, would certainly, be
involving planning. Planning helps one to achieve desired objectives. Audits should be
no different”- He was talking to himself.
Besides, he was pretty sure that there must be timelines in which audits were to be
completed for different entities. He remembered his father had held few shares of some
blue-chip companies. He was able to recall that notices of annual general meetings of
these companies used to be delivered at their ancestral home in Rajkot and those also
related to consideration and adoption of audited accounts. Linking that, he had
reasonably concluded that audits were required to be performed in a timely manner.
The whole audit process, therefore, must be properly planned to ensure its effectiveness.
He was curious to learn about how planning for an audit is undertaken. What are the
basic elements of planning? What are likely matters to be included therein?
He was aware about CA students undergoing articled training. Most of the students must
be going for audit work of different entities as part of their practical training. A thought
came to his mind- “How do students who have freshly joined their articles carry out
audit work? There must be some mechanism, some sort of detailed set of instructions
for carrying out audit. What is it known as?” His inquisitive mind was constantly engaged
in such kind of questions.
He was also anxious to know what would happen to audit plan if some new information
comes to light of auditor during course of audit which was hitherto unknown to him at
time of planning? Is audit plan flexible? Can it be changed as audit progresses? Another
question raging in his mind was whether all such information was necessary to be put in
writing by the auditor.
 2. AUDITING AND

1. AUDITOR’S RESPONSIBILITY TO PLAN AN

AUDIT OF FINANCIAL STATEMENTS
SA 300- Planning an audit of financial statements deals with the auditor’s responsibility
to plan an audit of financial statements. It states that objective of the auditor is to plan
the audit so that it will be performed in an effective manner.

1.1 Why Planning an audit is necessary? - Its Benefits

Planning an audit is necessary to carry out it effectively in a timely manner. Besides
ensuring compliance with professional standards, it helps in performing audit
engagement effectively.
Adequate Planning benefits the audit of financial statements in several ways, including
the following: -
1. Helping the auditor to devote appropriate attention to important areas of the audit.
2. Helping the auditor identify and resolve potential problems on a timely basis.
3. Helping the auditor properly organize and manage the audit engagement so that it
is performed in an effective and efficient manner.
4. Assisting in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks, and the proper
assignment of work to them.
5. Facilitating the direction and supervision of engagement team members and the
review of their work.
6. Assisting, where applicable, in coordination of work done by others such as
experts
Therefore, planning an audit ensures that audit risk is reduced to an acceptable low level.
When audit work is adequately and properly planned, it reduces the risk of inappropriate
opinion by the auditor.
Study Hint: 3 Helping, 3 Assisting. Helping is Audit related: Important areas, Potential Problems, organize
& manage and Assisting is Engagement Team Related :Selection of Team, Direction+ Supervision + Review,
Coordination with experts .
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND AUDIT

Appropriate attention to important

areas
Coordination Identify
with other and
Auditors and Resolve
Experts Benefits of Potential
Planning Problems

Direction and
Supervision Efficie
of Team & Selection of Team Members nt and
Review of Effecti
work ve
Audit

1.2 Nature of Audit Planning- A Continuous and iterative

process
Planning is not a discrete phase of an audit, but rather a continual and iterative process
that often begins shortly after (or in connection with) the completion of the previous
audit and continues until the completion of the current audit engagement. Planning,
however, includes consideration of the timing of certain activities and audit procedures
that need to be completed prior to the performance of further audit procedures. For
example, Planning includes the need to consider, prior to the auditor’s identification and
assessment of the risks of material misstatement, such matters as: -
1. (A)The analytical procedures to be applied as risk assessment procedures(RAP).
2. (U)Obtaininga general understanding of the legal and regulatory framework
applicable to the entity and how the entity is complying with that framework.
3. (M) The determination of materiality.
4. ((E)The involvement of experts.
5. (O)The performance of other risk assessment procedures.

Study Hint: AUMOE (read as aamai)

2 RAP , Understanding the entity so for Important areas (Materiality) we need to bring Experts
 2. AUDITING AND

Risk assessment procedures are audit procedures performed to

obtain an understanding of the entity and its environment, including
the entity’s internal control, to identify and assess the risks of material
misstatement, whether due to fraud or error at the financial statement
Therefore, planning includes consideration of matters such as obtaining knowledge
about legal framework in which entity is operating. Consider for example- Telecom
companies and Banks. Such entities operate in different legal and regulatory frameworks.
TRAI (Telecom Regulatory Authority of India) and RBI (Reserve Bank of India) are
regulators for telecom and banking industry respectively.
Planning also includes need to consider determination of material or significant matters.
It also involves considering whether experts need to be involved taking into account
complexity of business. Further, it also involves considering need to perform risk
assessment procedures for identifying and assessing risks of material misstatement.

Planning is not a separate or distinct phase of an audit. It is to be

viewed as a continual and repetitive process. It is a continuous
process that begins with completion of previous audit and continues
till the completion of current audit engagement.
Involvement of key engagement team members in planning audit
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. The involvement of the engagement partner and
other key members of the engagement team in planning the audit draws on their
experience and insight, thereby enhancing the effectiveness and efficiency of the
planning process.
Discussion of elements of planning with entity’s management
The auditor may decide to discuss elements of planning with the entity’s management
to facilitate the conduct and management of the audit engagement. When discussing
matters included in the overall audit strategy or audit plan, care is required in order not
to compromise the effectiveness of the audit.
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND AUDIT

2. Planning Process- Elements of Planning

The elements of planning can be categorized as under: -
(I) Preliminary engagement activities
(II) Planning activities

(I) Auditor's Consideration: Preliminary Engagement Activities

The auditor considers whether relationship with client should be continued and whether
ethical requirements including independence continue to be complied with. It includes:
-

(A) Performing procedures regarding the continuance of the client relationship

(B) Evaluating compliance with ethical requirements, including independence

(C) Establishing an understanding of terms of engagement

Preliminary engagement activities include the following: -

(A) Performing procedures regarding the Continuance of Client Relationships
and Audit Engagements
Acceptance and Continuance of Client Relationships and Audit
Engagements
It should be ensured that appropriate procedures regarding the acceptance and
continuance of client relationships and audit engagements have been followed
and that conclusions reached in this regard are appropriate.
The firm should obtain information considered necessary in the circumstances
before accepting an engagement with a new client, when deciding whether to
continue an existing engagement, and when considering acceptance of a new
engagement with an existing client.
Matters such as integrity of principal owners and key management, competence
of engagement team to perform the audit engagement and implications of matters
that have arisen during current and previous audit engagement may need to be
considered.
 2. AUDITING AND

Besides, in case of initial engagements, communication with predecessor auditor

should be made, where there has been a change of auditors.
(B) Evaluating compliance with ethical requirements including independence
The auditor shall continuously evaluate compliance with ethical requirements
including independence. “Independence” means that the judgement of a person is
not subordinate to the wishes or direction of another person who might have
engaged him.
Throughout the audit engagement, the engagement partner shall remain alert,
through observation and making inquiries as necessary, for evidence of non-
compliance with relevant ethical requirements by members of the engagement
team. If matters come to the engagement partner’s attention that indicate that
members of the engagement team have not complied with relevant ethical
requirements, the engagement partner, in consultation with others in the firm, shall
determine the appropriate action.
The engagement partner shall form a conclusion on compliance with
independence requirements that apply to the audit engagement. In doing so, the
engagement partner shall: -
(i) Obtain relevant information from the firm to identify and evaluate
circumstances and relationships that create threats to independence
(ii) Evaluate information on identified breaches, if any, of the firm’s
independence policies and procedures to determine whether they create a
threat to independence for the audit engagement and
(iii) Take appropriate action to eliminate such threats or reduce them to an
acceptable level by applying safeguards, or, if considered appropriate, to
withdraw from the audit engagement, where withdrawal is permitted by law
or regulation. The engagement partner shall promptly report to the firm any
inability to resolve the matter for appropriate action.
Besides, consideration for client continuance and compliance with ethical
requirements, preliminary engagements activities also include establishing an
understanding of terms of engagement.

Study Hint : [ Identify Info , Evaluate Info , Take Approp Action ]

– all info are relating to threats to independence
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND AUDIT
(C) Establishing an understanding of terms of engagement
It is in the interests of both the entity and the auditor that the auditor sends an audit
engagement letter before the commencement of the audit to help avoid
misunderstandings with respect to the audit. It ensures that there is no confusion
with the client regarding terms of the engagement.

Performing preliminary engagement activities assists the auditor

in identifying and evaluating events or circumstances that may
affect auditor’s ability to plan and perform audit engagement.
An overview of Preliminary engagement activities
Checkbox What is included in Preliminary engagement activities?

✔ Performing procedures regarding the continuance of client

relationship

✔ Evaluating Compliance with ethical requirements including

independence

✔ Establishing an understanding of terms of engagement with the client to

ensure there are no misunderstandings

(II) Planning activities

Planning activities involve: -
[A] Establishing the overall audit strategy
[B] Developing an audit plan

(A) Establishing the overall audit strategy- Assistance for the auditor

Overall audit strategy sets the scope, timing and direction of the
audit, and guides the development of the more detailed audit
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.
The process of establishing the overall audit strategy assists the auditor to
determine, subject to the completion of the auditor’s risk assessment procedures,
such matters as: -
 2. AUDITING AND

(i) The resources to deploy for specific audit areas, such as the use of
appropriately experienced team members for high-risk areas or the
involvement of experts on complex matters
(ii) The amount of resources to allocate to specific audit areas, such as the
number of team members assigned to observe the inventory count at
material locations, the extent of review of other auditors’ work in the case of
group audits, or the audit budget in hours to allocate to high risk areas
(iii) When these resources are to be deployed, such as whether at an interim
audit stage or at key cut-off dates
(iv) How such resources are managed, directed and supervised, such as when
team briefing and debriefing meetings are expected to be held, how
engagement partner and manager reviews are expected to take place (for
example, on-site or off-site), and whether to complete engagement quality
control reviews
Study Hint: Resources is the subject matter 1. Deploy 2. Allocate 3.when to deploy
4. How to supervise

PTO

Factors to be taken into consideration by auditor for

establishing audit strategy (see 2.14 for Study Hint)
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND into
The auditor shall take following factors AUDIT
consideration while establishing audit
strategy: -

(a) Identify the characteristics of the engagement that define its scope
It is important for auditor to identify scope of the engagement. Only a well
identified scope can lead to establishment of a sound audit strategy. There
are many characteristics of engagement defining its scope. Some of
characteristics are as under: -

⮚ Applicable financial reporting framework applicable to the entity

⮚ Nature of business segments to be audited including the need for

specialized knowledge

⮚ Industry specific reporting requirements required by industry

regulators

⮚ Expected use of audit evidence obtained in previous audits

Study Hint: 2- Reporting Requirements (FRF ,Industry Specific) , Nature of Business Segments ,
Previously obtained Aud Evidence
 2. AUDITING AND

(b) Ascertain the reporting objectives of the engagement to plan the

timing of the audit and the nature of the communications required.
The ascertaining of reporting objectives of engagement helps the auditor to
plan timing of different audit procedures and also nature of
communications. Some of the instances are given under: -

⮚ The entity’s timetable for reporting

⮚ Organization of meetings to discuss of nature, timing and extent of

audit work with management

⮚ Discussion with management regarding the expected type and

timing of reports to be issued including the auditor’s report

⮚ Discussion with management regarding the expected

communications on the status of audit work throughout the
engagement.

⮚ Expected nature and timing of communications among engagement

team members, including the nature and timing of team meetings and
timing of the review of work performed.

Study Hint: 5 EXPECTED – Timetable , Audit work , Type of Report, Status of audit,
communication w/team
(or) Time table + 4 discussion- NTE of work, Type of report ,status of work , w/team
AUDIT STRATEGY, AUDIT PLANNING 2.
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(C’) Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts
The auditor needs to direct efforts of engagement team towards matters that
in his professional judgment are significant. Preliminary identification of
material classes of transactions, account balances and disclosures help
auditor in establishing overall audit strategy. More energies need to be
devoted to significant matters to obtain desired outcomes. Few examples
are listed as under: -

● Volume of transactions which may determine whether it is more efficient

for the auditor to rely on internal control

● Significant industry developments such as changes in industry

regulations and new reporting requirements.
● Significant changes in the financial reporting framework, such as changes
in accounting standards.
● Other significant relevant developments, such as changes in the legal
environment affecting the entity.

Study Hint: FIVO -Volume, industry Developments , FRF , Others

(Just like a VIVO phone directs communication, FIVO directs audit
efforts)
 2. AUDITING AND

(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
Considering results of preliminary engagement activities and knowledge
gained from similar engagements goes a long way in establishing sound
audit strategy. Examples are listed as under: -

⮚ Results of previous audits that involved evaluating the operating

effectiveness of internal control, including the nature of identified
deficiencies and action taken to address them.

⮚ The manner in which the auditor emphasizes to engagement team

members the need to maintain a questioning mind and to exercise
professional skepticism in gathering and evaluating audit evidence.

(e’) Ascertain the nature, timing and extent of resources necessary to

perform the engagement.
Selection of engagement team and assignment of audit work to team
members is a significant factor in establishing overall audit strategy.
Experienced team members may be assigned in areas where there is higher
risk of material misstatement. Similarly, engagement budgeting and
devotion of more time to areas of higher risk of material misstatement are to
be kept in mind.
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND AUDIT
In establishing the overall audit strategy, the auditor shall:

Ascertain the
Consideration of Consider the nature, timing
Ascertain the significant factors results of and extent of
Identify the reporting
scope of the in directing the preliminary resources
objectives of the engagement engagement
engagement engagement required for
team’s efforts activities
the
engagement.

Study Hint: Scope , Objective, Direction, Results , Resources

ILLUSTRATION 1

The auditor T of Hand Fab Ltd is worried as to management of key resources to be

employed to conduct audit.
Required
How the audit strategy would be helpful to the auditor?

SOLUTION

Refer - Establishing the overall audit strategy- Assistance for the auditor for solution.
(B) Development of Audit plan
Once the overall audit strategy has been established, an audit plan can be
developed to address the various matters identified in the overall audit strategy,
taking into account the need to achieve the audit objectives through the efficient
use of the auditor’s resources.
Understanding client’s business is one of the important principles in developing an
audit plan. In fact, without adequate knowledge of client’s business, a proper audit
is not possible. Gaining knowledge of client’s business is, therefore, one of the
foremost requirements to develop audit plan.
SA-300 states that auditor shall develop an audit plan that shall include
description of-
(i) The nature, timing and extent of planned risk assessment procedures
(ii) The nature, timing and extent of planned further audit procedures at
assertion level
 2. AUDITING AND

(iii) Other planned audit procedures that are required to be carried out so that
the engagement complies with SAs.
The auditor plans what type of audit procedures are to be performed, their timing
and how much work should be done taking into account sample size etc.
The audit plan is more detailed than the overall audit strategy that includes the
nature, timing and extent of audit procedures to be performed by engagement
team members. Planning for these audit procedures takes place over the course
of the audit as the audit plan for the engagement develops.
For example, planning of the auditor's risk assessment procedures occurs early in
the audit process. However, planning the nature, timing and extent of specific
further audit procedures depends on the outcome of those risk assessment
procedures. In addition, the auditor may begin the execution of further audit
procedures for some classes of transactions, account balances and disclosures
before planning all remaining further audit procedures.

Elements of Planning

Preliminary
Planning activities
engagement acti

Establishing Develo
overall audit ping audit
strategy plan

Test Your Understanding 1

MG & Co, a firm of auditors, having a standing of 30 years is appointed
as a statutory auditor of company engaged in manufacturing of
defence equipment. Due to opening of defence sector by government
to private players in recent times, many new companies have entered
the fray to manufacture sophisticated defence equipment.
Considering technical and complex nature of operations, the auditors
recognize that involvement of experts in the audit is required. Does
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND AUDIT

Test Your Understanding 2

CA Kartik is planning for audit of a company engaged in manufacturing
of cosmetics. Considering nature of operations of the company, he
had planned to include testing of controls of the company over
purchases, sales and inventories. One fine day, he reaches the
corporate office and asks for manuals and required documentation to
ensure surprise element in testing. He had never shared with
management his intention to carry out above procedures. Is approach

3. RELATIONSHIP BETWEEN AUDIT STRATEGY

AND AUDIT PLAN
Audit strategy sets the broad overall approach to the audit whereas audit plan addresses
the various matters identified in the overall audit strategy. Audit strategy determines
scope, timing and direction of audit. Audit plan describes how strategy is going to be
implemented. The audit plan is more detailed than the overall audit strategy that includes
the nature, timing and extent of audit procedures to be performed by engagement team
members. Planning for these audit procedures takes place over the course of the audit
as the audit plan for the engagement develops.
Once the overall audit strategy has been established, an audit plan can be developed to
address the various matters identified in the overall audit strategy, taking into account
the need to achieve the audit objectives through the efficient use of the auditor’s
resources.
The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential processes, but are closely inter-related since changes
in one may result in consequential changes to the other.

4. OVERALL AUDIT STRATEGY AND THE AUDIT

PLAN- THE AUDITOR’S RESPONSIBILITY
The overall audit strategy and the audit plan remain the auditor’s responsibility. It is
the auditor who is responsible for establishing overall audit strategy and developing
 2. AUDITING AND

audit plan. However, as discussed earlier, auditor may discuss elements of planning
with entity’s management without compromising effectiveness of audit.

ILLUSTRATION 2

W, the auditor of SKM Ltd. asks its finance and audit head to prepare audit strategy
for conducting audit of SKM Ltd. W also insists him to draw detailed audit procedures.
On the request of auditor W completes audit strategy as well as audit procedures as
prepared by finance head of the company. Subsequently, auditor realizes that
effectiveness of the audit is compromised and it was his responsibility to prepare the
overall audit strategy. Comment.

SOLUTION

Refer - Overall audit strategy and the audit plan- The auditor’s responsibility -
Accordingly, approach of W was wrong and he should have prepared overall audit
strategy and detailed audit procedures.

5. CHANGES TO PLANNING DECISIONS

DURING THE COURSE OF AUDIT
The auditor shall update and change the overall audit strategy and the audit plan as
necessary during the course of the audit. As a result of unexpected events, changes in
conditions, or the audit evidence obtained from the results of audit procedures, the
auditor may need to modify the overall audit strategy and audit plan and thereby the
resulting planned nature, timing and extent of further audit procedures, based on the
revised consideration of assessed risks. This may be the case when information comes
to the auditor’s attention that differs significantly from the information available when
the auditor planned the audit procedures. For example, audit evidence obtained through
on detailed checking may contradict the audit evidence obtained through testing internal
controls.

6. PLANNING SUPERVISION AND REVIEW OF

WORK OF ENGAGEMENT TEAM MEMBERS
The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and the review of their work. The nature, timing and
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND AUDIT
extent of the direction and supervision of engagement team members and review of
their work vary depending on many factors, including: -
1. The size and complexity of the entity.
2. The area of the audit.
3. The assessed risks of material misstatement
4. The capabilities and competence of the individual team members performing the
audit work.

7. DOCUMENTATION
The auditor shall document: -
(a) the overall audit strategy
(b) the audit plan and
(c) any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes.
The documentation of the overall audit strategy is a record of the key decisions
considered necessary to properly plan the audit and to communicate significant matters
to the engagement team.
The documentation of the audit plan is a record of the planned nature, timing and extent
of risk assessment procedures and further audit procedures at the assertion level in
response to the assessed risks. It also serves as a record of the proper planning of the
audit procedures that can be reviewed and approved prior to their performance. The
auditor may use standard audit programs and/or audit completion checklists, tailored as
needed to reflect the particular engagement circumstances.
A record of the significant changes to the overall audit strategy and the audit plan, and
resulting changes to the planned nature, timing and extent of audit procedures, explains
why the significant changes were made, and the overall strategy and audit plan finally
adopted for the audit. It also reflects the appropriate response to the significant changes
occurring during the audit.
 2. AUDITING AND

Test Your Understanding 3

CA Mary, while planning audit of a company, feels that she would
inquire from inhouse legal counsel of the company status of pending
litigation matters against the company to identify and assess risks of
material misstatements. Considering above description, are you able
to identify said procedures? Where these identified procedures are

Test Your Understanding 4

CA Shubhendu is statutory auditor of a social media company. Due to
change in information technology regulations by government, it has
become mandatory for such companies to constitute “grievance
redressal mechanism” for users of social media platform of the
company. Failure to comply with regulations can potentially lead to
civil and criminal liabilities against the company. Is above factor to be

8. AUDIT PROGRAMME
It is desirable that in respect of each audit and more particularly for bigger audits, an
audit programme should be drawn up. Audit programme is a list of examination and
verification steps to be applied and set out in such a way that the interrelationship of one
step to another is clearly shown and designed, keeping in view the assertions discernible
in the statements of account produced for audit or on the basis of an appraisal of the
accounting records of the client.

An audit programme consists of a series of verification procedures to

be applied to the financial statements and accounts of a given entity
for the purpose of obtaining sufficient evidence to enable the auditor
to express an informed opinion on financial statements.
In other words, an audit programme 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
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AND AUDIT

8.1 Evolving one audit programme- Not Practicable for All

businesses
Businesses vary in nature, size and composition; work which is suitable to one business
may not be suitable to others; efficiency and operation of internal controls and the exact
nature of the service to be rendered by the auditor are the other factors that vary from
assignment to assignment. On account of such variations, evolving one audit programme
applicable to all business under all circumstances is not practicable. However, it
becomes a necessity to specify in detail in the audit programme the nature of work to
be done so that no time will be wasted on matters not pertinent to the engagement and
any special matter or any specific situation can be taken care of.

8.2 The Assistant to keep an open mind

To start with, an auditor having regard to the nature, size and composition of the business
and the dependability of the internal control and the given scope of work, should frame
a programme which should aim at providing for a minimum essential work which may
be termed as a standard programme. As experience is gained by actually carrying out
the work, the programme may be altered to take care of situations which were left out
originally, but are found relevant for the particular concern. Similarly, if any work
originally provided for proves beyond doubt to be unnecessary or irrelevant, it may be
dropped. The assistant engaged in the job should be encouraged to keep an open mind
beyond the programme given to him. He should be instructed to note and report
significant matters coming to his notice, to his seniors or to the partners or proprietor of
the firm engaged for doing the audit.

8.3 Periodic review of the audit programme

There should be periodic review of the audit programme to assess whether the same
continues to be adequate for obtaining requisite knowledge and evidence about the
transactions. Unless this is done, any change in the business policy of the client may not
be adequately known, and consequently, audit work may be carried on, on the basis of
an obsolete programme and, for this negligence, the whole audit may be held as
negligently conducted and the auditor may have to face legal consequences.
 2. AUDITING AND

The utility of the audit programme can be retained and enhanced only by keeping the
programme as also the client’s operations and internal control under periodic review so
that inadequacies or redundancies of the programme may be removed. However, as a
basic feature, audit programme not only lists the tasks to be carried out but also contains
a few relevant instructions, like the extent of checking, the sampling plan, etc. So long as
the programme is not officially changed by the principal, every assistant deputed on the
job should unfailingly carry out the detailed work according to the instructions governing
the work. Many persons believe that this brings an element of rigidity in the audit
programme. This is not true provided the periodic review is undertaken to keep the
programme as up-to- date as possible and by encouraging the assistants on the job to
observe all salient features of the various accounting functions of the client.

8.4 Constructing an audit programme

The audit planning ideally commences at the conclusion of the previous year’s audit, and
along with the related programme, it should be reconsidered for modification as the
audit progresses. Such consideration is based on the auditor’s review of the internal
control, his preliminary evaluation thereof, and the results of his compliance and
substantive procedures.
While developing an audit programme, the auditor may conclude that relying on certain
internal controls is an effective and efficient way to conduct his audit. However, the
auditor may decide not to rely on internal controls when there are other more efficient
ways of obtaining sufficient appropriate audit evidence. The auditor should also consider
the timing of the procedures, the coordination of any assistance expected from the
client, the availability of assistants, and the involvement of other auditors or experts.
Further, the auditor normally has flexibility in deciding when to perform audit
procedures. However, in some cases, the auditor may have no discretion as to timing,
for example, when observing the taking of inventories by client personnel or verifying
the securities and cash balances at the year-end.
For the purpose of programme construction, the following points should be kept in mind:
(1) Stay within the scope and limitation of the assignment.
 AUDIT STRATEGY, AUDIT PLANNING 2.
AND AUDIT
(2) Prepare a written audit programme setting forth the procedures that are needed
to implement the audit plan.
(3) Determine the evidence reasonably available and identify the best evidence for
deriving the necessary satisfaction.
(4) Apply only those steps and procedures which are useful in accomplishing the
verification purpose in the specific situation.
(5) Include the audit objectives for each area and sufficient details which serve as a
set of instructions for the assistants involved in audit and help in controlling the
proper execution of the work.
(6) Consider all possibilities of error.
(7) Co-ordinate the procedures to be applied to related items.

Stay within the

scope and
limitation of the
assignment.
Co-ordinate
the Prepare a
procedures to written audit
be applied to programme.
related items.

Determine the
evidence
Consider all reasonably
possibilities
of error. available
and the best
dentify
i evidence.

Apply only those

steps which are
Include the useful in
audit accomplishing the
objectives for verification
each area. purpose.
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8.5 Audit Programme- Designed to provide audit

evidence
Audit evidence may be defined as the 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.
Evidence is the very basis for formulation of opinion and an audit programme is designed
to provide for that by prescribing procedures and techniques. What is best evidence for
testing the accuracy of any assertion is a matter of expert knowledge and experience.
This is the primary task before the auditor when he draws up the audit programme.
Transactions are varied in nature and impact; procedures to be prescribed depend on
prior knowledge of what evidence is reasonably available in respect of each transaction.
In most of the assertions much of the evidence be drawn and each one should be
considered and weighed to ascertain its weight to prove or disprove the assertion. In this
process, an auditor would be in a position to identify the evidence that brings the highest
satisfaction to him about the appropriateness or otherwise of the assertion.
An auditor picks up evidence from a variety of fields and it is generally of the following
broad types:
(a) Documentary examination
(b) Physical examination
(c) Statements and explanation of management, officials and employees
(d) Statements and explanations of third parties
(e) Arithmetical calculations by the auditor
(f) State of internal controls and internal checks
(g) Inter-relationship of the various accounting data
(h) Subsidiary and memorandum records
(i) Minutes
(j) Subsequent action by the client and by others.
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Example

For cash in hand, the best evidence is ‘count’.

For investment pledged with a bank, the banker’s certificate.
For verifying assertions about book debts, the client’s ledger
invoices, debit notes, credit notes, monthly accounts statement sent
to the customers are all evidence: some of these are corroborative,
other being complementary. In addition, balance confirmation
procedure is often resorted to, to obtain greater satisfaction about
The auditor, however, has to place appropriate weight on each piece of evidence and
accordingly should prescribe the priority of verification. It is true that in all cases one
procedure may not bring the highest satisfaction and it may be dangerous for the auditor
to ignore any evidence that is available. By the word “available”, we do not mean that
the evidence available with the client is the only available evidence. The auditor should
know what normally should be available in the context of the transaction having regard
to the circumstances and usage.

8.6 Advantages and disadvantages of an audit programme

The advantages of an audit programme are: -
(a) It provides the assistant carrying out the audit with total and clear set of
instructions of the work generally to be done.
(b) It is essential, particularly for major audits, to provide a total perspective of the
work to be performed.
(c) Selection of assistants for the jobs on the basis of capability becomes easier when
the work is rationally planned, defined and segregated.
(d) Without a written and pre-determined programme, work is necessarily to be
carried out on the basis of some ‘mental’ plan. In such a situation there is always a
danger of ignoring or overlooking certain books and records. Under a properly
framed programme, such danger is significantly less and the audit can proceed
systematically.
 2. AUDITING AND

(e) The assistants, by putting their signature on programme, accept the responsibility
for the work carried out by them individually and, if necessary, the work done may
be traced back to the assistant.
(f) The principal can control the progress of the various audits in hand by examination
of audit programmes initiated by the assistants deputed to the jobs for completed
work.
(g) It serves as a guide for audits to be carried out in the succeeding year.
(h) A properly drawn up audit programme serves as evidence in the event of any
charge of negligence being brought against the auditor. It may be of considerable
value in establishing that he exercised reasonable skill and care that was expected
of professional auditor.
Some disadvantages are also there in the use of audit programmes but most of these
can be removed by following some concrete steps.
The disadvantages are: -
(a) The work may become mechanical and particular parts of the programme may be
carried out without any understanding of the object of such parts in the whole
audit scheme.
(b) The programme often tends to become rigid and inflexible following set grooves;
the business may change in its operation of conduct, but the old programme may
still be carried on. Changes in staff or internal control may render precaution
necessary at points different from those originally decided upon.
(c) Inefficient assistants may take shelter behind the programme i.e., defend
deficiencies in their work on the ground that no instruction in the matter is
contained therein.
(d) A hard and fast audit programme may kill the initiative of efficient and enterprising
assistants.
Study Hint: MIIIK (read as mic) : Mechanical , Inflexible , Inefficient and Initiative Kill
(if you do a mistake it will be told with Mic (MIIK) – Disadvantages of Audit Programme)

All these disadvantages may be eliminated by imaginative supervision of the work

carried on by the assistants; the auditor must have a receptive attitude as regards the
assistants; the assistants should be encouraged to observe matters objectively and bring
significant matters to the notice of supervisor/principal.
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Test Your Understanding 5

Rohit, undergoing practical training, is part of an engagement team
conducting audit of a company engaged in manufacturing of paints.
He has been provided with audit programme pertaining to sales. It
lists out various items to be checked and verified by him including
invoices, rate lists, posting in debtors accounts, correlation of invoices
with e-way bills on sample basis etc.
During verification, he notices that many e-way bills have been
cancelled by the company within 24 hours of their generation in
month of March. There is no specific instruction in audit programme
Extract of Sample audit programme pertaining to sales of an entity
Name of concern Fine Industries
Financial year 2021-22
Prepared by P (with date)
Reviewed by Q (with date)
Approved by R (with date)
Serial Nature of Procedure Extent of Basis of Done by
number Check sample
(a) Vouch few sales invoices from
copies available in record of the
concern.

(b) Trace these invoices into the

account books of the concern.
(c) Verify few invoices with e-way bills
generated on the e- way bill portal.
(d) Trace few sales invoices into the
stock records to ensure that sold
quantities have been reduced from
stocks.

(e) Trace also few sales invoices into

accounts of buyers
 2. AUDITING AND

CASE STUDY
Kaur & Associates, a sole proprietor firm of Simran Kaur, is offered appointment as
auditor of a company engaged in manufacturing of automobile components for the first
time. She is fact checking about the integrity of promoters of the company and key
managerial persons. Matters such as competence of staff to perform the engagement
are also considered by her. The appointment is subsequently accepted by her.
She is also taking into account number and location of branches of the company,
requirements of Schedule III of Companies Act, 2013 and expected time by which audit
has to be completed keeping in view statutory requirements. Initially, she has thought it
proper to inquire key employees of the company in procurement and marketing
departments and planned for the same. She has also planned to visit three plants of the
company. The purpose of planned inquiry and visit is to identify and assess risk of
material misstatements.
A detailed set of instructions has been prepared by her office and it has been handed
over to assistants in engagement team. These set of instructions include details of extent
of checking and nature of audit procedures to be performed regarding purchases, sales,
items of income, items of expenditure etc. During the course of execution of above set
of instructions, it has been brought to her notice that company is also producing
substantial quantities of scrap generated during manufacturing process. However, no
instructions have been given to engagement team in this regard.

Based on above, answer following questions:

1. Auditor is fact checking about promoters and key managerial persons. She is also
considering competence of staff to perform engagement. What is she trying to
do?
(a) She is establishing audit strategy.
(b) She is conducting preliminary engagement activities.
(c) She is designing audit plan.
(d) She is checking her compliance of ethical requirements.
 AUDIT STRATEGY, AUDIT PLANNING 2.
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2. Consideration of number and location of branches, requirements of financial
reporting framework and expected time of completion are relevant factors
primarily for which of the following -
(a) Developing audit plan
(b) Establishing overall audit strategy
(c) Designing audit programme
(d) Designing risk assessment procedures
3. Taking into account description of planned inquiry and visit, which of the
following statements is TRUE?
(a) Planned inquiry and visit fall in area of audit strategy.
(b) Planned inquiry and visit are planned risk assessment procedures and fall
in field of audit plan.
(c) The said description is not related to audit planning.
(d) Planned inquiry and visit fall in scope of audit programme.
4. What is detailed set of instructions given to assistants in engagement team
known as?
(a) Audit guidelines
(b) Audit plan
(c) Audit Programme
(d) Audit Procedures
5. The issue of generation of scrap has been overlooked in detailed set of
instructions given to engagement team. What should be proper course of action
by CA Simran Kaur?
(a) She should ignore this information as audit has already begun.
(b) She should modify earlier set of instructions.
(c) She should leave the matter to wisdom of engagement team.
(d) She should put the ball in court of management as she was not provided
with complete information earlier.
 2. AUDITING AND

Answers to Questions involving case study

1. (b) 2. (b) 3. (b) 4. (c) 5. (b)

SUMMARY
♦ SA-300 states that objective of the auditor is to plan the audit so that it will be
performed in an effective manner.
♦ Planning is not a discrete phase of an audit, but rather a continual and iterative
process.
♦ Elements of planning include preliminary engagement activities and planning
activities.
♦ Preliminary engagement activities include performing procedures regarding
continuance of client relationship, evaluating compliance with ethical
requirements including independence and establishing an understanding of terms
of engagement with the client so that there are no misunderstandings.
♦ Planning activities include establishing overall audit strategy and developing audit
plan.
♦ Audit strategy sets scope, timing and direction of audit.

♦ Audit plan addresses various matters identified in overall audit strategy.

♦ Audit plan includes nature, timing and extent of planned risk assessment
procedures, planned further audit procedures and planned other audit procedures
in accordance with SAs.
♦ The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential processes, but are closely inter- related since
changes in one may result in consequential changes to the other.

♦ Overall audit strategy, audit plan and changes made shall be documented by
auditor.
♦ An audit programme consists of a series of verification procedures to be applied
to the financial statements and accounts of a given entity for the purpose of
obtaining sufficient evidence to enable the auditor to express an informed opinion
on financial statements.
 AUDIT STRATEGY, AUDIT PLANNING 2.
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TEST YOUR KNOWLEDGE

MCQs based Questions
1. Which of the following is not considered in planning an audit generally?
(a) Understanding of legal and regulatory framework of an entity
(b) Need to consider determination of materiality
(c) Evaluating audit evidence
(d) Need to consider involvement of expert
2. Which of the following is true about audit plan?
(a) Once an audit plan has been finalized for an engagement, changes cannot
be made to it.
(b) Audit plan includes scope, timing and direction of planned risk assessment
procedures.
(c) Changes in audit plan cannot lead to change in audit strategy.
(d) Audit plan has to be documented by auditor.
3. Which of the following is not included in an audit programme normally?
(a) Extent of checking
(b) Date of checking
(c) Nature or type of procedure
(d) Planning of risk assessment procedures
4. Which of the following is not an advantage of an audit programme?
(a) It acts as a guide for audit of coming years.
(b) It fixes responsibility of assistants.
(c) It serves as a shelter for assistants.
(d) It serves a proof of work done by auditor.
5. Which of the following is most important principle for formulating an audit plan?
(a) Gaining knowledge of client’s workforce
 2. AUDITING AND

(b) Gaining knowledge of client’s business

(c) Gaining knowledge of client’s vendors
(d) Gaining knowledge of tax laws applicable to client

Correct/Incorrect
State with reasons (in short) whether the following
statements are correct or incorrect:
1. The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential processes, but are closely inter-related since
changes in one may result in consequential changes to the other.
2. Establishing an overall audit strategy that sets the scope, timing and direction of
the audit, and that guides the development of the audit plan is prerogative of the
management.
3. Planning is a discrete phase of an audit.
4. A detailed Audit Programme once prepared for a business can be used for all
business under all circumstances.
5. The audit plan is more detailed than the overall audit strategy.

Theoretical Questions
1. Discuss how performing preliminary engagement activities as part of planning
an audit assists auditor.
2. Discuss how an engagement partner ensures that firm complies with relevant
ethical requirements including independence in relation to client.
3. “Purported disadvantages of an audit programme can be overcome”. Do you
agree?
4. An auditor of a company fails to document audit strategy and audit plan. Briefly
outline consequences of such failure.
5. SA 300 states that auditor shall plan the nature, timing and extent of direction
and supervision of engagement team members and the review of their work.
Discuss few factors affecting such supervision and review of work of engagement
team members.
 AUDIT STRATEGY, AUDIT PLANNING 2.
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ANSWERS/SOLUTIONS
Answers to the MCQs based Questions
1. (c) 2. (d) 3. (d) 4. (c) 5. (b)

Answers to Correct/Incorrect
1. Correct: Once the overall audit strategy has been established, an audit plan can be
developed to achieve the audit objectives through the efficient use of the auditor’s
resources. The establishment of the overall audit strategy and the detailed audit
plan are not necessarily discrete or sequential processes, but are closely inter-
related since changes in one may result in consequential changes to the other.
2. Incorrect. 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.
3. Incorrect. Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begin shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the current
audit engagement. Planning, however, includes consideration of the timing of
certain activities and audit procedures that need to be completed prior to the
performance of further audit procedures.
4. Incorrect. Businesses vary in nature, size and composition; work which is suitable
to one business may not be suitable to others; efficiency and operation of internal
controls and the exact nature of the service to be rendered by the auditor are the
other factors that vary from assignment to assignment. On account of such
variations, evolving one audit programme applicable to all business under all
circumstances is not practicable.
5. Correct. The audit plan is more detailed than the overall audit strategy that
includes the nature, timing and extent of audit procedures to be performed by
engagement team members. Planning for these audit procedures takes place over
the course of the audit as the audit plan for the engagement develops.
 2. AUDITING AND

Answers to the Theoretical Questions

1. Performing preliminary engagement activities assists the auditor in identifying and
evaluating events or circumstances that may affect auditor’s ability to plan and
perform audit engagement.
2. Refer to point on evaluating compliance with ethical requirements including
independence.
3. Purported disadvantages of audit programme may be eliminated by imaginative
supervision of the work carried on by the assistants; the auditor must have a
receptive attitude as regards the assistants; the assistants should be encouraged
to observe matters objectively and bring significant matters to the notice of
supervisor/principal.
4. Refer to point on documentation
5. Refer to point on Planning supervision and review of work of engagement team
members

Answers to Questions involving Test Your Understanding

1. Consideration for involvement of experts by auditors falls within domain of
planning. While planning an audit, auditor would have to consider whether
involvement of experts is necessary. In the stated case, company is involved in
technical and complex operations. Therefore, while planning an audit, auditors
would have to consider whether involvement of expert is necessary.
2. In the case, CA Kartik has reached office of the company without sharing with
management his intention to test the controls. The auditor may decide to discuss
elements of planning with the entity’s management to facilitate the conduct and
management of the audit engagement without compromising effectiveness of
audit. Sharing details of visit to test controls does not compromise effectiveness
of audit. It is for the better facilitation and conduct of audit. Therefore, approach of
CA Kartik is not proper.
3. These are planned risk assessment procedures to identify and assess risk of
material misstatement. The objective of planned inquiry of inhouse legal counsel
is to identify and assess risk of material misstatement. Such planned risk
assessment procedures are included in audit plan in accordance with SA-300.
 AUDIT STRATEGY, AUDIT PLANNING 2.
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4. Changes in laws and regulations affecting the company is a factor to be considered
while establishing overall audit strategy. There has been change in information
technology regulations applicable to the company. Non- compliance of the same
can have implications in form of civil and criminal liabilities. Such an important
matter concerning changes in laws and regulations is to be considered by auditor
while establishing overall audit strategy.
5. Attitude of Rohit is not proper. The assistants should observe matters objectively
and bring significant matters to the notice of supervisor/principal. Reasons for
cancellation of many e-way bills in month of March need to be looked into. Matter
should be informed to engagement partner.