THE CATHOLIC UNIVERSITY OF EASTERN AFRICA

A.M.E.C.E.A
SCHOOL OF BUSINESS
BCOM- INTRODUCTION TO AUDITING (CAC- 312)

CHAPTER 3

AUDIT PLANNING, CONTROL & RECORDING

(ISA 300)
Chapter objectives
After you have studied this chapter, 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,

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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.

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 ND ASURANCE

Introduction
Audit 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.

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.

Industry context

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
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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. 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.
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•• 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.

Client: Price well Ltd.

Year end: 31 /12/2018
Control testing: Bank reconciliation

T EX T
Prepared by: ……………………
Received by: ………………… ...
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Audit procedure Timing Extent Responsibility

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Inquiry whether the bank reconciliations
Interim

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are prepared independent of July reconciliation Audit assistant
visit
maintenance of the cash book.
Inspect evidence of performance of
bank reconciliations by client staff.
Ensure that the person performing the September
reconciliations signed and dated the
reconciliations. Final and Audit assistant.
visit October
Ensure the reconciliations were
done by the person proposed at the reconciliations
appropriate time and the supervisor
signed the reconciliation as evidence
of his review.
Problems in developing and implementing audit plan.
•• A company may have many clients with similar year ends. This will make allocation of
time and audit staff difficult.
•• 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.
•• Lack of co-operation from client e.g . providing information and explanations in good time
is normally difficult for the client3. This will be the major challenge for the auditor
especially with a client who does not have proper accounting and internal control system
taff turnover in an audit firm. This inevitably interferes with the audit plan because it gives
rise to unplanned staff shortages.
Audit planning procedures

In 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.
4. 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.
5. Consider any accounting standards and legislations that could have an impact on the
audit of the new client.
6. 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.
7. 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.
8. 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

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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

•• To meet professional requirements. Audit staff employed by the firm should adhere to
the principles of independence, objectivity, confidentiality and professional behaviour.
•• 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.
•• Assignment. Audit work is to be assigned to personnel who have the degree of
technical training and proficiency required in the circumstances.
•• 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.
•• Consultation. Where necessary, consultation within and without the firm should be
carried out with those with appropriate knowledge.
•• 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.
•• Monitoring. The firm should continuously monitor the adequacy and operational
effectiveness of quality control policies4 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

i. 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.
ii. 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.
iii. 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.
iv. 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.

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
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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
•• To promote compliance with professional standards and other technical
pronouncements.
•• To provide reasonable assurance to users of financial statements that professional
standards have been complied with in performance of audit and related services.
•• To promote uniform application of generally accepted methods of professional
practice.
•• To gain increased user confidence in the reliability of audited financial statements.
•• To establish a mechanism of continuous quality improvement in professional practice
and a self regulatory framework for policies and procedures.
•• To enhance the status and image of accounts to the public through assurance of
compliance and quality in performance of audit and related services.
•• 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.
•• To help identify weaknesses in the audit process and provide technical assistance for
professional development.

Reasons for introducing Peer Review

•• There is desire on the part of professional bodies worldwide to ensure that members
apply and observe professional standards.
•• The institute of certified public accountants of Kenya (ICPAK) deems it appropriate to
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ensure adherence to existing technical standards through this mechanism of monitoring
compliance.
•• It is better for professional bodies to be self regulating than being regulated by the
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 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.
•• 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.
• Preparation of working papers enables to auditor to adopt a methodical approach to
his work.
•• Working papers assist in planning and performance of audit in future financial periods.
•• If sued for negligence, the auditor can use the working papers as evidence for work
done.
•• 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 mightXT
typically be contained therein.

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•• Information of continuing importance to the audit such as letter of engagement and

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memorandum of association.

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•• Planned audit approach as contained in the planning memorandum
•• Auditors assessment of client’s accounting system, his review and evaluation of internal
controls
•• Details of work carried out, not as of errors or exceptions noted and action taken
together with conclusion drawn by audit staff.
•• Evidence that the work of staff has been properly reviewed.
•• Record of relevant balances and other financial info that is subject to the audit.
•• Analysis of significant ration and trends
•• Copies of communications with other auditors, expects and other third parties.
•• Letters of representation received form management.
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.
It contains:
•• Statutory material governing the conduct of the audit e.g. for companies, the
companies Act Cap 486 and for quoted companies in Nairobi Stock Exchange, the
NSE booklet of regulation are required.
•• Rules and regulations of the entity e.g. articles of association or a partnership deed.
•• Copies of documents of continuing importance and relation to the auditors e.g. minutes
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of meetings that recorded the appointment of the auditor, guarantees and indemnities
entered into.
•• Address of registered office and all other premises with a short description of the
work carried at each of those premises.
 •• Organizational chart showing the principal departments and subdivision thereof and
names of officials and their responsibilities showing clearly the lines of authority.
•• A list of directors, their shareholding and service contracts.
•• A list of company’s advisors, bankers, lawyers, stock brokers and valuers.
•• An outline of history of the organization reserves and share capital.
•• 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:
•• A copy of the accounts being audited which must be signed by the directors.
•• A file index showing contents of the file
•• A detailed description of internal control system in form of flow charts, questionnaires
or any other form of suitable documentation.
•• Audit programme showing the audit objective and planned audit procedures for each
of the areas to be audited.
•• A schedule of each item in the balance sheet showing the balance at beginning of the
year, changes during the year and the statement of financial position at the end of the
year. The schedule also shows details of work performed on each balance, the result
and conclusion made.
•• A schedule of the items in the statement of profit and loss account and comprehensive income
It will show the details of work
performed on each balance the result and conclusion reached.
•• A check list for compliance with statutory disclosure requirements and accounting
standards.
•• A record of questions raised during the audit and those raised in the previous

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audit.
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•• A schedule of important statistics such as net profit margin, liquidity ratios and

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composition of sales.
•• A record or an abstract form minutes of all director’s meetings and of any internal

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committee whose deliberations are important to the auditor.
•• The management letter setting out weakness of the internal control system.
•• Letters of representation obtained from client’s management.

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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

•• This improves the efficiency with which working papers are prepared because they will
be used for many clients
•• They act on guidelines for instructions to audit staff and facilitate delegation of work.
•• They provide a means to control the quality of audit work by ensuring that minimum
quality standards are maintained.
•• Ensures that all relevant issues in the audit are addressed.
Disadvantages
•• 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.
•• The initiative of auditor staff may be restricted because the need to exercise
judgment in preparing working papers is eliminated.
•• The client staff may become familiar with the method and perpetuate fraud in areas not
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covered by the standard working papers.
•• The audit work becomes very mechanical with use of standardized working papers.
 ATTEMPT THE FOLLOWING QUESTIONS

QUESTION ONE
Audit planning process allows the audit senior to acquire adequate knowledge about the entity.
This process ensures an effective control and review of audit work.

Required;
a) Explain the auditor’s planning process when planning for an audit of a new client.
b) How does audit planning assist in the conduct of an audit?
c) Explain the following controlling procedures in a well planned audit:
• Direction and supervision of work
• Review and co-coordination of work
• Quality controls

QUESTION TWO
You are an audit senior responsible for understanding the entity and its environment and assessing
the risk of material misstatements for the audit of Rock for the year ending 31 December 2018,
Rock is a company listed on a stock exchange. Rock is engaged in the wholesale import,
manufacture and distribution of basic cosmetics and toiletries for sale to a wide range of stores,
under a variety of different brand names. You have worked on the audit of this client for several
years as an audit junior.

Required:
(a) Describe the information you will seek, and procedures you will perform in order to
understand the entity and its environment and assess risk for the audit of Rock for the
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year ending 31 December 2018

(b) You are now nearing the completion of the audit of Rock for the year ending 31
December 2018. Draft financial statements have been produced. You have been given
the responsibility of performing a review of the audit files before they are passed to the
audit manager and the audit partner for their review. You have been asked to concentrate
on the proper completion of the audit working papers. Some of the audit working papers
have been produced electronically but all of them have been printed out for you. Describe
the features of those working papers that show that they have been properly completed.

QUESTION THREE

ISA 230 Audit Documentation (Revised) establishes standards and provides guidance regarding
documentation in the context of the audit of financial statements.

Required:
a) List the purposes of audit working papers. (3 marks)
b) The time is now towards the end of the audit, and you are reviewing working papers
produced by the audit team. An example of a working paper you have just reviewed is
shown below.

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Client Name Specs4You Co
Working paper Payables transaction testing
Year end 30 April 2018
Prepared by ……………………..
Reviewed by ……………………

Audit assertion: To make sure that the purchases day book is correct.
Method: Select a sample of 15 purchase orders recorded in the purchase order system. Trace
details to the goods received note (GRN), purchase invoice (PI) and the purchase day book
(PDB) ensuring that the quantities and prices recorded on the purchase order match those on
the GRN, PI and PDB.
Test details: In accordance with audit risk, a sample of purchase orders were selected from a
numerically sequenced purchase order system and details traced as stated in the method.
Details of items tested can be found on another working paper.
Results: Details of purchase orders were normally correctly recorded through the system. Five
purchase orders did not have any associated GRN, PI and were not recorded in the PDB.
Further investigation showed that these orders had been cancelled due to a change in spectacle
specification. However, this does not appear to be a system weakness as the internal controls do
not allow for changes in specification.
Conclusion: Purchase orders are completely recorded in the purchase day book.

Required:
Explain why the working paper shown above does not meet the standards normally expected of

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a working paper.

QUESTION FOUR

International Standard on Auditing 300, (Planning an Audit of Financial Statements) states that
an auditor must plan the audit.
Explain why it is important to plan an audit.

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