M A Wahab Akanda FCA

Head of Operation - HQ,

CF Global, Dubai, UAE

Audit & Assurance

Chapter 7: Planning

The Need to Plan

If audits and other assurance engagements are conducted without making any plan:
 Time might be wasted doing the wrong work
 The really important work might not be done at all
 Ultimately, the wrong conclusion might therefore be drawn

Planning an engagement is a key aspect of the quality control associated with the
audit. If an audit is planned, then the right work is done, it is easier to supervise
and review that work, and therefore it adds to the quality of the whole
engagement.

In summary, planning helps the auditor know:

 What to do
 How much to do
 Where to focus resources
 What the important matters are that need dealing with

Overall Audit Strategy and Audit Plan

The key planning document is called an overall audit strategy. This covers the main
general areas of planning: materiality, risk, audit approach, use of experts and
internal audit, timing, budgets and deadlines.

An audit plan is more detailed than the strategy and sets out the nature, timing and
extent of audit procedures (including risk assessment procedures) to be performed by
the engagement team in order to obtain sufficient appropriate audit evidence.

Most of the audit firms have “audit packs” which have a specific planning section
and set out the key areas that auditors must consider when planning an audit.
However, care should be taken when using any standard forms, as there is a risk
that matters particular to the client might be forgotten. It is important to tailor
the plan to the client. Identifying key issues relating to the client and then adjusting
the audit approach will be necessary. This is why understanding the business and
risk assessment are very important.

The overall audit strategy and audit plan should be updated as necessary during the
course of the engagement.

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Materiality

Information is material if its omission or misstatement could influence the

economic decisions of users taken on the basis of the financial statement.
 Auditors should consider materiality when determining the nature, timing
and extent of audit procedures.
 Items might be material by value or nature.
 Materiality provides a threshold or Cut-off point.
 During planning, the auditors will often set a computed level of materiality,
often based on the following ranges:
 Revenue: 0.5% - 1%
 Profit before tax: 5% - 10%
 Gross Assets: 1% - 2%

 In addition, some matters might be material by nature, for example:

 Taka 1,000 that turns a profit into loss might be considered very
important by some companies/ shareholders.
 Some matters are automatically material, such as matters relating to
directors or related parties because these matters have to be
disclosed in financial statements regardless of the value of them.

 Auditors should always bear in mind that materiality is a matter of

professional judgment.

 Materiality is also important at the completion stage of an audit, when the

auditors are evaluating the effect of discovered misstatements.

Analytical Procedures

Analytical procedures mean evaluations of financial information made by a study of

plausible relationships among both financial and non-financial data. Analytical
procedures also encompass the investigation of identified fluctuations and
relationships that are inconsistent with other relevant information or deviate
significantly from predicted amounts.

The BSA 520 states that analytical procedures include:

 The consideration of comparison with:
 Comparable information for prior periods.
 Anticipated results of the entity, such as budgets or forecasts, or
expectations of the auditor, such as an estimation of depreciation.
 Similar industry information, such as a comparison of the entity’s
ratio of sales to accounts receivable with industry averages or
with other entities of comparable size in the same industry.
 Consideration of relationships between:
 Elements of financial information that would be expected to
conform to a predictable pattern based on the entity’s experience,
such as the relationship of gross profit to sales.

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  Financial information and relevant non-financial information,
such as the relationship of payroll costs to number of employees.

Benefits and Limitation of Analytical Procedures at the Planning Stage

Benefits

 Identifies items for attention that detailed tests may miss.

 Uses information outside accounting records, for example, budgets.
 Allows comparison of data from different sources.

Limitations

 A good knowledge of the business is required to understand results

 Consistency of results may conceal a material error
 There may be a tendency to carry out procedures mechanically, without
appropriate professional skepticism
 Requires an experienced member of staff to be done properly
 Reliable data may not be available

Ratios Applied for Analytical Procedures

These are the ratios that are needed for applying analytical procedures:

Performance

SL # Heading/ Ratio Purpose

1. Return on capital employed Effective use of resources
2. Return on shareholders’ funds Effective use of resources
3. Gross profit percentage Assess profitability before taking overheads
into account
4. Cost of sales percentage Assess relationship of costs to revenue
5. Operating cost percentage Assess relationship of costs to revenue
6. Net margin/ operating margin Assess profitability after taking overheads into
account

Short-term Liquidity

SL # Heading/ Ratio Purpose

1. Current ratio Assess ability to pay current liabilities from
current assets
2. Quick ratio Assess ability to pay current liabilities from
reasonably liquid assets

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Long-term Solvency

SL # Heading/ Ratio Purpose

1. Gearing ratio Assess reliance on external finance
2. Interest cover Assess ability to pay interest charges

Efficiency

SL # Heading/ Ratio Purpose

1. Net asset turnover Assess revenue generated from asset base
2. Inventory turnover Assess level of inventory held
3. Trade receivables collection Assess ability to turn receivables into cash
period
4. Trade payables payment Assess ability to pay suppliers
period

Sample Questions

1. Analytical review procedures are used by the auditor for a number of

purposes. Describe briefly the nature of these purposes during the
audit and the circumstances in which they will be used by the auditor.

Analytical review procedures should be used during the planning stage, during
field work and in the auditor’s review of the financial statements, to isolate
account areas which merit further investigation of trends which seem unusual.
Procedures will include ratio analysis, exception reporting and comparison with
industry and competitor standards. The auditor will consider current and
historical data and trends. The reconciliation of purchases, sales and inventory
by volume and quantity can be a useful technique.

The review forms part of the basis for the auditor’s conclusion on the financial
statements as well as useful and time saving information to assist in the planning
and conduct future audits.

2. The concept of materiality is fundamental to the work of auditors.

Matters that are immaterial are not reported in financial statements.
i. Explain the concept of materiality.
ii. Describe how materiality affects the audit work performed by
auditors.
iii. Give an example of qualitative materiality.

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How to answer (solve) a case/ question

The following general guidelines (i.e. steps) may be followed to solve a case:

1. At first read the requirements of the case/ question.

2. Look carefully the wording of the question.
3. Read the verbs of the requirements very carefully.
4. Read the case thoroughly keeping in mind the requirements of the question.
5. Answer the question ensuring timelines.

Important Verbs which normally have been mentioned in the questions

SL. No. Name of Verb Particulars/ Explanations

1. Define Give the meaning of
2. Identify Make clear
3. Describe Give the key features
4. Distinguish Define two different terms, viewpoints or concepts
on the basis of the differences between them
5. Compare and Explain the similarities and differences between
contrast two different terms, viewpoints or concepts
6. Contrast Explain the differences between two different
terms, viewpoints or concepts
7. Analyze Give reasons for the current situation or what has
happened
8. Assess Determine the strengths/ weaknesses/
importance/ significance/ ability to contribute
9. Examine Critically review in detail
10. Discuss Examine by using arguments for and against
11. Explore Examine or discuss in a wide-ranging manner
12. Criticize Present the weaknesses of/ problems with the
actions taken or viewpoint expressed, supported
by evidence
13. Evaluate/ critically Determine the value of in the light of the
evaluate arguments for and against (critically evaluate
means weighting the answer towards criticisms/
arguments against)
14. Construct the case Present the arguments in favor or against,
supported by evidence
15. Recommend Advise the appropriate actions to pursue in terms
the recipient will understand