What is Audit Planning
The audit process can usually be broken down into three phases. This includes planning the audit phase, performance of the audit and the reporting phase.
The audit planning stage or phase includes the process of gaining an understanding of the client and their business, making risk and material assessments, determining the audit strategy and the type of evidence to collect based on the risk levels.
The performance of the audit refers to the process of collecting evidence. And, finally, the reporting phase is the process of making conclusions, issuance of the independent audit report and reporting necessary adjustments to management.
Audit planning is important because all auditors must plan and perform the audit to reduce audit risk to acceptable and low levels consistent with the objective of the process. The auditor should plan the timing, nature, and extent of the direction and supervision of the engagement team and review their work.
The main reasons for audit planning includes:
- To be able to identify areas of risk of material misstatements
- To be able to design audit procedures that address these risks and get sufficient evidence
- To be able to help keep the cost of audit reasonable
- To be able to avoid and prevent misunderstandings with the client.
Audit planning for New Clients
If a potential new client contacts you and asks you to be their auditor because the previous auditor has resigned. However, the company is known for being ‘shady’ and it needs to raise money for ongoing operations. What should the auditor be careful and wary of?
New client matters may involve important issues involving legal liability, fee issues, ongoing concern issues, and previous auditor issues. A new auditor should consider any potential integrity issues with the new client. This includes if the client is notorious for fraudulent manipulations, prone to making unauthorised changes. If fraud-related issues arise, this is a huge problem for the client and the auditor as well, because the auditor has a duty of care to clients and users of the audit report.
The auditor should also consider the overall financial state of the client. This includes if the client is able to survive another year in business or if it’s only struggling to break even. The auditor should also make sure that the client can pay the audit fees. Auditors must be paid for their external or internal audit services.
Finally, auditors might need to contact the former auditor to ask about specific issues that require special attention about the client.
Audit planning for Continuing Clients
With continuing clients, audit reports from the previous year should not influence the audit process for the new year. Auditors must consider new issues and be careful about them. Auditors should gain an understanding of the client and make necessary risk assessments. They should also identify transactions that need special attention like complex investments, assess risks of fraud, and ongoing concerns and issues.
Gaining an understanding of the client involves:
- Having knowledge of the business environment and industry
- Knowing what regulatory or inherent risks are present and if there are unique accounting rules used.
- Knowledge of the major source of the revenue of the client and its key customer and suppliers.
- Know related parties that the auditor should be aware of
- Understand the general business processes and operation of the client and review of the Board of Director’s minutes.
In audit planning, auditors should consider several factors that may potentially or possibly impact the financial statements of their clients and tackle or address risks properly to accomplish their duty with care of users that demand and rely on the audit opinion or report.
Examples of audit planning scenarios and things to consider.
- An employee replaces another one who was terminated who received 10,000 stock options at an exercise price of $5.00. Accounting stock options have inherent risks because a lot of judgment is involved due to the volatility in the fair value of stock options. Severance issues are also accounting issues that need attention.
Acquisition of a subsidiary completed in the current quarter. Final judgment was made to the deal. Instead of a pure cash deal, sellers agreed on taking convertible debenture. This may present consolidation problems or issues in the accounting process. Currency issues have a high and inherent risk because of exchange rate risk and the process of accounting for them. There is also complexity in accounting convertible debt, therefore, auditors must coordinate with foreign auditors regarding international conditions.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.