Chapter 2 “Audit Planning, Strategy and Execution”
2.1 - Audit Planning 2.2 - Audit Strategy
Developing an overall plan for the expected scope & conduct of audit Meaning: Designing Audit Approaches to achieve necessary audit assurance
Meaning
and at the lowest cost.
Developing an audit programme showing NTE of Audit procedures 1. Obtaining knowledge of business: It provides a frame of
reference within which auditor exercises his professional
judgment to assess risk, to plan audit, to evaluate audit evidence &
1. To devote attention to important areas
providing quality services.
Importance of
2. Identify & resolve potential problems.
planning
Steps involved in Audit Strategy
3. Organized and managed audit. 2. Performing Analytical Procedures at Initial Stages: To assess
4. Selection of suitable ET. the potential for material misstatement in the F.S. as a whole.
5. Coordination of work done 3. Evaluating Inherent Risk:
6. Direction & supervision of engagement team. On the basis of
prior audit experience,
Size and Complexity of Auditee (Client). controls exercised by management,
Factors affecting
Nature & Extent
Past Experience Significant changes since last assessment.
of Planning
Changes in Circumstances
1. Evaluating IC System: By documenting extent of computerization,
preparing/updating flowcharts to record the transactions.
2. Formulating Audit Strategy: Requires consideration of:
Engagement objective
Knowledge of client’s business
Acquire knowledge of client accounting system, policies & IC procedures.
Aspects to be
Preliminary judgments as to materiality
Establishing expected degree of reliance on IC.
covered
Identified inherent risks
Determining the NTE of audit procedures. Extent of compliance testing
Coordinating the work to be performed. NTE of Substantive testing
Points relating to planning and controlling the audit.
1. Employment of Qualitative Resources.
Terms of engagement
Benefits
2. Allocation of appropriate quantity of resources.
Nature & timing of reports 3. Determining the timing of deployment of resources.
Factors to be
Legal or statutory requirements.
considered
4. Better management of resources in terms of direction, supervision,
Accounting policies & changes therein. timing of team meetings etc.
Effects of new accounting/auditing pronouncements. Relationship - Audit Strategy & Audit Planning
Inter-related to each other because change in one would result change in other.
Identification of significant audit areas.
Audit strategy is prepared before the audit plan and provides the guidelines for
Setting of materiality levels. developing the audit plan.
Degree of reliance on internal control.
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Quick Revision Summary of Chapter 2
2.3 - Audit Programming 2.4 - Stages of Audit Execution
Detailed plan of work Stage – I Execution During execution planning, auditor should consider
Meaning
comprises of techniques and procedures, Planning manpower requirement, qualification of members
may also contain objectives for each audit step. of ET, time factor etc.
Nature of business. Stage – II Risk and Auditor need to conduct a detailed assessment of
Control risk and control as per requirements of SA 315.
Matters to be
Overall Plan
considered
Evaluation Steps involved in assessment of risk are:
System of internal control and accounting procedures.
Size and structure of organization. List the risk that need to be reviewed for each
segment of audit.
Information regarding the organization.
Capture for each risk the controls that exist or
Accounting policies followed.
those that are needed
Draw a broad outline Determine the steps required to test the
First Time Audit
Filled up the details on a consideration of deficiencies in effectiveness of each controls.
Development of Audit
internal control. Note: While making Risk & Control assessment
auditor need to consider the Materiality levels.
programme
Determine the special procedures needs to be applied.
Stage - III Testing As required by SA 330, auditor should test
Review earlier programme and modified on account of: operating effectiveness of IC to determine
Engagement
Subsequent
Experience gained during the previous audit. whether controls are operating as designed.
Important changes in internal control system, Auditor should perform appropriate
substantive procedures (ToD and SAP) so as to
accounting procedures etc.
collect SAAE w.r.t. completeness, accuracy and
Evaluation of internal control for current year.
validity of accounting data.
1. Substantial increase in Volume of turnover. Stage - IV Reporting The auditor should review and assess the
requiring changes
2. Significant changes in accounting procedures.
Circumstances
conclusions drawn from the audit evidence
3. Observation w.r.t. ineffective internal control. obtained as the basis for the expression of an
4. Substantial increase in book debts or inventory. opinion on the F.S.
5. Suspicion as to misappropriation of assets. Opinion so farmed should be expressed in form
of audit report as required by SA 700.
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