AUDIT PLANNING, CONTROL & RECORDiNG (iSA 300)

Major learning objectives

By the end of this chapterr, you should be able to:

• Define audit planning and explain its objectives, advantages scope and timing.
• Discuss the sources of information on client’s nature of business.
• Explain the purposes of the audit planning memorandum and the audit program.
• Explain audit planning procedures and the problems in developing and
implementing an audit plan.
• Explain quality control procedures at an individual audit level and their
objectives.
• appreciate the need for working papers, their advantages and disadvantages.

ISA 300 Planning an Audit of Financial Statements:

planning refers to developing a general strategy and a detailed approach for expected
nature, timing and extent of the audit. The auditor should plan his work to enable him
conduct an effective audit in an efficient and timely manner. The form and nature of
the planning required from audit will be affected by the size and complexity of the
organization, the commercial environment in which it operates and the methods of
processing transactions and reporting requirements to which the organization is
subject.

Advantages of good audit planning

• Establishes the intended means of achieving the objective of the audit.

• assist in the direction and control of the audit work.
• a good plan assists in the proper utilization of audit assistants and in
coordination of work done by other auditors and specialists.
• helps ensure that attention is devoted to important areas of the audit. The
planning process identifies potential problematic areas e.g. areas with weak internal
controls where more detailed substantive testing should be carried out.
• Helps ensure that work is completed expeditiously through more efficient use of
time
and proper allocation of work to audit staff.
• Ensures proper division of work between the interim and the final audit avoiding
repetition of work already done.
• Takes into consideration times when information needed for audit proposes is
available and when the client is not very busy. This encourages cooperation by
ensuring less disruptions of client’s work.

INTRODUCTION

aAudit planning is a vital stage of the audit process covered under iSa 300. Every
audit should be planned so that the engagement will be performed in an effective
manner. The main aim is to reduce audit risk to an acceptably low level.

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Definition of key terms

Audit planning covers the development of an overall plan for the expected coverage
and conduct of the audit.

Quality control refers to the various policies and procedures put in place by the
auditor to ensure that all audits conducted by the audit firm meet the quality standards
set out by the accounting profession and the firm’s own quality standards.

Peer review -described as an independent review of a firm’s accounting and auditing

practices.

Working papers -evidence is recorded in the form working papers of which are
prepared by the auditor or obtained during the audit. The working papers are retained
by the auditors in connection with the performance of an audit.

Relevance to the industry

Audit planning is essential for every audit to direct the work of the auditor for him to
allocate resources. it is therefore inevitable to conduct an audit effectively without an
audit plan.

Scope of Audit Planning

audit planning covers the development of an overall plan for the expected coverage
and conduct of the audit. The audit plan is recorded in a planning memorandum.

An audit programme is then developed which shows the nature, timing and extent
of audit procedures to be applied at every level of audit testing. in order to plan his
work adequately, the auditor needs to understand the nature of client’s business, its
organization, its methods of operation and the industry in which it operates. This is to
enable the auditor appreciate which events and transactions are likely to have
significant effect on the financial statements.

Sources of information on client’s nature of business

iSa 315 states that the auditor should obtain an understanding of the information
system, including the related business processes, relevant to financial reporting.

In performing an audit on financial statements, the auditor should have or obtain

knowledge of client’s business sufficient to enable him identify and understand events,
transactions and practices that in the auditor’s judgment may have significant effect
on the financial statements or the audit report. prior to accepting an engagement, the
auditor should obtain a preliminary knowledge of the industry and of ownership,
management and operations of the entity to be audited. after accepting to act as the
company’s auditor, further and more detailed information would be obtained.

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obtaining the required knowledge of the business is a continuous and cumulative
process. The following may be used as sources for that information.

 previous experience with the entity and the industry.

 Discussions with people within the entity.
 Discussion with internal audit personnel and review of internal audit reports.
 Discussion with other auditors and with legal and other advisors who have
Provided services to the entity.
 Journals and publications of the industry.
 visits to the entity’s place of business and plant facilities.
 Documents such as minutes of meetings, annual financial reports, operations and
 system manuals and budgets.
 The auditor should ensure that audit assistants in an engagement also obtain
sufficient knowledge of clients business to enable them carry out delegated work.

Audit planning memorandum

The planning memorandum sets out the audit approach, how, whom and when each
item in financial statements will be audited timing requirements of the audit and staff
usage with time budget for each set of audit work. it generally contains the following.
 a summary of terms of engagement required to set out the nature of the audit
work.
 a job timetable giving provisional dates of the timing of the audit.
 records of any changes about the client since last audit e.g. changes in
management structure.
 background information about the client.
 Details of key client contacts.
 Extent of reliance expected on internal control system.

Audit Programme

an audit programme describes how the audit approach is to be implemented. auditors

develop an audit programme for each material accounts balance or account balance
assertions. it is prepared in line with the planning memorandum and generally
documents the audit objectives and procedures that will be carried out at the specific
areas the auditor is interested in.

The following is an example of an audit programme designed to gather evidence in

the control testing stage as to the effectiveness of operation of a client’s bank
reconciliation procedures.

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Client: mugutho ltd.

Year end: 31 / 12/2006

Control testing: bank reconciliation

prepared by: ……………………

received by: …………………....

audit procedure TimingExtent responsibility

inquiry whether the bank reconciliations are prepared independent of maintenance of
the cash book.
interim visit: July reconciliation

audit assistant: inspect evidence of performance of bank reconciliations by client staff.

Ensure that the person performing the reconciliations signed and dated the
reconciliations.

Ensure the reconciliations were done by the person proposed at the appropriate
time and the supervisor signed the reconciliation as evidence of his review.

Final visit: September and october reconciliations

audit assistant.

Problems in developing and implementing audit plan.

1. a company may have many clients with similar year ends. This will make
allocation of time and audit staff difficult.

2. abrupt changes in the client’s business will call for more audit time outside the
planned time. This especially happens when the client converts from manual
accounting system to a computerized system such changes weaken the internal
control system in the short term and call for more audit time than was previously
planned for.

3. lack of co-operation from client e.g. providing information and explanations in

good time is normally difficult for the client. This will be the major challenge for
the auditor especially with a client who does not have proper accounting and
internal control system.

4. Staff turnover in an audit firm. This inevitably interferes with the audit plan
because it gives rise to unplanned staff shortages.

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Audit planning procedures

When planning the audit of a new client, the auditor should carry out the following
procedures.

1. Carry out a preliminary review of the client. This will involve obtaining a
good understanding of the nature of the client’s business.
2. Discuss with management to obtain an understanding of the management
structure and a general feel of the current operating circumstances of the client
and any factors that affect client’s accounting and internal control system.
3. Communicate with previous auditor of the client and obtain from him all the
information that is relevant to the audit of the new client.
1. Seek to obtain a preliminary understanding of the nature of the clients accounting
and internal control system. This assists determine the extent to which the auditor
will rely on the client’s internal control system.
2. Consider any accounting standards and legislations that could have an impact on
the audit of the new client.
3. The audit senior should check the nature and timing of reports and other
communications of the client so that such timings can be accommodated in the
audit plan. E.g. dates of the aGm, stock takes and when management reports are
ready.
4. The audit senior should determine the number of audit staff required, their
experience and any special skills required and the timing of the audit visit.
5. prepare an audit planning memorandum that summarizes the scope of the work
under the engagement and the strategy to be followed to meet the client’s needs.

Quality control (iSA 220)

The quality of the work carried out by the auditor is of fundamental importance. This
is especially so in the light of potential of being sued for negligence. The auditor
remains personally responsible for the work he carries out and the opinion he issues.
The only way of reducing the risk of being sued is to ensure that work performed by
the firm is of the highest quality possible.

Quality control refers to the various policies and procedures put in place by the
auditor to ensure that all audits conducted by the audit firm meet the quality standards
set out by the accounting profession and the firm’s own quality standards.

Objectives of quality control

1. To meet professional requirements. Audit staff employed by the firm should

adhere to the principles of independence, objectivity, confidentiality and
professional behaviour.

2. Skill and competence. The audit firm should be staffed by personnel who have
attained and maintained the technical standards and professional competence
required to enable them fulfill their responsibilities with due care.

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3. assignment. audit work is to be assigned to personnel who have the degree of
technical
4. training and proficiency required in the circumstances.

5. Delegation. There should be sufficient direction, supervision and review of work

at all levels to provide reasonable assurance that the work performed meets
appropriate standards of quality.
6. Consultation. Where necessary: consultation within and without the firm should
be carried out with those with appropriate knowledge.
7. acceptance and retention of clients: an evaluation of prospective clients and a
review on an ongoing basis of existing clients should be conducted. in making a
decision to accept or retain a client, the firm’s independence and ability to serve
the client properly and the integrity of the client’s management should be
considered.
8. Monitoring:The firm should continuously monitor the adequacy and
operational effectiveness of quality control policies and procedure’s.

The firm’s general quality control policies and procedures should be communicated to
its personnel in a manner that provides reasonable assurance that the policies are
understood and implemented.

Quality control policies and procedures at individual audit level

1. Delegation. audit work should be delegated by the reporting partner to staff who
have appropriate experience, training, proficiency and independence. This will
provide reasonable assurance that such work will be performed with due care by
persons having he required technical competence.

2. Direction. audit assistants to whom work is delegated should be given

appropriate instructions. This involves informing audit assistants of their
responsibilities and objectives of the procedures they are to perform. it also
involves informing them of matters such as nature of client’s business and the
possible accounting and auditing problems.

3. Supervision. This involves monitoring the progress of the audit to consider

whether assistants have the necessary skills and competence to carry out their
assigned tasks, establishing whether assistants understand the audit instructions
and resolving any differences of professional judgment between personnel.
Supervision also entails identifying and addressing any significant accounting
and auditing questions raised in course of the audit and ensuring that work is
being carried out in accordance with the overall audit plan and audit programme.

4. Review Work performed by each staff member should be reviewed by a person

of equal or higher competence to ensure that work has been performed in
accordance with audit programme, has been properly documented and that audit
objectives have been met.

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Peer Review

Peer review may be described as an independent review of a firm’s accounting and

auditing practices. it is intended that the review be done by practitioners upon fellow
practitioners hence the term peer review. The work of the review is limited to:

• professional aspects of the practice.

• overall total quality control policies.
• Professional aspects of firm’s accounting and auditing practices like maintenance
of working papers and custody of financial statements.

Objectives of Peer Review

1. To promote compliance with professional standards and other technical
pronouncements.
2. To provide reasonable assurance to users of financial statements that professional
3. standards have been complied with in performance of audit and related services.
4. To promote uniform application of generally accepted methods of
professional practice.
5. To gain increased user confidence in the reliability of audited financial statements.
6. To establish a mechanism of continuous quality improvement in professional
practice and a self regulatory framework for policies and procedures.
7. To enhance the status and image of accounts to the public through assurance of
compliance and quality in performance of audit and related services.
8. To help ensure that auditors are competent and independent and to identify
potential problems in this regard at an early stage for necessary corrective actions.
9. To help identify weaknesses in the audit process and provide technical assistance
for professional development.

Reasons for introducing Peer Review

1. There is desire on the part of professional bodies worldwide to ensure that

members apply and observe professional standards.
2. The institute of certified public accountants of Kenya (ICPAK) deems it
appropriate to
3. ensure adherence to existing technical standards through this mechanism of
monitoring compliance.
4. it is better for professional governments.

Audit Recording (iSA 230-Documentation)

The auditor must record or document all the information gathered as audit evidence in
forming an opinion on the financial statements. The evidence is recorded in the form
of working papers which are prepared by the auditor or obtained during the audit.
The working papers are retained by the auditors in connection with the performance
of an audit. audit working papers should always be sufficiently complete and detailed
to enable an inexperienced auditor having no previous connection to the audit to
ascertain work that was performed to support the conclusion reached. The auditor

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should record all relevant information known to him at the time, the conclusion
reached based on that information and the views of management.

The need for good working papers

The reporting partner needs to satisfy himself that the work delegated by him has been
properly performed. This is only possible by reviewing detailed working papers
prepared by the audit staff who perform the work. This also aids in supervision and
review of work done by audit assistants.

1. Working papers provide details of problems encountered together with evidence

of work performed and conclusion reached. They can also serve as a good
reference point for future audit.

2. preparation of working papers enables to auditor to adopt a methodical approach

to his work.

3. Working papers assist in planning and performance of audit in future financial

periods.

4. if sued for negligence, the auditor can use the working papers as evidence for
work done.

5. Working papers can be used for training of audit staff. They contain audit
programme and specimen schedules which audit assistants can refer to when
conducting the audit.

Auditing guidelines do not define precisely, the form of working papers but it
indicates what might typically be contained therein. This may include:

i. information of continuing importance to the audit such as letter of engagement

and memorandum of association.
ii. planned audit approach as contained in the planning memorandum.
iii. auditors assessment of client’s accounting system, his review and evaluation of
internal controls
iv. Details of work carried out, not as of errors or exceptions noted and action taken
together with conclusion drawn by audit staff.
v. Evidence that the work of staff has been properly reviewed.
vi. Record of relevant balances and other financial info that is subject to the audit.
vii. Analysis of significant ration and trends
viii. Copies of communications with other auditors, expects and other third parties.
ix. letters of representation received form management.
x. Working papers are divided into the current audit file (CAF) and the permanent
audit file (PAF)

The permanent audit file

This contains documents and matters of continuing importance which are required for
more than one financial period.The specific information therin includes the following:

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1. Statutory material governing the conduct of the audit e.g. for companies, the
companies act Cap 486 and for quoted companies in Nairobi Securities Exchange,
the NSE booklet of regulation are required.
2. Rules and regulations of the entity e.g. articles of association or a partnership
deed.
3. Copies of documents of continuing importance and relation to the auditors e.g.
minutes of meetings that recorded the appointment of the auditor, guarantees and
indemnities entered into.
4. Address of registered office and all other premises with a short description of the
work carried at each of those premises.
5. Organizational chart showing the principal departments and subdivision thereof
and names of officials and their responsibilities showing clearly the lines of
authority.
6. a list of directors, their shareholding and service contracts.
7. a list of company’s advisors, bankers, lawyers, stock brokers and valuers.
8. an outline of history of the organization reserves and share capital.
9. accounting policies used on material areas such as stock and depreciation.

The current audit file

This file contains matters pertinent to the current year’s audit and contains:

1) a copy of the accounts being audited which must be signed by the directors
2) A file index showing contents of the file.
3) A detailed description of internal control system in form of flow charts,
questionnaires or
4) any other form of suitable documentation.
5) audit programme showing the audit objective and planned audit procedures for
each of the areas to be audited.
6) a schedule of each item in the balance sheet showing the balance at beginning of
the year, changes during the year and balance at the end of the year. The schedule
also shows details of work performed on each balance, the result and conclusion
made.
7) A schedule of the items in the profit and loss account. It will show the details of
work
8) performed on each balance, the result and conclusion reached.
9) a check list for compliance with statutory disclosure requirements and accounting
standards.
10) a record of questions raised during the audit and those raised in the
previous audit.

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11) A schedule of important statistics such as net profit margin, liquidity ratios
and composition of sales.
12) a record or an abstract form minutes of all director’s meetings and of any internal
committee whose deliberations are important to the auditor.
13) The management letter setting out weakness of the internal control system.
14) letters of representation obtained from client’s management.

Standardized working papers

This refers to a predetermined format of presenting and documenting audit findings

formulated by individual audit firms e.g. check lists and specimen letters which are
filled with standard wording and gaps left to fill in the relevant details of the client.

Advantages of standardized Working Papers

1) This improves the efficiency with which working papers are prepared because
they will be used for many clients
2) They act on guidelines for instructions to audit staff and facilitate delegation of
work.
3) They provide a means to control the quality of audit work by ensuring that
minimum quality standards are maintained.
4) Ensures that all relevant issues in the audit are addressed.

Disadvantages

1) It is not appropriate to follow mechanically, a standardized approach to the

conduct and documentation of audit work as the auditor in some cases will need
to exercise his own judgment.
2) The initiative of auditor staff may be restricted because the need to exercise
judgment in preparing working papers is eliminated.
3) The client staff may become familiar with the method and perpetuate fraud in
areas not covered by the standard working papers.
4) The audit work becomes very mechanical with use of standardized working
papers.

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 AUDIT EVIDENCE (ISA 500)

Chapter Objectives

By the end of this chapter, the student should be well versed on the following:
1. Explain the following concepts
ii. reliability of audit evidence
iii. obtaining audit evidence
iv. management assertions
v. methods of obtaining audit evidence
vi. audit sampling
vii. representations by management

2. Describe the quantity and quality of audit evidence to be obtained.

3. Explain the audit procedures that auditors use for obtaining that audit evidence.
4. Explain Assertions about classes of transactions and events for the period under
audit

Introduction

The objective of an audit of the financial statement is for an auditor to express an

opinion of the financial and state whether they present a true and fair view of the
financial statements. In order for the auditor to do so he needs to gather sufficient and
reliable audit evidence. The work of an auditor is used by many users and hence
before he comes up with his conclusion he needs to have gathered sufficient audit
evidence on which to base his opinion so that whatever decision those users come up
with, is the right one. This chapter covers the gathering of that evidence, the methods
used and the reliability of that evidence to the auditor amongst many other things.
audit evidence is covered by iSa 500 Audit Evidence.

KEY TERMS

Audit evidence - refers to the information obtained by the auditor in arriving at the
conclusions
on which the audit opinion on the financial statements is based.

Substantive procedures - these are audit tests carried out to test the accuracy and
validity of the accounting records.

Sufficient appropriate audit evidence- Sufficiency is the measure of the quality of

audit evidence while appropriateness is the measure of the quantity of the evidence

Reliability of audit evidence- this refers to the credibility of the source of the
evidence

Audit sampling- involves the application of substantive or compliance procedures to

less than 100% of items within an account balance or class of transactions to be

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enable the auditor obtain and evaluate some characteristics of the balance and form a
conclusion concerning that characteristics

Audit Evidence

This is covered under ISA 500 which to establishes standards and provide guidance
on what constitutes audit evidence in an audit of financial statements, the quantity and
quality of audit evidence to be obtained, and the audit procedures that auditors use for
obtaining that audit evidence.

In order to form an opinion, an auditor must obtain evidence.This evidence should be

sufficient, relevant and reliable. The auditor designs substantive procedures to obtain
this evidence about the financial statement assertions.

Definition audit evidence: This refers to the information obtained by the auditor in
arriving at the conclusions on which audit opinion on the financial statements is based.
Audit evidence comprises of source documents and accounting records underlying the
financial statements. The accounting records generally include:

1. records of initial entries and supporting records

2. records of electronic fund transfers, invoices, contracts and cheques.
3. General and subsidiary ledgers, journal entries and other adjustments to the
financial statements not reflected in the journal entries.
4. records such as work sheets and spread sheets supporting cost allocations,
computations and reconciliations.

other information the auditor can use as audit evidence are:

5. minutes of meetings
6. Confirmations form third parties
7. analysis reports.
8. Comparable data about competitors.
9. Control annuals.
10. information obtained by auditor from audit procedure such as observation
and enquiries.

The sources and amount of evidence needed to achieve the required level of assurance
is determined by the auditor’s judgment. The auditor’s judgment will be influenced by
the materiality of item being examined, the relevance and reliability of evidence
available from each source and cost involved in obtaining it. audit evidence is
obtained through an appropriate mix of tests of controls and substantive procedures
where internal control system is considered weak; evidence may be obtained entirely
from substantive procedures.

Substantive tests are procedures carried out to test the accuracy and validity of
accounting records. They are of two types i.e. analytical review procedure and test of
detail.

By approving the financial statements, the directors are making representations about
the information therein. These assertions may fall into the following categories:

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(a) Assertions about classes of transactions and events for the period under
audit:

1. Occurrence—transactions and events that have been recorded have occurred and
pertain to the entity.

2. Completeness—all transactions and events that should have been recorded have
been recorded.

3. Accuracy—amounts and other data relating to recorded transactions and events

have been recorded appropriately.

4. Cut-off—transactions and events have been recorded in the correct accounting

period.

5.Classification—transactions and events have been recorded in the proper accounts.

(b) Assertions about account balances at the period end:

1. Existence—assets and liabilities exist.

2. Completeness—all assets and liabilities that should have been recorded have been
recorded.

3. Rights and obligations—the entity holds or controls the rights to assets,

and liabilities are the obligations of the entity.

4.Valuation and allocation —assets and liabilities are included in the financial
statements at appropriate amounts.

(c) Assertions about presentation and disclosure:

1.Occurrence and rights and obligations—disclosed events, transactions, and other

matters have occurred and pertain to the entity.
2.Completeness—all disclosures that should have been included in the financial
statements have been included.
3.Classification and disclosures —financial information is appropriately presented
and described, and disclosures are clearly expressed.
4.Accuracy and valuation—financial and other information are disclosed fairly and
at appropriate amounts.

Procedures used by auditors to obtain evidence

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1. Inspection of tangible assets; Inspection confirms existence and valuation and
gives evidence of completion. It doesnot however confirm rights and obligations.

2. Inspection of documents and records; Confirmation of documentation confirms

existence of an asset or that a transaction hasoccurred. Confirmation that items are in
the books shows completeness. Also helps testing cut-off. It provides evidence of
valuation, measurement, rights and obligations and presentation and disclosure.

3.Observation; This procedure is of limited use in that it only confirms that a

procedure took place
when it was observed.

4.Inquiry and confirmation; Information sought from client or external sources.

The strength of the evidence depends on knowledge and integrity of the source of the
information.

5.Recalculation and Re-Performance: Checking calculations of client records.

6.Audit automation tools: Such as computer assisted auditing techniques.

7.Analytical procedures:This may include statistical sampling of various

transactions.

This is the analysis of relationships such as between items of financial data to identify
consistency and predicted patterns or significant fluctuations, unexpected
relationships and results of investigations thereof.

Analytical procedures (1SA 520)

Nature and purpose of analytical procedures

They are mainly used at 3 stages of the audit:

• as part of the planning process

• At the final review stage
• as substantive procedures

analytical procedures are involved in evaluation of financial statements information

by a study of relationships among financial and non financial information. A basic
premise underlying the application of analytical procedures is that logical or plausible
relationship among data may be expected to exist and continue in the absence of
conditions to the contrary. Therefore the auditor can use these relationships to obtain
evidence of the financial statements amounts. A simple analytical procedure is to
compare revenue and expenses amounts for the current year to those of prior periods
noting any significant differences. Essentially, the process of performing analytical
procedures consists of four steps.

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a. develop an expectation of account balance or ratio

To determine the amount of difference from expectation that can be accepted without
investigation.
Comparison of company’s account balances or ratios with the expected.
Investigate and evaluate significant ratio differences from the expectation

1. Developing an expectation.

a variety of types of information are available to the auditor to develop an expectation

for analytical procedures including;

• Financial information for comparable priority periods.

• anticipated results such as budgets and forecasts.
• Relationships among elements of financial information within a period e.g. level
of debtors and credit sales.

Information derived from similar firms in the same industry e.g. industry
wageaverage.

Relationships between financial and non financial data e.g. wage expenses and a
number of employees. in establishing these relationships, the auditor may use
shillings amount, physical quantities ratios or percentages.

To increase the precision of the analytical procedures, separate relationships may be

computed for each department or product line. industrial averages provide a
potentially rich source of information in developing expectation for analytical
procedures, since industry statistics may alert auditors to classification error, improper
application of accounting principles or other misstatements in specific items in
client’s financial statements. However there may be problems of lack of comparability
among companies and inability to obtain current industry data.

Methods of developing expectation on account balances and ratios

a) Trend analysis. This includes review of changes in an account balance over

time e.g. review of clients sales for the past six years may reveal a growth rate of 5%.
This information could assist auditor in developing an expectation of sales for the
current year.
b) ratio analysis. This involves comparison of relationships between two or
more financial statement account balances or comparisons of an account balance to
non financial data e.g. revenue per sale order. The typical financial ratios are liquidity,
profitability, leverage and activity ratios.
because ratio analysis involves examination relationships between two or more
variables and may involve industrial data, it is often a richer analysis than trend
analysis. There are two basic approaches to ratio analysis;

• horizontal analysis. This involves review of client’s ratios and trends over time
• Cross sectional analysis. This involves comparisons of ratios of similar firms at a
given

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point in time.

2. The amount of acceptable difference.

The amount of acceptable difference between the expectation and the financial
statements balance that can be accepted without investigation is determined primarily
by the amount that is considered to be a material misstatement However; this amount
must be consistent with the degree of assurance from the procedure. When trend or
ratio analysis is used, the auditor typically uses professional judgment to specify an
absolute amount of difference or percentage difference that will result into
investigation.

3. Comparison of the account balance or ratio with the expected balance or ratio.

once the auditor has determined the expectation and amount of acceptable difference,
he makes
the actual comparison to determine where significant difference lies.

4. Investigation and evaluation of significant differences.

The auditor must investigate any significant differences and his expectation and the
client’s financial statements balance or ratio to determine whether they represent
misstatements. This involves reconsidering the methods and factors used in
developing the expectation. inquiry to management can be useful in this regard.
management explanations however must be ordinary be supported with other audit
evidence. if the explanations are not tallying with other audit evidence, the editor will
often be required to expand his tests of related financial amounts to determine
whether or not they are materially misstated.

Timing of analytical procedures

iSas require the application of analytical procedures at the planning and overall
review stages of the audit. The auditor may also decide to use them during the audit
on substantive tests to provide evidence as to the reasonableness of specific account
balances. Analytical procedures performed in planning the audit are used to determine
the nature, timing and extent of audit procedures that will be used to obtain evidence
about specific accounts. They are also used in understanding the client’s business at
the planning stage.

Analytical procedures must be used as part of the overall review stage of an audit to
assist the auditor in assessing the adequacy of the evidence gathered and the validity
of conclusions reached. At the final review stage of an audit, the analytical procedures
generally include reviewing the financial statements and re-computing ratios if
necessary to identify any unusual or unexpected balance or that have not been
previously identified and explained.

Where the auditors are not required to use analytical procedure as substantive tests,
they are usually most efficient tests of certain assertions .e.g. performing analytical

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procedures is the most efficient way to evaluate competence of various revenue and
expense accounts.

Extent of analytical procedures

auditors must consider cost and likely effectiveness of analytical procedures in

determining how much they may be used for a particular audit a primary measure of
the effectiveness of analytical procedures is its precision. precision depends on a
number of factors including the predictability of the relationship, the techniques used
to develop the expectation and the reliability of the underlying data used. monthly
data is more precise than yearly data.

QUALITIES OF A GOOD AUDIT EVIDENCE

a) Sufficient and appropriate

Sufficiency is the measure of the quantity of the evidence, while the appropriateness
is the measure of the quality (reliability & relevance) of the evidence. This applies to
both tests of controls and substantive procedures.

An auditor’s judgment as to what is sufficient appropriate evidence is influenced by

the following factors:

a)Risk assessment, is it low or high?

b)The nature of the accounting and internal control systems,
c)The materiality of the item being examined,
d)The experience gained during previous audits,
e)The auditors’ knowledge of the business and industry,
f)The results of audit procedures,
g)The source and reliability of the information available.

The auditor needs to obtain sufficient, relevant and reliable evidence to form a
reasonable basis for his opinion on the financial statements. His judgement of
sufficiency will be influenced by such factors as:

1)His knowledge of the business and its environment,

2)The risk of misstatement,
3)The quality of the evidence.

b) Appropriate- relevance

The relevance of audit evidence should be considered in relation to the overall

objective of forming an audit opinion and reporting on the financial statements. The
evidence should allow the auditor to conclude on the following:

Balance sheet items

Are there suitable completeness, existence, ownership, valuation and disclosure issues?

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Profit and loss items
Are there suitable completeness, occurrence, valuation and disclosure issues?

C ) Appropriate – reliable

Reliability of audit evidence depends on the particular circumstances of each case.

However, the following should be considered:

i.Documentary evidence is more reliable that oral evidence,

ii.Evidence from external independent sources is generally more reliable than that
within an entity,
iii.Evidence from the auditor by such means as analysis and physical inspection is
more reliable than evidence obtained by others.

F. Documentation

Audit planning memo

An audit plan is the formulation of the general strategy for the audit, which sets out
the direction for the audit, describes the expected scope and conduct of the audit and
provides guidance for the development of the audit programme. This plan is in the
form of a written document. Included will be:

1.The discussion among the audit team concerning the susceptibility of the financial
statements to material misstatements including any key decisions reached;
2.Key elements of the understanding gained of the entity;
3.The identified and assessed risks of material misstatement;
4.Significant risks identified and related controls evaluated;
5.The overall responses to address the risks of material misstatements;
6.The nature, extent and timing of further audit procedures linked to the assessed risks
at the assertion level;
7.If the auditors have relied on evidence about the effectiveness of controls
from previous audits, conclusions about how this is appropriate.

Example of an outline audit plan

Initial visit

This visit is essential in building up a background about the client company in order
to assist in the detailed planning of the audit.

The auditor will use techniques such as inquiry, observation and review of
documentation in order to understand details about the company such as:

1)The development and past history,

2)The nature of the environment in which it operates,
3)Products and processes,
4)Organisational plans,
5)Accounting and internal controls in operation,

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6)The maintenance of accounting records.

Interim Visit

Ideally this visit should take place close to the year end. The purpose of this visit is to
carry out detailed tests on the client’s accounting and internal controls with a view to
establishing those controls on which you can rely. Where controls are operating
effectively, restricted substantive procedures need only be carried out. Where
controls are ineffective in practice, more extensive substantive tests will need to be
carried out. At this stage, if any weaknesses in controls have been noted, it may be
appropriate to draft a letter to the client management.

Final Visit

This visit will take place after the accounting year end. On this visit, the detailed
substantive procedures will be carried out in order to substantiate the figures in the
accounting records and subsequently, the financial statements. After an overall
review of the financial statements, the auditor will be able to assess whether
sufficient and appropriate evidence has been obtained in order to draw reasonable
conclusions so that an opinion can be expressed on the financial statements.

Examples of the work to be carried out would include:

i.Discussion with management of known risk areas,

ii.Attendance at stock count,
iii.Verification of assets/liabilities and income/expenditure,
iv.Follow up on outstanding interim audit issues,
v.Review of post balance sheet events,
vi.Seek and obtain representations from management,
vii.Review financial statements,
viii.Draft an audit report.

Management representations iSA580

a) Oral representations.

Throughout an audit the auditors ask many questions to the officials and employees of
Client Company. oral inquires are made on an endless range of topics from the
location of records and document, reasons for unusual account procedures and
probability of collecting overdue accounts receivable. in making inquires, the auditor
should consider the knowledge, objectivity, experience, responsibility and
qualifications of individuals being questioned and use carefully structured questions
to address relevant issues. Client replies should be carefully evaluated as appropriate
and followed up with additional questions.

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Generally, oral client representations are not sufficient themselves but they may be
useful in disclosing situations that require investigation or in corroborating other
forms of evidence e.g. after making careful analysis of all accounts receivable, the
auditor normally discusses with the credit manager, the prospects of collecting
specific accounts.

b) Written representations.

The auditor must also obtain written representations from the client in accordance
with provisions of iSa 580. at conclusion of the audit, the auditor obtains from the
client a written representation letter. This letter summarizes the most important oral
representations made by management during the audit. Many specific items are
included in this representation letter e.g. management represents that all liabilities
known to exist are reflected the financial statements. The representations generally
fall into the following broad categories;

• All accounting records, financial data and minutes of director’s meetings have
been
made available to the auditor.
• The financial statements are complete and were prepared in conformity with
generally
accepted accounting principles.
• management believes that adjusting entries brought to the attention by the
auditor and not recorded are not material individually or collectively.
• all items requiring disclosures such as contingencies, illegal acts and related
parties transactions have been properly disclosed.

iSa 580 requires the auditor to obtain representations letter on every engagement and
provide suggestions as to its form, content and guidance on how it is to be used as
audit evidence and actions to be taken if client refuses to provide representations.
These letters are dated as of the date of the auditor’s report ordinarily the last day of
field work and are usually signed by both the client chief executive officer and the
chief accountant. A client representations letter should never be used as a substitute
for performing other audit procedures. The financial statements already constitute
written representations by the client hence representation letter does little more than
assert that the original representations were correct.

Purposes of representations letter

1. To remind the client’s directors of their primary responsibilities for the

financial
2. statements.
3. Documents in the audit working papers, client responses to the significant
questions
4. asked by the auditor during the engagement.
5. at times a representation letter may be the only evidence available in respect to
management future intentions e.g. whether a maturing debt is classified as a
current or long term liability will depend on whether management has both the
ability and intent to refinance the debt.

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management may be unwilling to sign letters of representation or pass minutes
required by the auditor. if management declines, the auditor should inform the
management that he will himself prepare a statement in writing setting out his
understanding of any representations that they have been made during the course of
the audit and send this statements to management with a request for confirmation that
the auditor’s understanding of the representations is correct.

if management disagrees with the auditor’s statement of representations, discussions

should be held to clarify the matters in doubt and if necessary a revised statement
prepared and agreed. Should management fail to reply, the auditor should follow up
the matter to ensure the position as set out in his statement is correct

in rare circumstances, the auditor may be completely unable to obtain written

representations which he requires e.g. because of the refusal by management to
cooperate or because management declines to give proper representations required on
the ground of its own uncertainty regarding that particular issue. in such
circumstances, the auditor may have to conclude that he has not received all
information and explanations required and consequently may need to consider
qualification his audit report an ground of limitation in scope of the audit.

ISA 620 Using the work of an expert

The auditor should obtain sufficient appropriate audit evidence that the work of the
expert is adequate for the purpose of the audit.

An expert is a person possessing specialized skills, knowledge and experience in

another field other than auditing and accounting. From his experience, an auditor only
has general knowledge on matters outside his profession and is not expected to have
the skills of a person trained or qualified to work in another profession .Consequently,
the auditor may need the advice of another expert for example, a pharmacist when
verifying stock in the laboratory or lawyers in arriving at the legal interpretation of
legal cases against a client.

Situations where the auditor may require work of an expert

1. The legal interpretation of contracts, laws and regulations.
2. valuations of certain types of assets e.g. precious stones, minerals and buildings
and machines.
3. Actuarial valuation e.g. for pension funds.
4. When measuring the work to be completed in construction contracts.

in deciding whether to use the work of an expert the auditor should consider

a. The materiality of an item being examined in relation to the financial statements

as a whole.
b. The nature and complexity of the item including the risk.
c. The audit evidence available in respect with the item.

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Factors considered before relying on the work of the expert

The auditor should consider;

1) The skills and competence of the expert. The auditor should consider this by
examining the expert’s professional qualifications, licenses or membership of an
appropriate professional body. The experience and reputation of the expert in the
field in which the auditor is seeking evidence is very important.
2) Objectivity and independence of the expert.. The auditor should consider
whether the expert is independent from the client. The risk of independence being
impaired increases where the expert is employed by the client. in such cases he
owes his loyalty to the client because there exists a financial relationship.
3) The source of the data used by the expert in arriving at his opinion. if the source
of the data can be regarded as reliable, then the auditor can reasonably use the
work of the expert as audit evidence.
4) The assumptions and methods used. The auditor should consider whether the
methods used by the expert in arriving at his opinion are appropriate to the
circumstances. he should also obtain an understanding of those assumptions and
methods to determine that they are reasonable based on the auditor’s knowledge
of the client’s business and
5) the results of his other audit procedures.

Communication with the expert

When consulting an expert the auditor should cover:

1) Objectives and scope of his work

2) an outline of the item the auditor expects to be covered in the report.
3) The intended use of the expert work by the auditor and disclosure to third parties
as to the expert’s identity and extent of involvement
4) Clarification of the expert’s relationship with the client.
5) The confidentiality of the client information.
6) assumptions and the methods the expert intends to use. These will be evaluated
for reasonableness by the auditor.
7) recording of any further information as audit evidence.

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BAB 1401 AUDIT PRACTICE & INVESTIGATION YEAR 4 SEM 1 23