IPCC Auditing 1

Chapter II

Audit Strategy, Audit Planning & Audit Programme

Audit Process
Audit Process refers to the sequence of activities performed in the formulation of
audit opinion. It is a well – defined methodology for organizing an audit.

Audit Process in three steps:

I. Planning
II. Performing procedures and obtaining audit evidence (Compliance and
Substantive Procedures)
III. Concluding and Reporting

Audit Process involves the following:

a. Formulating audit plan; Laying down broad framework for conducting audit
b. Examination and evaluation of the nature, extent and efficacy of IC System
c. Obtaining the knowledge of client’s business
d. Initial discussions with client
e. Ascertain arithmetical accuracy of accounts
f. Vouching - Checking validity of transactions w.r.t Statutory Provisions, MoA,
AoA Partnership deed, Prospectus, Contracts, AS and SAs
g. Verify existence, ownership, title & value of assets and nature of liabilities.
h. Compute significant accounting ratios
i. Ensure adequate disclosure of FS so as to convey ‘true and fair’ view of the
financial position and performance.

Audit Techniques - It refers to the methods and means adopted for collection and
accumulation of audit evidence. Some of the techniques used are Posting, Casting,
Physical Verification and count, Confirmation, Inquiry, Re-computation, Tracing in
subsequent period, Bank reconciliation, Year - end Scrutiny, ARP
Difference b/w Audit Procedures and Audit techniques
Basis Procedures Techniques
Meaning Basic way to handle audit work Methods employed for
conducting procedures
Types Two types – Compliance and Posting, Casting, …….
Substantive
Nature A specific procedure may In verification of assets, many
require a number of techniques techniques such as physical
examination, inquiry and
computations are needed.

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Audit Strategy
Audit Strategy sets the scope, timing and direction of the audit and guides the
development of the more detailed audit plan.

Advantages of establishing overall Audit Strategy are:

i. Determination of resources to employ for specific audit areas (eg:
experienced team members in high risk areas)
ii. Determine the amount of team members to specific audit areas (eg: number
of teams members to observe cash count)
iii. Determination of time at which resources are to be deployed (eg: at interim
audit stage or cut off dates)
iv. Determination of how these resources are to be managed, directed and
supervised (eg: when should the team briefing meetings be conducted, where
should review take place (on site or off site))

While establishing an overall audit strategy, auditor shall perform the following:
a. Identify the characteristics of the engagement that define its scope
b. Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required
c. Consider the significant factors in directing the engagement team’s efforts.
d. Consider the results of preliminary engagement activities (SA 220 -
Acceptance/continuance, ethical requirements, SA 210 – Understanding the
terms of Engagement) and whether knowledge gained on other engagements
performed by the engagement partner for the entity is relevant and
e. Ascertain the NTE of resources necessary to perform the engagement.

Once the overall audit strategy has been established, an audit plan can be developed
inorder to achieve the audit objectives through the efficient use of the auditor’s
resources. The establishment of the overall audit strategy and the detailed audit plan
are not necessarily discrete or sequential processes, but are closely inter-related since
changes in one may result in consequential changes to the other.

Audit Planning
This refers to planning by the auditor to enable him to conduct an effective audit
in an efficient and timely manner. It is one of the basic principles governing an
audit. Plans should be based on the knowledge of the client’s business.

In planning his audit, auditor shall consider the complexity of the audit,
environment in which the industry operates, previous experience with the client.

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Plans should also cover the following:

a. Acquire knowledge of the client’s internal control, accounting system and

policies.
b. Establish the degree of reliance that can be placed on IC.
c. Determine the nature, timing and extent of the audit procedures to be
performed.
d. Coordinating the work to be performed.

Audit planning facilitates:

 Appropriate attention to important areas
 Prompt identification of potential problems
 Timely completion of work
 Selection of engagement team as per requirements of the engagement
 Utilization of assistants in a better way
 Co-ordination of work (among the engagement team as well as between
auditors of components and experts)

For efficient conduct of audit, knowledge of client’s business is important. The

auditor can acquire the knowledge about the client’s business from the following:
a. Annual Report
b. Minutes of meetings (GM, BM etc)
c. Visits to the client’s premises
d. Discussion with the client and client staff, internal auditor & other auditor
e. Discussion with knowledgeable persons outside entity
f. Publications relating to industry in which client operates
g. Legislation and regulation
h. Accounting manual and Procedure manual
i. P.Yrs audit working papers and files
j. Internal management reports
k. Relevant publications of ICAI and other professional bodies
l. Previous experience

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The auditor should develop and document his overall plan. The auditor should
consider the following while developing his plan:
1. Terms of engagement
2. Statutory liabilities and responsibilities
3. Nature and timing of report
4. Accounting Policies adopted by the client
5. Setting Materiality levels
6. Degree of reliance to be placed on accounting systems and internal controls
7. NTE of audit evidence
8. Involvement of other auditors and experts
9. Allocation of work between joint auditors
10. Establishing and coordinating staffing requirements

Plans should be further developed and revised as necessary during the course of
audit. According to SA 300 ‘Planning an Audit of FS’, planning is not a discrete
phase of audit, but rather a continual and iterative process. It begins shortly
after the completion of the previous audit and continues until the completion of the
current audit engagement.

The auditor may decide to discuss elements of planning with the entity’s management to
facilitate the conduct and management of the audit engagement. Even if these
discussions occur, the overall audit strategy and the audit plan remain the auditor’s
responsibility. When discussing matters included in the overall audit strategy or audit plan
care is required in order not to compromise the effectiveness of the audit.

[Go through Illustration in SM Page 2.10]

The auditor shall also plan the nature, timing and extent of direction and supervision of
engagement team members and review their work. Such direction, supervision and
review depends on the size and complexity of the entity, area of audit, assessed risks
of material misstatement, capabilities and competence of each member of the
engagement team.

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Chapter II

Audit Programme
It is the auditor’s plan of action. It is the detailed plan of work to be performed
specifying the procedures to be followed in verification of each item and giving the
estimated time required. Hence audit programme is a detailed plan of applying audit
procedures. It is a list of examination and verification steps to be applied.

There should be a periodic review of the audit programme to assess whether the
same continues to be adequate. Only if there is periodic review, can the utility of
the audit be retained and enhanced. Hence periodic review helps remove the
inadequacies and redundancies of the programme.

Evolving one audit programme is not practicable for all businesses.

Elements of Audit Programme:

 Study of relevant legal requirements
 Area of auditing and extent of checking
 Analytical review of past performance
 Study and evaluation of internal controls
 Analysis and review of FS
 Finalisation of audit report

Advantages:
i. Helps in selecting assistants as per their capability.
ii. Provides assistants with clear set of instructions about work.
iii. Serves as evidence in case a charge is brought against the auditor
iv. Responsibility can be fixed.
v. Serves as a guide for carrying out current audit and as a basis for drawing
future audit programme
vi. Serves as a ready checklist of procedures and techniques to be applied.
vii. Provides a basis against which the actual progress on an audit can be judged.
viii. Chances of forgetting/ overlooking important matters are reduced.
ix. Facilitates Supervision of work carried out by assistants.
x. Ensures timely completion of work

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Disadvantages:
i. Can make the audit exercise rigid and mechanical
ii. Inefficient assistants may take shelter behind the programme saying that
the matter does not contain any instructions.
iii. Procedures which may be inappropriate to the circumstances of audit may be
undertaken.

Measures to remove disadvantages:

i. To encourage staff to draw attention of the auditor to any defects in the
programme and to discuss the modifications. Assistants are encouraged to
keep an open mind beyond the programme given to him.
ii. Flexibility should be there. Review must take place from time to time.
iii. Audit programme should be made considering factors like nature of business
of entity, scale of operations etc.
iv. To encourage staff to explore fully unusual transactions or questionable
practices that comes to their knowledge while carrying out the audit.

Developing an Audit Programme

 Auditor should prepare a written audit programme.
 Programme may contain the audit objectives of each area and should have
sufficient details to serve as a set of instructions to the assistants.
 Auditor should stay within the scope and limitation of audit.
 Auditor can determine the extent of reliance to be placed on IC. Only on
this basis can he determine the nature, timing and extent of audit
procedures.
 Auditor needs to determine the timing of applying the audit procedures.
 Determine the evidence reasonably available and identify the best evidence.
 Consider all possibilities of error.
 Co-ordinate the procedures to related items.
 Audit plan must be reviewed.

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Audit Planning and Materiality

Materiality

 Information is material if its misstatements i.e omission or erroneous statement

could influence the economic decisions of users of financial statements.
 Materiality is a relative term and what may be material in one case may not be
material in another, eg: omission of sales of INR 25,000 in an entity with a turnover
of INR 1,000 crore may not be material. Such an omission would become material in
an entity with a turnover of INR 5 lakhs.
 Various aspects to determine whether a particular item is material or not:
Size/ amount – impact on BS or P&L
Comparison with P.Yr figures
Nature
Contractual violation
Legality
 Both the amount and nature of misstatements should be considered.
 Materiality level may change depending upon the experience gained during audit
process
 Materiality should be considered by the auditor when:
 Determining the nature, timing and extent of audit procedures
 Evaluating the effect of misstatements

While planning Audit, auditor should consider materiality and its relationship with audit
risk. The auditor considers what would make the financial information materially misstated.
The auditor’s preliminary assessment of materiality related to specific account balances
and classes of transactions helps the auditor decide such questions as what items to
examine and whether to use sampling and analytical procedures. This enables the auditor to
select audit procedures that, in combination, can be expected to support the audit opinion
at an acceptably low degree of audit risk. It may be noted that the auditor’s assessment
of materiality and audit risk may be different at the time of initially planning the audit as
against at the time of evaluating the results of audit procedures.

Performance materiality means the amount(s) set by the auditor at less than
materiality for the FS as a whole to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements exceeds materiality
for the FS as a whole. Performance materiality also refers to the amount(s) set by the
auditor at less than the materiality levels for particular classes of transactions,
account balances or disclosures.

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Determining materiality involves the exercise of professional judgment. A percentage

is often applied to a chosen benchmark as a starting point in determining materiality
for the FS as a whole.

Auditor shall document the materiality of the FS as a whole, Materiality levels for
particular class of transactions, performance materiality and any revision of these
levels as the audit progresses. Auditor shall also document the factors considered
for determining such levels.

Using Benchmarks to determine Materiality

Determining materiality is a matter of professional judgement.
While determining materiality for the FS as a whole, a percentage is applied to a
chosen benchmark.
 The various elements of FS are considered while selecting a benchmark
(Assets, Liabilities, Revenue, Expenses, Equity, etc)
 Auditor checks whether there is any item upon which attention of users are
to be focused (eg: for the purpose of evaluating financial performance users
may tend to focus on profits or net assets amount)
 Auditor checks in which stage the company is in its life cycle and also the
industry and economic environment of the company.

After choosing a benchmark, the relevant financial information that needs to be

gathered are:
(i) Prior period figures
(ii) Current period figures
(iii) Forecasts/ Budgets
All these are considered after incorporating the relevant changes that has
occurred. (eg: a major business acquisition in recent period)

Materiality levels may need to be revised as a result of change in circumstances

that occurred during the audit.

[Do Go through the examples in the SM]

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