The primary objective of an audit is the expression of an expert and independent opinion on the truth and fairness of the information contained in the annual financial statements expressed in the audit report and the ascertainment and evaluation of the accounting systems as the basis for the preparation of financial statements.
It is for he auditor to decide the extend of audit work he considers necessary in order to support his opinion.
ISA 200 Objectives and General Principles governing an audit of financial statements states that the auditor should carry out an audit in accordance with ISAs and ethical principles to provide reasonable assurance that the financial statements are free from material misstatement.
The auditor should plan the audit work so that the audit will be performed in an effective manner.
“Planning” means developing a general strategy and a detailed approach for the expected nature, timing and extent of the audit. The auditor plans to perform the audit in an efficient and timely manner.
International Standard on Auditing (ISA) 300 Planning establishes standards and provides guidance on planning an audit of financial statements.
An audit is an assignment. To complete the assignment efficiently and effectively in an economical and cost effective manner then it must be planned for in some detail before commencement and the strategy constantly reviewed as the audit progresses. Planning consists of determining what is to be done, determining when it is to be done, determining who is to do it; and determining what it will cost in terms of hours and money.
Audit Planning Memorandum
Planning must be formalised in a written document ordinarily called an Audit Planning Memorandum (APM). In practice, such a plan includes the following information:
Section 1 can be a summary of the terms of engagement, basically summarizing the expected scope of the assignment and the reports or other communications called for under the terms of engagement.
Section 2 would consist of the history or a brief background of the client and any major changes that have taken place since the previous audit visit. Accordingly, this paragraph will cover such matters as the kind of business the client is in, the products, the spread of the company’s products, the location from which the client operates, changes in key personnel, accounting policies and procedures, legislation and even changes in the industry structure.
If the company is a part of a group, then a summary of the relationship with other companies in the group may also be provided.
Section 3 would summarize those areas with high inherent risk. These are those areas whereby because of the nature of the business environment in which the client operates, there is a high chance of misstatement or misreporting those are areas where the auditor could reach a wrong conclusion unless special audit procedures are adopted.
Section 4 could summarize the financial position and results. This normally involves summarizing the balance sheet and the profit and loss account for the last audited year and having alongside those figures the latest a management accounts figures as well as the budgeted figures. The auditor then carries out a ratio analysis on the financial information to identify other audit risk areas or areas where apparently there have been new developments or significant changes that require investigation and explanations.
Section 5 could consist of a listing of incomes, expenses, assets and liabilities i.e. the significant components of the financial statements and a brief description of the methods to be adapted to verify them.\
Section 6 is materiality levels, which would be set for every material component of the financial statements and the related audit approach.
An outline of the proposed audit approach. The aspects that would be covered here include:
- The expected client staff assistance in the preparation of supporting schedules
- The expected reliance on the Internal Control Systems (ICS)
- The intended use of internal auditor’s work
- The intended use of experts or specialists
This section would also highlight the expected levels of assurance to be derived from:
- tests of control
- analytical review procedures
- substantive procedures of details
Section 8 could consist of a timetable on timing of key events or activities such as the proposed date of the AGM, the date of audit clearance, the date of the stock take and the date of the various audit units.
Section 9 could deal with the staffing arrangements, identifying the partner responsible for the audit, the manger, the accountant in charge and the audit assistants.
Section 10 could be for the budget and a fee quotation. This would show for every staff member, the number of man hour as well as the cost of throe hours.
Note that the plan must be approved by the partner in writing before the audit commences.