CHAPTER 4
AUDIT PLANNING
LEARNING OBJECTIVES
• Define audit engagement letter and its contents
• Discus the commencement of a new audit and outline the steps in the audit
planning process
• Explain audit program its advantages and disadvantages
• Describe audit note book its contents and advantages
• Explain the audit working papers its objectives ownership and general
guidelines
AUDIT ENGAGEMENT LETTER
• Audit engagement letter is a formal written agreement between the
auditor and the client which outlines the terms and scope of an audit
CONTENTS OF A ENGAGEMENT LETTER
• Audit objectives
• Management’s responsibility for the financial statements
• Scope of audit
• Form of communication
• Limitations of audit
• Unrestricted access to records
• Planning of audit
• Representations
CONTENTS OF ENGAGEMENT LETTER
• Confirmation of terms
• Description of other communication
• Remuneration for services
• Involvement of other auditors
• Involvement of internal auditor
• Predecessor auditor
• Further engagements
COMMENCEMENT OF A NEW AUDIT
• The steps are:
• Receiving the appointment letter
• Communication with existing auditor
• Appointment confirmation
• Legal documents
• Prospectus issued during the year
• Inventory observation
• Nature of business
• System of accounting
• Internal control system
• Reason why the auditor was changed
AUDIT PLANNING
• Steps in the planning of audit are:
• Discussion with the client
• Review of audit documentation
• Recent developments
• Interim financial statements
• Non-audit personnels
• Staff requirements
• Timing
• Outside assistance
• Scheduling with the client
• Pronouncements
AUDIT PROGRAM
• Audit program is the set of policies and procedures that dictate how auditing is
to be implemented
• Usually it involves the use of software and internal work performed by an
auditor to collect and evaluate evidence
• Organizations prepare audit program based on operational planning
• Formalities of audit program depends on the size of the organization
• Audit program is the last step in the completion of planning faze of audit
AUDIT PROGRAM
• By preparing the audit program the auditor makes following decisions regarding the
scope of audit procedures
• Nature
• Timing
• Extent of procedures
• Responsibility of a person
• Also known as tailored made audit program
• The purpose of audit program is to coordinate audit work, procedures, responsibility,
and its completion
ADVANTAGES OF AUDIT PROGRAM
• Verifies the audit objectives
• Estimation of audit staff requirement
• Allocation of work
• Guidance to audit staff
• Reduce risk of omission
• Provision of audit staff
• Transfer of work
• Increase efficiency of audit staff
• Timely completion of work
• Review of work
• Useful for future
DISADVANTAGES OF AUDIT PROGRAM
• Dynamic systems
• Awareness of client
• Protects inefficient audit clerks
• Needs appropriate revision
• Risk of mechanical repetition
• Risk of disclosure
• Not suitable for small audit
AUDIT NOTE BOOK
• For each individual audit the auditor usually maintain a separate audit
note book which contain the records of important matters which are
encountered while conducting audit of accounts in certain companies
• The note book serves as an evidence to show the exact work done by
the auditor
CONTENTS OF AUDIT NOTE BOOK
• Name of business concern
• Audit program
• Extracts of legal documents memorandum of association, minutes,
articles of association, contracts, agreements, etc
• Organizational structural management
• A complete record of the exact nature of work done with dates of
commencement and completion
• Instructions from management on matters of audit
CONTENTS OF AUDIT NOTE BOOK
• Notes of all the errors and frauds detected
• Total balances of important accounts
• Extracts from all correspondence
• Observations creating doubts during audit dwork
• Irregularities in adopting rules and regulations of business
• Points for which queries were made and further explanations and
certifications needed
ADVANTAGES OF AUDIT NOTE BOOK
• Helps in preparing audit report
• Helps auditor in case any suit is filed against him/her
• Audit note book serves as a guide for next auditor
• Information recorded in the audit note book shows the interest taken by
the auditor
• Acts as an evidence for the effort put by the auditor in the course of
discharging the duties
AUDIT WORKING PAPERS
• Audit working papers record all the work done by the auditor which is
obtained during the audit work
• Audit documentation is the property of auditor including documents
prepared by the client at the auditors request
• Companies ordinance 1984 requires audit documentation to be
pertained for 5 years from the date of engagement letter
OBJECTIVES, IMPORTANCE, AND NEED OF
WORKING PAPERS
• Prepare records
• Effectiveness of internal control system
• Tool for staff training
• A guide for subsequent audit
• Location of lost data
• Audit report
• Decision making
OWNERSHIP OF WORKING PAPERS
• The auditor has the ownership of working papers
• The auditor can adopt reasonable procedures for safe custody of
papers
• Auditor should keep secrecy of accounts
• The auditor should respect the confidentiality of the information
acquired
• The auditor should keep audit working papers for five years
FILING OF WORKING PAPERS
• Permanent files are use to retain auditing data
• It includes:
Memorandum and Articles of Association
Business registration certificate
Business License
Franchising certificate and agreements
Business agreements with bank, suppliers and customers
GENERAL GUIDELINES FOR THE PREPARATION
OF WORKING PAPERS
• General guidelines for the preparation of working papers are:
• Completeness and accuracy
• Clear and understandable
• Pertinence
