What is financial statements audit planning?

 

Planning is one of the stages of independent audit of financial statements. The nature and extent of planning activity depends on the size and complexity of the company, engagement team members’ previous experience with the company and changes in circumstances that take place during the audit engagement.

Qualitative planning benefits the audit of financial statements in several ways:

•  Helping the auditor to allocate appropriate attention to important areas of the audit.
• Helping the auditor to identify and resolve potential problems on a timely basis.
• Assisting in the selection of engagement team members with appropriate levels of capabilities and competence.
• Assisting in coordination of work done by auditors of components and experts
• Helping the direction and supervision of engagement team members and the review of their work.

 An overall audit strategy and an audit plan are the main documents of the planning of an audit of financial statements.

An overall audit strategy sets the scope, timing, and direction of the audit and also  may include following matters:

Characteristics of the Engagement:

•  The financial reporting framework on which the financial information to be audited.
•   Industry-specific reporting requirements.
• The number and locations of components to be audited.
• The nature of the business segments to be audited.
•  Availability of internal audit function and, the possibility of using it.
• The company’s use of service organizations.
• The expected use of audit evidence obtained in previous audits.
• The effect of information technology on the audit procedures, including the expected use of computer-assisted audit techniques.

Reporting Objectives, Timing of the Audit, and Nature of Communications:

• The company’s timetable for reporting, such as at interim and final stages.
• The discussion with management and a board of directors regarding the expected type and timing of reports to be issued and other communications.
• Communication with auditors of components regarding the expected types and timing of reports to be issued.
• Other expected communications with third parties, including any statutory or contractual reporting responsibilities arising from the audit.

Significant Factors, Preliminary Engagement Activities, and Knowledge Gained on Other Engagements

• The determination of materiality.
• Preliminary identification of areas where there may be a higher risk of material misstatement.
• The impact of the assessed risk of material misstatement at the overall financial statement level on direction, supervision and review.
•  Results of previous audits that involved evaluating the operating effectiveness of internal control, including the nature of identified deficiencies and action taken to address them.
•  Changes within the applicable financial reporting framework, such as changes in accounting standards, which may involve significant new or revised disclosures.
• Volume of transactions, which may determine whether it is more efficient for the auditor to rely on internal control.
• Significant business developments affecting the entity, including changes in information technology and business processes, changes in key management, and acquisitions, mergers, and divestments.
• Significant industry developments such as changes in industry regulations and new reporting requirements.

Nature, Timing and Extent of Resources

•  The selection of the engagement team (including, where necessary, the engagement quality control reviewer) and the assignment of audit work to the team members.
•   Engagement budgeting, including considering the appropriate amount of time to set aside for areas where there may be higher risks of material misstatement.

An overall audit strategy is a part of an audit documentation and could be presented in the form of Planning Memorandum.

An overall audit strategy guides the audit plan.  An audit plan is more detailed  than the overall audit strategy and it includes the nature, timing and extent of audit procedures to be performed by engagement team members. 

Actually, an audit plan may consist of following sections:

• Preparation and performance of audit planning procedures.
• Audit procedures to be performed at the assertion level.
• Review, and completion of the audit assignment.

      An audit program is a document which includes the list of audit procedures and instructions how to perform these procedures. Each procedure is linked to the specific assertion (or assertions), has its own aim and assumes deriving a certain conclusion after performing it.

      Each program is applied for testing separate financial reporting section (item). Audit programs could be used for substantive tests of such items as Trade and other receivables, Trade and other payables, PP&E, Inventory, Intangible assets, Cash and cash equivalents, Revenue, Cost of sales, Distribution costs, Finance costs.

      The audit programs also contains such information as the name of client, the reporting period, the names of preparer and reviewer and the dates when they  were prepared and reviewed. Audit programs can exist in electronic or paper forms.

Audit programs are included in the audit plan and the audit plan is based on the audit strategy.

     The overall audit strategy and the audit plan are updated and changed as necessary during the audit.

In conclusion, planning an audit of financial statements is extremely useful for performing an audit of financial statements in an effective way. The overall audit strategy and the audit plan are the result of planning activity and included by auditors in audit documentation.