AUDIT PLANNING AND CONTROL - Institute of …

1 1. AUDIT PL ANNING AND CONTROL . PLANNING . LEARNING OBJECTIVES. After studying this chapter, readers should be able to understand: ! The general concept of AUDIT strategy. ! The Importance of AUDIT strategy as an effective plan for an AUDIT . ! Internal CONTROL systems, evaluation and assessment. ! AUDIT documentation. ! Relationship with experts. ! AUDIT risks and its relative importance to AUDIT . ! Components of AUDIT risks. ! How to assess AUDIT risks. INTRODUCTION. Auditing has developed over many years, but it was not until the late nineteenth century (with the formation of joint stock companies, the predecessors to present day limited liability companies) that auditing became widely accepted in the United Kingdom and by extension, in other parts of the world. Individual firms of accountants have refined their approach to auditing from time to time and the professional accountancy bodies in various countries have published guidelines to their members on auditing procedures.

2 CONCEPTS OF AUDIT STRATEG. STRATEG. TEGYY. AUDIT strategy is directed to the gathering of relevant and reliable AUDIT evidence in order to support the expression of an opinion on the accounts. In carrying out an AUDIT assignment, the auditor should: (a) Consider his responsibilities as defined in the terms of engagement;. (b) Familiarise himself with the client's business and organisation;. (c) Obtain a preliminary understanding of the principal features of the client's accounting system and internal CONTROL procedures;. (d) Determine and record the AUDIT strategy to be adopted;. (e) Where it is proposed to carry out a detailed evaluation of all or certain internal controls with a view to placing some reliance on such controls, obtain a more detailed description of the accounting system and internal CONTROL procedures and review selected transactions to confirm that he has understood and recorded the system properly.

3 1. ADVANCED AUDIT AND ASSURANCE. (f) Review critically and evaluate those aspects of the client's accounting system, procedures and internal controls on which he intends to place some reliance;. (g) Discuss any weakness in the system with the client in order, inter alia, to ascertain whether they are compensated by some other controls;. (h) Test the system to determine whether the controls on which he intends to place reliance were operating during the period;. (i) Report apparent weakness and breakdown in internal CONTROL to the client in a management letter; and (j) Based on the results of the work described above, carry out a programme of AUDIT work to substantiate the amounts appearing in the accounts and related notes so as to ensure that the accounts show a true and fair view of the state of affairs and the results of the business.

4 The above paragraph summarises the basic procedures that an auditor should carry out in order to express an opinion on the accounts. It should be noted, however, that the procedures and terminology used in practice may vary, even though, the fundamental concept may be the same. Furthermore, the extent to which the auditor places reliance on the work of an internal AUDIT department may significantly affect the nature, timing and extent of his work. DETERMINATION OF THE AUDIT STRA. DETERMINATION TEG. STRATEG. TEGYY. Purpose The purpose of determining an AUDIT strategy is to enable the auditor familiarise himself with the client's business and organisation as well as to obtain a preliminary understanding of the client's accounting system. This will entail the preliminary identification of those internal controls on which he proposes to rely upon.

5 The auditor should then determine and record his AUDIT strategy before commencing any detailed AUDIT work. In doing so, the auditor will need to identify the optimum balance between, on one hand, relying on internal controls and reducing the level of his substantive tests, and on the other hand, placing little or no reliance on internal controls and seeking AUDIT satisfaction from a higher level of validation procedures. The purpose of making this assessment is to enable the auditor to carry out the AUDIT in the most effective and efficient manner. Determination of the AUDIT strategy requires a high degree of professional judgement. Consequently, the AUDIT assignment should be carried out by an experienced staff, with the involvement of the AUDIT partner. In particular, the determination of the AUDIT strategy for a new client will usually require considerably more time and effort than for existing clients, except where the circumstances of existing clients have changed significantly since the last AUDIT .

6 However, this does not mean that a 2. AUDIT PLANNING AND CONTROL . formal determination of the AUDIT strategy is not necessary for existing clients whose circumstances do not change significantly from year to year. In all cases, a formal record of the AUDIT strategy is essential. The overall strategy should focus on a more efficient and effective AUDIT . AUDIT Plans and AUDIT PLANNING Memorandum In order to ensure a high standard of performance, it is important that the auditor should prepare adequately for his work. PLANNING for an AUDIT , just like every human endeavour, is essential for the smooth performance of the AUDIT work and its successful completion. PLANNING ahead for an AUDIT work will not only guarantee a valid AUDIT opinion but will also help the auditor to ensure that: (a) The AUDIT objective is established and achieved.

7 (b) The AUDIT is properly controlled and adequately directed at all stages;. (c) High risk and critical areas of the engagement are not omitted but that adequate attention is focused on these areas; and (d) The work is completed economically and expeditiously, hence, savings on AUDIT resources. It is important to distinguish between an AUDIT PLANNING memorandum. AUDIT plan relates to preparations made by the auditor for one specific AUDIT engagement. While AUDIT PLANNING memorandum is a standing arrangement made by the auditor for the continuing engagement of a particular client. Hence, an AUDIT plan for the AUDIT of one client for one year while AUDIT PLANNING memorandu is a standing plan for the continuing AUDIT of a client from year to year. Points for Consideration in AUDIT PLANNING AUDIT PLANNING requires a high degree of discipline on the part of the auditor.

8 In order to make the PLANNING more meaningful, the auditor shouldtake into consideration the following matters in relation to the AUDIT engagement: (a) Preliminary Work to be Done in Addition to the Real AUDIT Work This will include such matters as stocktaking, cash count, debtors'circularisation and review of previous year's working papers. This will remind the auditor of those matters brought forward from the previous year and any other points to be resolved in the current year or problems anticipated. (b) Changes in Legislation or any Auditing Standards or Guidelines The promulgation of the Companies and Allied Matters Act, Cap. C 20, LFN 2004, brought with it a lot of changes in accounting 3. ADVANCED AUDIT AND ASSURANCE. and auditing requirements of companies. Such legislations whether in respect of all companies or particular industrial group, must be reviewed ahead of the engagement in order to deter- mine their effects on the operations or reporting requirements of the enterprise.

9 (c) Analytical Review of Available Management Accounts and Other Management Information that Relate to the Accounts This will assist in establishing valuable ratios and indicators that will guide the auditor. For instance, the computation of the gross profit percentage compared with that of the previous year will provide a good indicator to the auditor of the accuracy and reliability of sales and cost of sales. (d) Changes in the Business or Management The appointment of a new Finance Controller and the establishment of a new business line or the creation of a new branch are significant changes in the circumstances of the company which will necessitate changes in the existing AUDIT plans. (e) Changes in the Accounting System The introduction of computers such that when a company introduces significant changes in its operating procedures will require a review and evaluation of the system of internal CONTROL .

10 (f) Deadlines Established for the Submission of AUDIT Report Where a client has set deadlines for its statutory activities such as the annual general meeting, it is important for the auditor to work in line with such programmes. (g) Use of R otational TTesting Rotational esting and V erification Verification In practice, the auditor may not carry out a hundred percent testing or verification of the client's transactions or segments of the business. Where rotational testing or verification is adopted, it will be necessary for the auditor to determine ahead of the date of the engagement which aspects of the business should be selected for testing or verification. An example of rotational testing could be applied on the client's branches to be visited. Points for Consideration in AUDIT PLANNING Memorandum AUDIT PLANNING memorandum should cover the following standing matters which are designed to achieve the desired AUDIT objectives: (a) Terms of Engagement In the case of a new AUDIT engagement, a letter of engagement should be prepared as part of the overall plan of the AUDIT .