Auditing and investigation acc 412

Planning process

Both the IFAC and ICAN codes give the following fundamental ethical principles namely:
(a) Integrity: The principle of integrity imposes an obligation on all professional accountants to
be straightforward and honest in all professional and business relationships. Integrity also
implies fair dealing and truthfulness. A professional accountant shall not knowingly be
associated with reports, returns, communications or other information where the professional
accountant believes that the information:
(i) Contains a materially false or misleading statement;
(ii) Contains statements or information furnished recklessly; or
(iii Omits or obscures information required to be included where such omission or obscurity
would be misleading. Where such issues as above have arisen, a professional accountant shall
take steps to be disassociated from that information and is advised to issue a modified report..
(b) Objectivity –A professional Accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments. A professional accountant
may be exposed to situations that may impair objectivity. A professional accountant shall not
perform a professional service if a circumstance or relationship biases or unduly influences the
accountant’s professional judgment with respect to that service.
(c) Professional Competence and Due Care – The Accountant has the obligation to maintain
professional knowledge and skill at the level required to ensure that a client or employer
receives competent professional services based on current developments in practice, legislation
and techniques and act diligently and in accordance with applicable technical and professional
standards. Members shall act diligently and in accordance with applicable technical and
professional standards. Professional competence may be divided into two separate phases:
(a) Attainment of professional competence; and
(b) Maintenance of professional competence. The maintenance of professional competence
requires a continuing awareness and an understanding of relevant technical, professional and
business developments. Continuing professional development enables a professional
accountant to develop and maintain the capabilities to perform competently within the
professional environment. Diligence encompasses the responsibility to act in accordance with
the requirements of an assignment, carefully, thoroughly and on a timely basis.
(d) Confidentiality – The Accountant has the obligation to respect the confidentiality of
information acquired as a result of professional and business relationships. He should
therefore, not disclose any such information to third parties without proper and specific
authority, unless
there is a legal or professional right or duty to disclose. He must not use such information for
his personal advantage or that of third parties. The need to comply with the principle of
confidentiality continues even after the end of relationships between a professional accountant
and a client or employer. However, when a professional accountant changes employment or
acquires a new client, the professional accountant is entitled to use prior experience. A
professional accountant shall maintain confidentiality, including in a social environment, being
alert to the possibility of inadvertent disclosure, particularly to a close business associate or a
close or immediate family member. A professional accountant shall maintain confidentiality of
information within his firm or employing organization including information disclosed by a
prospective client or employer. . Circumstances where professional accountants may disclose
Confidential Information The following are circumstances where professional accountants are
or may be required to disclose confidential information or when such disclosure may be
appropriate:
(a) Disclosure is permitted by law and is authorized by the client or the employer;
(b) Disclosure is required by law, for example:
(i) Production of documents or other provision of evidence in the course of legal proceedings;
or
(ii) Disclosure to the appropriate public authorities of infringements of the law that come to
light; and
(c) There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with the quality review of a member body or professional body;
(ii) To respond to an inquiry or investigation by a member body or regulatory body;
(iii) To protect the professional interests of a professional accountant in legal proceedings; or
(iv) To comply with technical standards and ethics requirements.
In deciding whether to disclose confidential information, relevant factors to consider include:
(a) Whether the interests of all parties, including third parties whose interests may be affected,
could be harmed if the client or employer consents to the disclosure of information by the
professional accountant;
(b) Whether all the relevant information is known and substantiated, to the extent it is
practicable; when the situation involves unsubstantiated facts, incomplete information or
unsubstantiated conclusions, professional judgment shall be used in determining the type of
disclosure to be made, if any;
(c) The type of communication that is expected and to whom it is addressed; and
(d) Whether the parties to whom the communication is addressed are appropriate recipients.
(e) Professional Behavior - The principle of professional behavior imposes an obligation on all
professional accountants to comply with relevant laws and regulations and avoid any action
that may discredit the profession. This includes actions that a reasonable and informed third
party, weighing all the specific facts and circumstances available to the professional accountant
at that
time, would likely to conclude that it would adversely affect the good reputation of the
profession. In marketing and promoting themselves and their work, professional accountants
shall not bring the profession into disrepute. Professional accountants shall be honest and
truthful and not:
(a) Make exaggerated claims for the services they are able to offer, the qualifications they
possess, or experience they have gained; or
(b) Make disparaging references or unsubstantiated comparisons to the work of others.

AUDIT PLAN

An audit plan is an overview of the engagement that outlines the nature and characteristics of
the client and its environment and the overall audit strategy. It highlights the preparations
made for one specific audit engagement. A typical audit plan includes details on –
1. Objectives of the audit (e.g reporting to shareholders, special- purpose audit or reporting to
any other party).
2. Nature and extent of other services to be performed for the client e.g taxation services.
3. Timing and scheduling of the audit work – what to do before balance sheet date, on the
balance sheet date or after, including dates for cash count, observing of inventory, third party
confirmations/circularization.
4. Description of the client company and its environment.
5. Work to be done by the client staff eg production/presentation of T/balance, schedules,
reconciliations etc
6. Staffing requirements during the engagement.
7. Discussions among team members about significant risks.
8. Target dates for completing major segments of the engagement eg consideration of internal
control, audit report, filing of tax returns etc
9. Significant risks of material misstatement due to fraud or error and auditor’s response to
those risks.
10. Preliminary judgments about materiality levels for the engagement. With respect to the
auditor’s consideration of fraud, it is important to document in the audit plan the following –
i. Discussions among team members about fraud risks held during planning.
ii. Procedures performed to identify fraud risks.
iii. The fraud risks identified and the response to those risks.
iv. Any other conditions that caused the auditors to perform additional fraud related
procedures.
v. The nature of any communication made to management, audit committee or any other party
about fraud. Note: Audit plan is drafted before the start of work at the client’s office but may
be modified throughout the engagement as special problems are encountered and areas
requiring more or less audit work emerge.
Preliminary Engagement Activities Prior to planning any current engagement, the auditor
performs some preliminary engagement activities. These include:
i. Procedures regarding the continuance of the client relationship and the specific audit
engagement. He needs to find out if there are issues with management integrity that may affect
the auditor’s willingness to continue with the engagement. There is also the need to ensure
that there is no misunderstanding with the client as to the terms of the engagement.
ii. Evaluation of compliance with ethical requirements, including independence.

iii. Establishing an understanding of the terms of the engagement.

Note: Procedures (i) and (ii) occur throughout the performance of the audit as changes in
circumstances occur.

The Planning Process (Points for Consideration in Audit Planning It is important that the
planning is documented in a document called the Audit Planning Memorandum. The planning
process will involve:

1. Review of previous years’ working papers for key issues and problem areas (for a continuing
engagement).
2. Considering the impact of any changes in legislation, auditing or accounting standards,
especially in relation to their effects on the operations and/or reporting requirements of the
enterprise.
3. Considering the background of the client and any changes in the industry or issues that may
affect the audit work.
4. Considering changes in the business, its management or ownership. A change in the CEO,
CFO, a new management structure, establishment of a new business line, new branch etc will
result in significant changes in the circumstances of the company that will affect the audit plan.
5. If there are changes in systems, accounting procedures and policies, review their effect on
the audit.
6. Carry out analytical review of management accounts and note key performance indicators
(KPIs).
7. Decide on the audit approach (substantive, systems-based or risk-based).
8. Agree on timing of the audit work – interim, final including established deadlines for the
submission of audit report.
9. Agree on time for availability of draft accounts, supporting schedules, analyses and
summaries by client.
10. Evaluate internal controls and decide on level of reliance to be placed on them.
11. Consider the use of experts, if necessary, and incorporate in plan.
12. Plan rotational visits and testing, where many branches exist.
13. Work out time budget.
14. Plan and arrange staffing requirement and decide on likely fee chargeable.
15. Organize liaison with the audit committee (if any) and joint auditors, in case of group
audits.
BENEFITS OF AUDIT PLANNING
1. The audit objective is established and achieved.
2. Attention is devoted to important areas of the audit, that is, to critical and high risk areas.
3. Potential problems are identified and resolved on timely basis.
4. The resources needed for the engagement, including the use of experts, are identified and
procured.
5. Works are properly/appropriately assigned to engagement team members. 6.
The audit engagement is properly organized and managed for effectiveness and efficiency.
 7. The direction and supervision of the audit, including the review of the works of team
members, are facilitated.
8. The co-ordination of the works of joint auditors ( in the case of a group audit) and experts
are facilitated.
9. The audit engagement is completed economically and within time schedule.
DECIDING ON AUDIT STRATEGY
The audit strategy sets the scope, timing and direction of the audit and guides the
development of detailed audit plan. Establishing the audit strategy involves –
a. Determining the characteristics of the engagement that define its scope, such as the
reporting framework used, industry-specific reporting requirements (eg banks, insurance
companies etc) and the location of the components/branches of the entity.
b. Ascertaining the reporting objectives of the engagement to plan the timing of the
audit and the nature of communication required (eg deadlines for interim and final reporting,
key dates for expected communication with management and those charged with Governance.
c. Considering the important factors that will determine the focus of the engagement team’s
efforts e.g. preliminary determination of high risk areas, determination of appropriate
materiality levels, and assessment of the strength of internal control, identification of recent
entity-specific, industry financial reporting or other relevant developments.

FACTORS TO CONSIDER IN DETERMINING AUDIT STRATEGY

i. Auditor’s responsibility under the terms of the engagement:
In addition to regulatory or statutory requirements (e.g Company’s Act provisions regarding
audit), the auditor should consider whether additional responsibilities arise from request by the
client’s management such as accountancy or taxation work or because the client is required to
conform to special regulatory requirements.
ii. The nature of the client’s business and organization:
It is essential to have a good knowledge of the client’s business as well as the industry in which
it operates, including its products and services, important customers, significant contracts and
suppliers, the accounting system, the control environment (directors and mgt.’s attitude to
internal control) etc. Knowledge about the business and organization could be obtained from
●Company’s interim and management accounts, including annual reports and procedures
manual.
●Previous years’ audit files
● Published materials about the client’s company and the industry
● Policy statements and minutes of board and committee meetings.
● Legal documents ,lease and loan agreements, feasibility reports etc
● Tour of the principal places of business.
iii. The nature and significance of items in the accounts:
A very important factor in the determination of audit strategy is a review of the recent
accounts and other financial information to assess the significance of items appearing in the
balance sheet.
Obtain information on the nature and approximate volume of transactions resulting in
significant account balances. Subject insignificant account balances to limited audit procedures.
A key feature of the entity’s accounting system and the effectiveness of the control system:
 To evaluate the potential for reliance on internal control in respect of significant items in the
accounts, it is essential to gain a preliminary understanding of the key features of the entity’s
accounting system that gave rise to the items together with the related internal controls. Note
methods of and control over processing and recording of significant transactions/items.
Document your preliminary understanding and evaluation of the potential for reliance on
internal control. Any apparent weakness in internal control should be brought to the attention
of the client. Summary of steps for preparing Audit strategy
i. Identify/State the client to be audited and the relevant reporting period/year end.
ii. Identify the key characteristics of the client, that is, the nature of the client business
and the industry in which it operates. State the type of audit to be conducted and the
financial reporting framework.
iii. Give key dates/timing (i.e. timetable) for various stages/aspects of the audit – interim,
final, staff briefing meeting, meeting with audit committee, approval of financial
statements by management, issue of final report.
iv. Overview of the audit approach
v. Materiality determination/setting materiality levels for various transaction cycles
vi. Risk assessment and identification of high risks areas
vii. Specific audit approach and extent of compliance/substantive testing required.
viii. Review of events after the reporting period – areas of focus.
AUDIT STRATEGIES
The three broad audit approaches are:
1. Vouching/Substantive Approach: This approach is often adopted for the audit of small
organizations where the internal control system is weak, there is limited number of staff and
therefore there is great need to test a large number of transactions. This audit approach
involves complete examination of the transactions of the business together with the
documentary evidence of sufficient validity to satisfy the auditor that the transactions are in
order, properly authorized and accurately recorded. The auditor traces the transactions to
their sources in order to ascertain their full origins and meanings. Generally, vouching audit is
useful in:
● Very small organizations with few transactions.
● Organizations where the system of internal control is weak or nonexistent
● Specialized audits which require investigations such as those of trust, estate, church,
mosque, charity etc.
● Checking of non-recurring, material, unusual and extraordinary items.
● When the auditor is put on enquiry
2. Systems-based Approach: This approach relies on the controls contained in the client’s
financial system to validate accounting records. It is a system to determine what reliance can be
placed on the established controls to ensure that resources are being managed effectively and
financial information provided accurately especially for reporting purposes. Additionally, a
system based audit is an audit of the internal controls in a system. The auditor tests the
controls by means of testing a sample of transactions taken to be representative of the types of
transactions checked by the particular control or set of controls the auditor is testing. Two
procedures may be adopted in a system audit:
 i. Compliance tests which seek evidence that a good and reliable system of control as
established in the organization is being maintained.
Ii. Substantive tests are designed to ensure that the system of controls that have been
established continue to operate at all times confirming the validity, completeness and accuracy
of recorded transactions. The essence is to determine whether especially, because of the
volume of transactions, the sample of the population selected for testing is representative of
the whole population for the purpose of expression of opinion thereof.
Moreover, any balance sheet items or unusual transactions which have not gone through
normal accounting system are subjected to detailed testing (substantive testing). Generally,
Systems Audit is useful in the following areas:
(i) Tests seeking evidence that the internal controls are being applied as prescribed.
These are called compliance tests.
(ii) Once the compliance tests have been completed, further tests may be required to
substantiate the entries in the figures in accounts and the evaluation of financial
information by a study of plausible relationship among both financial and nonfinancial
data.
(iii) When an auditor investigates a system by identifying the control objectives of the
system and evaluating the system’s internal control on paper, the auditor should
determine whether the internal controls that currently exist appear to be adequate.
3. Risk-based Auditing/approach: This approach is adopted for very large organizations or
organizations with excellent internal control system. It is an efficient way of auditing large
organizations where errors or misstatements have to be fairly large to have any impact on the
financial statements. The logic is that errors or misstatements will not arise from wrong
recording of transactions but will have their source in identified areas of risk – either
operational risks arising from the nature of the business or from the complexity of the
accounting system. Thus, the auditor in this strategy carries out a limited amount of testing of
transactions and balances and concentrates efforts on analyzing the business risks faced by the
organization. The auditor determines, by applying judgment, what levels of risks pertain to
different areas of the client systems and designs appropriate audit tests. Emphasis of the audit
work is directed at areas in which the financial statements are mostly likely to be misstated
materially. In effect, audit costs are likely reduced. The risk that the auditor will give
inappropriate opinion is also reduced.

ASSIGNMENT
An audit plan is an overview of the engagement that outlines the nature and characteristics of
the client and its environment and the overall audit strategy. It highlights the preparations
made for one specific audit engagement. To evaluate the potential for reliance on internal
control in respect of significant items in the accounts, it is essential to gain a preliminary
understanding of the key features of the entity’s accounting system that gave rise to the items
together with the related internal controls. DISCUSS