1 Auditing 1 Lecture 6 Audit Management; Audit plan, audit control and audit programme
2 Audit ManagementAudit management involves planning, execution, control and review of the audit work so as to achieve a high standard of the audit work.
3 Audit planISA 300 ‘Planning an audit of financial statements’ states that the auditor shall plan the audit so that the engagement is performed in an effective manner.The audit plan converts the audit strategy into a more detailed plan and includes the nature, timing and extent of audit procedures to be performed by engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
4 The importance of planning Helps auditor to devote appropriate attention to important areas of the audit.Helps auditor to identify and resolve potential problems on a timely basis.Helps auditor to properly organise and manage the audit so it is performed in an effective manner.Assist in the selection of appropriate team members and assignment of work to themFacilitate the direction, supervision and review of work
5 The importance of planning Assist in coordination of work done by auditors of components and experts.Establishes the means of achieving the objectives of the audit.Makes sure that the audit can be completed on timeGuarantees the required professional standards (ISA’s) can be achieved.
6 Guidelines for the Audit Plan The form for audit planning varies from audit to audit. However planning memorandum makes the following procedure appropriate;1. Hold an initial meeting with client to know about operations of the business.2. Review previous years files to find out outstanding matters to be cleared and consider changes in legislation and accounting practices which affect the client.3. Study for review interim accounts as well as any management accounts available
7 Guidelines for the Audit Plan 4. Agree time table with client5. Agree significant matters to be covered in the preparation of the financial statement and conduct of the audit. e.g. Stocktaking date, confirmation of balances by 3rd parties etc.6. Assess the reliability of the internal audit work and agree on non-audit matters.
8 The Form of the Audit Plan 1. An outline approach of the conduct of the audit2. Selection of the number of staff and required grades and special skills3. Briefing of the audit staff about the audit work4. Establishment of time budgets5. Agreement on detailed work and remuneration for any non-audit work6. Consultation with joint auditors on work allocation and scheduling of meetings for mutual exchange of information.The guidelines and the form above forms the planning memorandum which establishes the framework for audit work
9 The Overall Audit Plan The overall audit plan should cover; 1. Knowledge of the entity’s business2. Risk and materiality3. Nature, timing and extent of procedures4. Co-ordination, direction, supervision and review5. Reporting obligation under the engagementStandards on audit plan includes ISA 220, ISA 300 & ISA 320
10 The overall audit strategy and audit plan; matters of consideration The overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.Characteristics of the engagementReporting objectives, timing of the audit and nature of communication.Significant factors, preliminary engagement activities, and knowledge gained on other engagements.Nature, timing and extent of resources
11 Characteristics of the engagement Financial reporting frameworkIndustry-specific reporting requirementsExpected audit coverageNature of business segmentsAvailability of internal audit workUse of service organisationsEffect of IT on audit proceduresAvailability of client personnel and data
12 Reporting objectives, timing of the audit and nature of communication. Entity’s time table for reportingOrganization of meetings with management and those charged with governanceDiscussion with management and those charged with governanceExpected communication with third parties
13 Significant factors, preliminary engagement activities, and knowledge gained. Determination of materialityAreas identified with higher risk of material misstatementResults of previous auditsNeed to maintain professional scepticismEvidence of management’s commitment to design, implementation and maintenance of sound internal controlVolume of transactionsSignificant business and industry developmentsSignificant changes in financial reporting and other changes
14 Nature, timing and extent of resources Selection of engagement teamsAssignment of work to team membersEngagement budgeting
15 Overall audit strategy example Items to include in the strategy;Industry-specific FR requirementsNumber of locations to be visitedAudit clients time table for reporting to its membersCommunication between audit team and the client
16 Control over Conduct of an Audit After formulating a concrete plan for the audit work, there is the need to constantly monitor the progress of the audit work so as to ensure a high quality of the audit work and proper control over the conduct of the audit.
17 Approaches to controlQuality control is a cardinal aspect of audit management. Proper control could be instituted by adopting the following approach;1. Work should be allocated according to skill, experience, training and proficiency of the staff available.2. Audit objectives should be made known and explained to the audit staff.3. Staff should be advised to refer problem to senior staff. There should be consultation between staff and partners/managers.4. There should be adequate supervision and detailed recording of audit work.
18 Review of Control1. The general quality control measures operated by the firm.2. Personnel standards set by the firm as regards training and criteria for engaging and promoting staff.3. The monitoring, evaluating and communicating of current developments to audit staff.4. The assessment of the technical department set up in the firm as a back up of the audit firm.5. A second partners review of the controls or review by a review panel, referred to as ‘live review’ or by another audit firm (peer reviews) is advisable.
19 Audit ProgrammeThe auditor should develop and document the nature, timing and extent of planned audit procedures required to implement the overall audit plan in an audit programme document.Audit Programme is a set of instructions in writing issued to audit staff involved in the conduct of the audit, which outlines the step-by-step approach of the audit work to be undertaken.It directs and guides the audit staff in tackling specific duties.
20 Audit ProgrammeThe auditor should prepare a written audit programme setting forth the procedures that are needed to implement the audit plan. The programme may also contain the audit objectives for each audit and should have sufficient details to serve as a set of instructions to assistants involved in the audit and as a means to control the proper execution of the work.The audit plan and related programme should be reconsidered as the audit progress. Such consideration is based on the auditor’s review of internal control, his preliminary evaluation thereof, and the results of his compliance and substantive procedures.
21 Audit Programme Audit programme enhances; The auditor’s consideration and understanding of risks of error and the required audit evidence.Coordination of audit with financial statement preparation.Timing of tests of controls and substantive proceduresCo-ordination of assistance from the entityComposition of audit teamInvolvement of other auditors/experts
22 When to compile the programme It is compiled whenever the auditor starts a new audit, though it should not be as rigid as future programmes.It can be drawn during the initial visit to the client and meeting with management so as to gain insight into the operations of the company.The auditor should draw on experience from similar operations and should consider the level of intelligence, skill and experience of audit staff.Auditor should consider soundness or otherwise of internal control system.
23 Advantages of audit programme It acts as a permanent record or guide to the conduct of the audit work (plan of work).The auditor can be certain that certain cardinal areas of the audit work are covered (checklist for important areas).The progress of the work can be ascertained at any point in time and easy for audit staff to carry on the work of another.It allows senior staff to control the audit work.Supervision of audit may reduceIt allows for budget and plan of staff allocations
24 Disadvantages of audit programme It tends to stifle initiative and flexibility on the part of audit staff.Audit staff may rush to complete a required schedule by placing ‘ticks’ at programmes not yet covered hence errors and frauds may not be located.Client’s staff may exploit any loopholes in the conduct of the audit by committing fraud.Audit assistants may not be able to recommend for amendments to the programme.
25 Minimizing dangers in audit programme Avoid the use of the standardised audit programme. Audit programme should be drawn for each particular audit.Audit programme for a new audit should not be made rigid to follow until the auditor has had considerable insight into the operations of the company as well as internal control systems.Audit staff should be encouraged to use their initiative and discretion as well as adopt flexible attitude to the conduct of the audit.
26 Example of audit programme: Bank Client ……………………… Account Date………………….Nature of test………………………………………………………..Preliminary : Obtain or prepare lead schedules and reference totals to balance sheetAudit objective: To verify the existence and title of bank and cash balanceBank;1. Obtain standard bank letters for all accounts opened during the year and ensure all items on the request are answered
27 Example of audit programme: Bank 2. Investigate monies held on behalf of third parties. Specify detailed programme followed.3. count cash balance using firm’s audit procedures4. obtain cash certificates for cash balances not counted.5. Prepare continuation sheets for additional test necessary to meet this audit objective or specify ‘none’.Audit objectiveTo ensure that all bank and cash balance are properly stated
28 Example of audit programme: Bank 6. review or prepare reconciliation for all bank accounts in accordance with firm’s audit procedures7. ascertain whether all cheques had left the premises prior to the date of reconciliation8. compare cash book and pay-in-book immediately prior to and after year-end to ensure dates correspond9. for accounts maintained in foreign currency, ensure that the correct rate of foreign exchange is used.10. prepare schedule of all inter-bank transfers before and after balance sheet and verify receipts of amounts in transit.
29 Standard Audit Programme for Sales Test a number of recent transactions relating to sales shown on records completing sales such as copy goods dispatched notes or completion orders.Obtain relevant copy sales invoices and check prices charged with independent evidence such as price lists, tenders, etc.Test check calculations and additions on copy sales invoice.Test a number of items with stock records to ensure deductions from stock particularly items near end of year.Check sales analysis.Test check postings on sales ledger
30 Standard Audit Programme for Sales Returns Verify selected number of items with evidence giving rise to their issue.Check with goods dispatch and ensure that full numerical sequence is maintained.Verify that all credit notes have been properly authorized by an official engaged in duties other than maintaining sales ledger or dealing with cash receipts.Check extensions, additions and prices in the credit notes with original invoices enquiring into any difference. Check analysis of credit notesWhere good have been returned, check with stock records.Check postings to return inwards ledger.
31 AssignmentDesign a detailed audit programme for the audit of a new client for the following accounts;Account ReceivablesAccount PayablesState the audit objective (2) in each case.