Role and Timing of Planning

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 effectively and efficiently.

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 the coordination of work done by auditors of components and experts.

Audit procedures should be discussed with the client’s management, staff and/or audit committee to co-ordinate audit work, including that of Internal audit.

However, all audit procedures remain the responsibility of the external auditors.

Planning the Audit

Audit planning involves the development of an overall strategy or game plan for the expected conduct and scope of the audit. The auditor should plan the audit with an attitude of professional skepticism about such. matters as the integrity of management, errors and irregularities, and illegal acts.

The amount of planning required in engagement will vary with the size and complexity of the client, and the auditor’s knowledge of and experience with the client.

As to be expected, considerably more effort is needed to adequately plan an initial audit than a recurring audit.

Preliminary Engagement Activities

The auditor should perform the following activities at the beginning of the audit:

a.       Perform procedures regarding the continuance of the client relationship and the specific audit engagement,

b.      Determine compliance with independence and ethics requirements, and

c.       Establish an understanding of the terms of the audit engagement with the audit committee.

Planning Activities

The nature and extent of planning activities that are necessary depending on the size and complexity of the company, the auditor’s previous experience with the company, and changes in circumstances that occur during the audit.

When developing the audit strategy and audit plan, the auditor should evaluate whether the following matters are important to the company’s financial statements and internal control over financial reporting and, if so, how they will affect the auditor’s procedures:

1.      Knowledge of the company’s internal control over financial reporting obtained during other engagements performed by the auditor;

2.      Matters affecting the industry in which the company operates, such as financial reporting practices, economic conditions, laws and regulations, and technological changes;

3.      Matters relating to the company’s business, including its organization, operating characteristics, and capital structure;

4.      The extent of recent changes, if any, in the company, its operations, or its internal control over financial reporting;

5.      The auditor’s preliminary judgments about materiality, risk, and, in integrated audits, other factors relating to the determination of material weaknesses;

6.      Control deficiencies previously communicated to the audit committee or management;

7.      Legal or regulatory matters of which the company is aware;

8.      The type and extent of available evidence related to the effectiveness of the company’s internal control over financial reporting;

9.      Preliminary judgments about the effectiveness of internal control over financial reporting;

10.  Public information about the company relevant to the evaluation of the likelihood of material financial statement misstatements and the effectiveness of the company’s internal control over financial reporting;

11.  Knowledge about risks related to the company evaluated as part of the auditor’s client acceptance and retention evaluation; and

12.  The relative complexity of the company’s operations.