# 6. PLANNING

(INCORPORATING ISA 300)

# 6.1 Planning

# 6.1.1 Why Plan?

ISA 300 requires the auditor to plan the audit so that the engagement is performed in an effective manner. Planning also helps the firm perform the engagement efficiently. Planning involves establishing and documenting the overall audit strategy for the engagement and developing and documenting an audit plan , in order to reduce audit risk to an acceptably low level. Effective audit planning ensures:

  • .That appropriate attention is devoted to key audit areas and significant risks.
  • .That potential problems are identified and resolved on a timely basis.
  • .That the engagement is properly organised and managed in order to be performed in an effective and efficient manner.
  • .Proper assignment of work to the engagement team and also makes the engagement team aware of their responsibilities.
  • .Proper direction and supervision of the engagement team and review of their work, and assists, where applicable, in the coordination of work done by the auditors of components and experts.

Planning is not a discrete phase of an audit, but a continual process that often begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement. Planning should in any case start before the accounting year-end to take into account year end procedures which need to be carried out e.g. attendance at the annual inventory count or circularisation of receivables. The nature and extent of planning will vary according to the size and complexity of the entity, previous experience with the entity and changes in circumstances that occur during the engagement.

# 6.1.2 Planning Activities

The table below summarises the key planning activities and gives reference to the section in the manual where these stages are covered in detail.

Planning Activity ISA Audit Manual Reference
Preliminary Engagement Activities
Independence ISA 220 and COE Section 4.1
Client acceptance (initial engagement) and continuation ISA 220 Section 5.1 and 5.3
Terms of audit engagement ISA 210 Section 5.2
Planning - Overall Audit Strategy
Materiality ISA 320 Section 11.3 and 11.4
Assessing the reporting requirements ISA 250 and IAPS 1014 Sections 9.2 and 10.2
Communicating audit matters to those charged with governance ISA 260 Section 27.3 and 27.4
Preliminary assessment of the accounting system and internal controls ISA 315 and ISA 402 Section 7.2
Setting out responsibilities for the engagement team ISA 200 Section 2.5
Development of the audit strategy ISA 300 Section 6.2
Opening balances and comparatives ISA 510 / ISA 710 Section 13
Planning - Audit Plan
Preliminary analytical review ISA 520 Section 14.3
Preliminary review of risk ISA 315 Section 7.2
Considering the work of internal audit and other sources of reliance ISA 505, ISA 580, ISA 600, ISA 610 and ISA 620 Section 12.7, 22.2 and 23
Setting materiality levels ISA 320 Section 11.3 and 11.4
Response to assessed risk ISA 330 Section 7.7
Consideration of fraud ISA 240 Section 8.4
Compliance / Substantive testing ISA 315 Section 7.4, 7.5 and 15
Sampling ISA 530 Section 16.7 and 16.8
Administration including audit timetable, audit requirements, time and staff budgets and allocation of work. ISA 220 and ISA 300. Section 6 and Part E

# 6.2 Key Tasks in the Planning Process

# 6.2.1 Preliminary Engagement Activities - Initial Engagements

The auditor should perform the following activities prior to commencing an initial audit engagement:

  • .Perform the client acceptance procedures in accordance with ISA 220 and the CEO.
  • .Evaluate compliance with ethical requirements.
  • .Communicate with the previous auditor for professional clearance in compliance with the CEO.

Form 5.03 Part E of the Manual** : Client Acceptance Questionnaire should be completed for each new acceptance and once every five years thereafter and filed in the Permanent Audit File with a copy as Form 5.03 in the Current Audit File.**

# 6.2.2 Preliminary Engagement Activities - Continuing Audits

Prior to performing any significant activities for the current audit engagement, the engagement partner should perform preliminary engagement activities to help ensure that the firm has considered any events or circumstances that may adversely affect the firm's ability to plan and perform the audit engagement to reduce audit risk to an acceptably low level. Independence may also be impaired if overdue fees, together with fees from the proposed re-appointment will constitute a significant loan. The process often commences shortly after the completion of the previous audit. The key components include:

  • .Performing procedures regarding the continuation of the client relationship after evaluating compliance with the ethical requirements, including independence, in accordance with ISA 220 and the COE.
  • .Considering significant matters that may have arisen during the previous engagement and thereafter that may adversely affect continuation of the engagement. Such matters could include significant lapses in internal controls, frauds, doubts over the integrity of management etc.
  • .Understanding the terms of audit engagement in accordance with ISA 210. Consideration should be given to whether the firm has the necessary resource and experience to continue the audit engagement.

Form 5.03 Part E of the Manual** : Engagement Continuation Questionnaire **** should be completed **each year preferably on the completion of the previous audit and filed as Form 5.03 in the Current Audit File. The form need not be completed in the years where the Client Acceptance Questionnaire is completed.

# 6.2.3 Planning - Overall Audit Strategy

The development and documentation of the overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan. It also helps to ascertain the nature, timing and extent of the resources necessary to perform the engagement. In developing the audit strategy, the engagement team may consider the experience gained on other engagements performed for the entity. The key components of an audit strategy include:

  • .Review and updating the client background information.
  • .Location of the components of the entity.
  • .Financial reporting framework used and industry specific reporting requirements.
  • .The timing of the audit and reporting deadlines.
  • .Key dates for communicating with the management and those charges with governance.
  • .Materiality.
  • .Identification of areas where there may be higher risk of material misstatement.
  • .Preliminary identification of material components and account balances.
  • .Preliminary indication of whether the auditor may plan to obtain evidence regarding the effectiveness of internal controls.
  • .Identification of recent significant entity-specific, industry, financial reporting or other developments.
  • .Initial assessment of the overall resource requirements including the use of experts on complex matters.
  • .Initial assessment of resource allocation to specific audit areas, e.g. the allocation of team members to observe inventory count at material locations, extent of review of the other auditor's work in the case of group audits.

Form 5.01 in Part E of the Manual sets out a template that should be used to record the overall audit strategy.

Liaison with client

Discussions with the client will be an essential aid to developing the audit strategy. The discussions would usually take place before the accounting year-end. It would be preferable to have a pre-audit meeting but in some cases a telephone conversation may be adequate. One of the primary aims of such discussions is to enable the auditor to update his knowledge of the client's business. An auditor should have sufficient knowledge of the business to enable him to identify and understand the events and activities that may have a significant effect on the financial statements. Discussions should also aim to:

  • .Obtain the latest financial information to help in setting materiality levels and in performing preliminary analytical review work.
  • .Agree a timetable (including inventory counts and visits) and any specific deadlines.
  • .Agree schedules requirements and on any other accounting work to be produced by the client.
  • .Find out the actions taken on the points raised in last year's management letter.
  • .Agree settlement of any outstanding fees.
  • .Identify any specific areas of concern to the client and their impact on the audit scope.

It may be appropriate to document the above in writing.

Review of last year's file

The last year's audit file should be reviewed for:

  • .Points brought forward to be considered during the engagement.
  • .Any areas where time or cost savings could be made, any unnecessary audit work and any other ways in which the effectiveness of the audit could be improved.
  • .Any previously unidentified areas of audit risk.

Initial Engagements

In case of initial engagements, while the planning elements remain the same as for recurring engagements, the auditor may need to expand the planning activities as the auditor does not necessarily have the previous experience with the entity that is considered when planning recurring engagements. Additional matters that may be considered in planning initial engagements include:

  • .Where possible and where not prohibited by law, consider arrangements with the previous auditor to review the working papers.
  • .Review any major issues, including the application of accounting principles or auditing and reporting standards, discussed with management or those charged with governance in connection with the initial selection as auditors, and how these affect the audit strategy and audit plan.
  • .Obtaining sufficient appropriate audit evidence regarding opening balances.
  • .Involvement of another partner or a senior individual to review the overall audit strategy prior to commencing significant audit procedures or to review reports prior to their issuance.

Once the overall audit strategy has been established the auditor can commence the development of a more detailed audit plan to address the various matters identified in the strategy. Although the auditor establishes the overall audit strategy before developing the audit plan, the two activities are not necessarily sequential processes but closely inter-related since changes in one may result in changes to the other.

In case of audits of smaller entities where the audit is conducted by a very small audit team, the development of an audit strategy need not be a complex process and a brief memorandum prepared at the completion of the previous audit, based on a review of the working papers and highlighting the issues identified, updated and changed in the current period based on discussions with the management, can serve as the basis for planning the current audit engagement.

APPENDIX 1: Matters That an Auditor May Consider in Developing an Audit Strategy provides examples of the matters that an auditor may consider in establishing an audit strategy.

# 6.2.4 Planning - Audit Plan

The audit plan includes the nature, timing and extent of the audit procedures to be performed by the engagement team in order to obtain sufficient appropriate audit evidence to reduce the audit risk to an acceptably low level. Audit planning is evidenced in two ways by the:

  • .Overall audit plan
  • .Audit programme.

The Overall Audit Plan

The overall audit plan documents the assessment of risk and the response to assessed risk by setting out the nature, timing and extent of the overall audit procedures to be performed by the engagement team in order to obtain sufficient appropriate audit evidence to reduce the audit risk to an acceptably low level. The plan also reflects the auditor's decision on whether to test the operating effectiveness of controls and the extent of planned substantive procedures.

The audit planwill often be prepared by the manager, although preparation of parts or all of it may be delegated to the senior. In case of high risk audits the partner may also be involved in preparing the plan, particularly in the areas of materiality, risk assessment and approach to assessed risk and sample sizes. The overall plan together with the tailored audit programmes setting out the nature, timing and extent of the audit procedures to be adopted during the engagement should be completed and approved by the partner prior to commencement of the engagement. In case of a sole proprietorships or small audit firms, the partner may be actively involved in developing the audit plan and programmes.

Appendix II: Contents of the Audit Plan provides a summary of the contents of an audit plan.

Form 5.01 in Part E of the Manual sets out a template that should be used to record the overall audit plan.

Audit Programme

The audit programme documents the nature, timing and extent of audit procedures to be performed at the assertion level for each material class of transactions, account balance and disclosure. The programme sets out the nature, timing and extent of the audit procedures required to implement the overall plan and serves as a set of instructions to the engagement team and as a means to control and record the proper execution of the audit.

The audit programme will often be drafted by the senior and reviewed by the manager and approved by the engagement partner. However, the extent of the manager's role will depend on the senior's previous experience and knowledge of the entity.

In preparing the audit programme, consideration should be given to the specific assessment of risk and the level of assurance to be provided by substantive procedures. Part E of the manual provides specimen audit programmes. These must however be edited and added to where necessary to ensure the implementation of the overall audit plan. The use of unedited programmes does not constitute adequate planning as it could expose the auditor to risks not covered in detail by the programme or result in the auditor carrying out unnecessary tests thereby resulting in inefficiencies.

# 6.2.5 Communication with Those Charged with Governance

The engagement partner or the manager may discuss elements of planning with those charged with governance and the management as part of the overall communication required to be made or to improve the effectiveness and efficiency of the audit. The overall audit strategy and the audit plan, however, remain the auditor's responsibility and the engagement team should exercise care not to compromise the audit by making the audit procedures too predictable by discussing the nature, timing and the extent of the audit tests. The matters normally communicated would include the overall audit strategy, the timing of the audit, any limitations on the scope of the audit and the audit requirements.

# 6.2.6 Changes to Planning Decisions During the Course of the Audit

The engagement team may be required to change the audit strategy and the audit plan thereby resulting in the planned nature, timing and extent of further audit procedures as a result of:

  • .Unexpected events;
  • .Changes in condition e.g. a material business combination; or
  • .Evidence obtained from the result of audit procedures which contradict the information available at the planning stages or the result of substantive tests which contradict the results obtained from testing the effectiveness of internal controls.

As the assessed risk of material misstatement increases, one would ordinarily increase the extent and timeliness of direction and supervision of the engagement team and perform a more detailed review of their work.

Any changes to the audit strategy and plan needs to be documented giving reasons for significant changes and the auditor's response to the events, conditions or results of audit procedures that resulted in such changes. The changes need to be discussed and approved by the partner.

In case of smaller entities where the audit is carried out entirely by the engagement partner, the partner needs to ensure that the audit has been conducted in accordance with ISA's. In such cases the partner needs to ensure that he takes an objective view on the appropriateness of the judgements made in the course of the audit, and where desirable, on complex or unusual issues, the partner undertakes appropriate consultations.

# 6.3 Time Costing

The auditor's service to a client is based on the level of staffing involved on the engagement and the time spent by each staff on the engagement. It is therefore important that the firm adequately costs its time to ensure that it is running a commercially viable practice and keeps an adequate record of time spent on each engagement. ISQC 1 requires that an auditor develops policies and procedures on compensation of human resources. Such polices can only be sustained on a long term basis by ensuring that staff cost and operating overheads are recovered from the engagements undertaken.

# 6.4 Time Budgeting

Time budgets are an essential tool for monitoring the progress of an engagement, in determining actual performance against the budget and to assist in future planning of audits.

The aim of preparing budgets is:

  • .To aid in planning, so that the engagement team may use their time efficiently.
  • .To monitor the actual costs of the engagement.
  • .To estimate and negotiate the fees.

When preparing budgets, the following factors should be considered:

  • .The level of detail i.e. whether the budget is to be broken down into individual audit areas or prepared for the assignment as a whole.
  • .The time to be spent in planning, review and completion procedures.
  • .Any additions in the scope of the engagement.
  • .Contingency factors such as future staff salary increases.
  • .A comparison of last year's time spent with this year's budget. Any significant differences should be explained.

When conducting the audit, the auditor should aim to keep within the budget in so far as is possible, but the auditor should never compromise the standard of his audit work, to keep within budget. If it appears that there will be significant discrepancies between the budgeted time and the actual time, the senior/ manager should inform the manager/ partner as soon as possible, particularly where additional time arises due to the client's shortcomings.

Time summaries should be prepared for all engagements and the total time spent should be compared with the budgeted time and reasons given for significant variances. A record should be kept of work which the engagement team have had to complete as a result of client shortcomings, as a basis for additional charges if necessary.

Form 5.04 Part E: Time Budget Format gives the format of preparing the time budgets and the actual on an overall basis.

APPENDIX I: MATTERS THAT AN AUDITOR MAY CONSIDER IN DEVELOPING AN AUDIT STRATEGY

A. Scope of the Audit Engagement**

  • .A summary of the terms of the engagement.
  • .Industry specific reporting and legal requirements and how the entity is complying with these.
  • .Any specific legal responsibilities of the auditor.
  • .The financial reporting framework to be used in preparing the financial statements and need for reconciliation to another reporting framework.

B. Entity Specific Issues

  • .Changes in the client background information.
  • .The nature of the business including number and location of components to be audited, contact person at each component, and working hours.
  • .Any special circumstances.
  • .The need for specialised knowledge including involvement of specialist staff and non-audit experts.
  • .The reporting currency to be used including any translation requirements.
  • .Internal audit and the extent of reliance that can be placed on work of the internal audit function or work of other experts or specialists.
  • .The group structure, including the nature of control between the parent and its components, the need for standalone financial statements, the consolidation requirements and the extent to which components are audited by other auditors.
  • .The expected use of audit evidence obtained in prior years, e.g. audit evidence related to risk assessment procedures and tests of controls.
  • .The effect of information technology on the audit processes, including the availability of data and the expected use of computer-assisted auditing techniques.
  • .The coordination of the expected coverage and timing of the audit work with any reviews of interim financial information and the effect on the audit of the information obtained during such reviews.
  • .Discussion of matters that may affect the audit with firm personnel responsible for performing other services to the entity.
  • .Availability of client personnel and data.

C. Business and Regulatory Environment

  • .Details of any significant changes in industry conditions affecting the entity's business (for major clients, consideration should be given to discussing industry conditions with economists or industry regulators or obtaining industry publications).
  • .Changes and trends in the business including new activities, products or locations; changes in governance and senior management; general level of competence of management; legal disputes; and financial performance and trends.
  • .Changes in the client's accounting systems; issues emanating from review of reports from the internal audit function; and changes in accounting standards, policies or regulatory pronouncements and their effect on the entity.

D. Reporting Objectives, Timing of the Audit and Communications Required

  • .The entity's timetable for reporting including interim and final audits.
  • .The nature and timing of reports or other communications that are expected under the engagement including the auditor's report, management letters and communications to those charged with governance.
  • .The outcome of meetings with management and those charged with governance regarding the expected communications on the status of the audit work throughout the engagement and the expected deliverables from the audit process taking into account the nature, extent and the timing of the audit work.
  • .Communication with auditors of components regarding the expected types and timing of reports to be issued and other communications in connection with the audit of components.
  • .The expected nature and timing of communications among the engagement team members, including the nature and timing of team meetings and timing of the review of the work performed.
  • .Statutory or contractual reporting responsibilities arising from the audit and any other expected communication with third parties.

E. Other Issues to Consider when Setting the Direction of the Audit

  • .Materiality:

    • .Setting materiality for planning purposes.
    • .Setting and communicating materiality for auditors of the components.
    • .Reconsidering materiality as audit procedures are performed during the course of the audit.
    • .Identifying material components and account balances.
  • .Identification of audit areas where there is a higher risk of material misstatement and discussions among the engagement team on these.

  • .The impact of assessed risk of material misstatement at the overall financial statement level on the direction, supervision and review.

  • .Time budget including the allocation of the appropriate amount of time for areas where there may be higher risk of material misstatement and the selection of an engagement team, (including, where appropriate, an engagement quality control reviewer) and the assignment of task to members of the engagement team with suitable and appropriate experience.

  • .Volume of transactions, which may determine whether it is more efficient for the auditor to rely on internal controls.

  • .Assessment of the control environment and evidence of management's commitment to design, document and ensure the operation of sound internal controls and the importance attached to internal controls throughout the entity to successful operations of the business.

  • .Results of previous audits that involved evaluating the operating effectiveness of internal controls, including identified weaknesses and actions taken to address them.

APPENDIX II: CONTENTS OF THE AUDIT PLAN

A. Preliminary Analytical Review - Section 14.3 of the Manual**

  • .Review of key business ratios, trends and other financial information available at this stage as a risk assessment procedure to obtain an understanding of the entity and its environment.

B. Preliminary Risk Assessment - Section 7.2 of the Manual**

A preliminary review of overall risk and key risks in individual audit areas and their impact on the audit taking into account:

  • .Past experience.
  • .Areas large in materiality.
  • .Changes in financial reporting standards and accounting policies.
  • .Areas where there is a significant risk of material misstatement or fraud.
  • .Complex accounting areas including those involving accounting estimates.
  • .The impact of information technology.
  • .Conditions requiring special attention, such as the existence of related party transactions, contingencies, market and industry conditions.
  • .Any taxation aspects which may affect the audit.
  • .Appropriateness of the going concern assumption.

C. Sources of Reliance

Refer to Section 12 of the Manual on Audit Evidence.

D. Materiality - Section 11.3 and 11.4 of the Manual**

  • .Details of the materiality level chosen and the reason for choosing it.

E. Auditor's Response to Assessed Risk - Section 7.7 of the Manual**

This will include the risks identified for each key audit area above and the planned response to such risks including the use of specialised audit tools including Computer Assisted Audit Techniques (CAAT's).

F. Sampling Techniques - Section 16 of the Manual**

  • .The sampling techniques to be adopted.

G. Audit Timetable and Requirements**

  • .Determination and communication of the accounting work and audit schedules that will be prepared by the client and by the auditor.

  • .Consideration of independence requirements where accounting and tax work is carried by the auditor.

  • .Overall audit timetable including:

    • .Client and legal reporting deadlines.
    • .Availability of accounting records for audit commencement.
    • .Year-end procedures.
    • .Audit needs at different client locations.
  • .Time and cost budgets.

Last Modified: 7/9/2019, 10:45:48 AM