During planning, the auditor is required to:
Obtain knowledge of the client's business and industry.
Develop the audit strategy.
Develop the audit plan.
Perform risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control, sufficient to assess the risks of material misstatement and design further audit procedures.
The auditor is not required to have prior experience with a client's business or industry before accepting the engagement. However, once the engagement has been accepted, the auditor must obtain an understanding of the client's industry and business.
The audit strategy outlines the scope of the audit engagement, the reporting objectives, timing of the audit, required communications, and the factors that determine the focus of the audit. The audit strategy also includes a preliminary assessment of materiality and tolerable misstatement.
Developing the audit strategy early in the audit process helps the auditor determine the resources needed to complete the audit, including:
The involvement of other auditors, specialists, and the client's internal auditors.
The assignment of staff to specific audit areas, including the assignment of more experienced staff to higher risk areas.
The timing of testing (interim versus year-end) and audit team meetings.
The budget hours to assign to specific audit areas.
The extent, location, and timing of reviews of audit work.
The audit plan is based on the audit strategy and outlines the nature, extent, and timing of the procedures to be performed during the audit. While creation of an audit plan typically follows development of the audit strategy, the two are closely interrelated and may overlap to some extent.
An audit plan may be prepared by leveraging the prior year audit plan or by using a template. In either situation, the fol lowing items are included in the audit plan.
Further audit procedures (tests of controls and substantive procedures) are performed at the relevant assertion level for each material account balance, transaction class, and disclosure item in the financial statements.
Financial statements are not statements of facts. They are claims and assertions, made implicitly or explicitly by management, about the recognition, measurement, presentation, and disclosure of information in the financial statements.
There are six main financial statement assertions:
Completeness: All account balances, transactions, and disclosures that should have been recorded have been recorded and included in the financial statements.
Cutoff: Transactions have been recorded in the correct (proper) accounting period.
Valuation, Allocation, and Accuracy: Account balances, transactions, and disclosures are recorded and described fairly and measured at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded .
Existence and Occurrence: Account balances exist, and transactions that have been recorded and disclosed have occurred and pertain to the entity.
Rights and Obligations: The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
Understandability of Presentation and Classification: Transactions have been recorded in the proper accounts and appropriately aggregated or disaggregated. Financial information is appropriately presented and described, and disclosures are clearly expressed and understandable in the context of the applicable financial reporting framework.
After sufficient planning information has been gathered, an audit plan should be drafted. A written audit plan is required for every audit. The audit plan is a listing of audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. It serves as the work plan for the supervising auditor and assistants working on the engagement. Thus, the audit plan should set out procedures in reasonable detail, specifying the nature, extent, and timing of the work to be performed, and include a reference to the assertion under consideration (this reference may be implied as to the objective).
During the initial planning phase of an audit, the auditor most likely would:
Identify specific internal control activities that are likely to prevent fraud.
Evaluate the reasonableness of the client's accounting estimates.
Discuss the timing of the audit procedures with the client's management.
Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.
In developing an overall audit strategy, an auditor should consider: