Part-07AUDIT PLANNING PHASE

Way to Success, Paving way for your SuccessFPSC all tests preparation (Subscribe channel)www.youtube.com/channel/UCzKLIIALE4fRKaKYT1rwg7QSenior Auditor Videos Lectureshttps://www.youtube.com/watch?v=SXi2IGb9Xm4&list=PLRU_Qu5ts84bwVqBbkUNcEdK1pdzGnidG

Senior Auditor Facebook Grouphttps://web.facebook.com/groups/1293101957367756/English Grammar, Vocabulary Lectureshttps://www.youtube.com/watch?v=AzCcBRvdlPI&list=PLL-s2CngKN2qT7RCWVq8rkFG9v1FUDEJHCustom Inspector Video Lectureshttps://www.youtube.com/watch?v=38AhEGRmVxc&list=PLL-s2CngKN2rAhwky7KS7g5ghNqWwwi5YCustom Inspector Facebook Grouphttps://web.facebook.com/groups/153706491922374/WhatsApp+923335706226

Muhammad ZafarACMAM.Phil FinanceMA English , M.ComMA Political Science

AUDIT PLANNING PHASE

5.1 IntroductionUnder the existing guidance available to theField Audit Offices (FAOs), all the FAOs arerequired to prepare an Annual Corporate AuditPlan covering audit operations pertaining toCertification Audit, Compliance with AuthorityAudit and other audits like Performance Audit,Special Audit, Special Studies and Audit ofForeign Aided Projects.

This chapter contains guidance that theauditor can use to plan their RegularityAudit which includes Certification Auditand Compliance with Authority Audit.These guidelines do not replace the use ofprofessional judgment.

Individual audits must be planned toensure that:

appropriate and sufficient evidence isobtained to support the auditor's opinion;

the INTOSAI Auditing Standards arecomplied with; andonly necessary work is performed.

The planning phase involves the following:Determining the overall objectives and

scope of audit; *Understand the entity's business; *Assessing materiality, planned precision

and audit risk.Assessing the entity's system of internal

controls.

Determining the components by which theaudit will be conducted.*Determining Financial Audit and Compliance

with Authority Audit objectives, anderror/irregularity conditions *Assessing Inherent Risks and Control Risks.Determining the appropriate mix of tests of

internal control, analytical procedures andsubstantive tests of details.

* These steps of Planning Phase arecommon for both the Certification andCompliance withAuthority Audits, whereas the unmarkedsteps relate to Certification Audit only.

5.2 The Audit Team’s Responsibility in PlanningPhaseThe activities performed during the preparationof the Planning File are complex and varied.Each member of the audit team should checkthat they have a good understanding of theactivities that have been assigned to them. Fordetails, please refer to Chapter 7 of the FAM.

Based on the information noted above, head ofthe office is responsible for planning theactivities and associated resource requirementsin conducting audit. The Audit ManagementSoftware is a valuable tool to apply to this task.See Chapter 8 of the FAM and the AuditManagement Software Manual for additionalinformation.

It should also be noted that the INTOSAI AuditingStandards require that “Auditors should adequatelydocument the audit evidence in working papers,including the basis and extent of planning, workperformed and the findings of the audit”. Therefore,the audit team leader is responsible to check thatthe Planning File is complete and provides evidenceof the basis and extent of planning work performedby the audit team.

It needs to be highlighted that the audit strategyand methodology recommended under FAMprovide for continued quality assurance throughall the phases of audit. While reviewing theplanning phase, the functionaries entrustedwith the quality assurance of audit shouldensure that the various steps recommended inthese Guidelines and respective forms havebeen completely followed in all respects.

The key to maintaining the quality of theplanning process itself is a review of theplan, which the concerned Deputy AuditorGeneral (DAG) should supervise andapprove (Ref: FAM-Para 15.3).

5.3 Documentation in Planning PhaseTitles of various forms specified in the AuditWorking Papers Kit are listed below:Audit objectives and scope*Points for attention at next audit (from last

year)*Entity communication letter*Audit planning memorandum*Memorandum on post-planning changes*

Important dates*Tour programme *Information requested from entity officials*Materiality assessment formExpected aggregate error and planned precision

formAudit risk assessment formInherent risk assessment formInternal control questionnaire – control for overall

environment

Internal control questionnaire – generalcomputer controls

Internal control questionnaire –application controlsControl risk assessment formAnalytical procedures assurance formSource of audit assurance formList of applicable laws and regulations*

Sample selection checklistHigh value item selection form*Key item selection formSample sizing for tests of internal control

Sample sizing for substantive tests of detailsChecklist of accounting estimates to be

reviewedPoints for attention at next audit*Audit planning checklist*

Note: These forms recommended underFAM and Audit Working Papers Kitessentially meet the requirements ofCertification Audit. However, some of theseforms, marked with asterisks(*), can alsobe used for Compliance with AuthorityAudit.

The following paragraphs provide generalguidance for using the above mentionedforms. Instructions for filling in these formsare contained in the Audit Working PapersKit which the auditors are required tofollow.

5.4 Audit Objectives and ScopeThe audit is conducted to address a particular objective.Each audit will be designed to address one or more of thefollowing objectives:Expressing an opinion on Financial Statements;Expressing an opinion regarding compliance with

current rules and regulations;Testing compliance with authority or controls on

selected transactions with no opinion being expressed;andEvaluating operational performance.

Note: For a comprehensive discussion of auditobjectives, please see Section 7.1 of FAM. Thenature and size of the audit entity determinesthe scope of the audit and is generally definedby the audit mandate. For the audit of FinancialStatements, that are required under Section 7 ofthe Auditor-General Ordinance, 2001, the entityto be audited will be defined by the applicableaccounting policies of the government.

5.5 Points for Attention at Next Audit (From Last Year)The purpose of this form is to highlight matters thatshould be taken into account when planning the followingyear's audit. The auditor should record expecteddevelopments in the entity's activities that may requirechanges in the audit planning. This form can also be usedto document practical suggestions for changes to the nextyear's audit. All audit staff are encouraged to suggestimprovements in the audit plan and procedures.

5.6 Entity Communication LetterThe Audit Working Papers Kit includes the templateof a letter which needs to be issued to themanagement of the auditee. It sets out the terms ofthe audit and will include the issues that the auditorwants to bring to the attention of entity'smanagement. This letter will clarify what is expectedfrom auditors during the course of audit and leads tocooperation between both the parties.

5.7 Audit Planning MemorandumThe audit planning memorandum should comprise aconcise and easy to understand summary ofimportant factors and decisions made during theplanning phase. Emphasis should be placed onchanges that have been made to the previous year‟splan. The audit planning memorandum should notduplicate all of the details set out elsewhere in theplanning file, the permanent file or in the auditprogrammes.

The actual contents of the audit planningmemorandum will depend on specific circumstancesof the audit. It should include any changes in thenature of entity's business, structure of business,accounting policies or systems, internal controls oroperational environment that will affect the plannedaudit. It should also explain and establish an auditstrategy, time tables and overall budget togetherwith any significant changes made from the previousyear.

5.8 Memorandum on Post-Planning Changes Asthe execution, evaluation and reporting phasesof the audit proceed, it may be necessary toamend the planned scope of the audit work.This may result from gaining a betterunderstanding of the entity's activities, fromunexpected external developments, or fromdetermining a better means of achieving theaudit objectives as the audit progresses.

If the changes are significant, such as the one thatcalls for the development of new audit programmesor a re-consideration of the sources of auditassurance, the auditor should discuss the situationwith his/her supervisor. The auditor should thenprepare an addendum to the audit planningmemorandum. This addendum should follow thesame review and approval process as is used for theaudit planning memorandum itself.

5.9 Important DatesEach audit is scheduled around a numberof important dates. This form lists datesthat are likely to be significant andprovides the audit team leader with a toolto track when the work was planned andwhen it was actually performed.

5.10 Tour Programme Tour programmeneeds to be prepared and approvedkeeping in view the timelines, resourceconstraints and audit strategy. The head ofoffice should ensure that tour programmesare prepared, and approved well in time;and appropriate record is being kept in thisregard.

5.11 Information Requested from EntityOfficials The audit team leader should keeptrack of information requested from theauditee‟s management, including whatinformation was requested, when it wasrequired to be delivered and when it wasactually received. This form provides asuggested format, but the audit team leadermay choose to use his or her own format.

5.12 Materiality Assessment FormMateriality can be defined as follows: “Anerror (or the sum of the errors) is materialif the error (or the sum of the errors) is bigenough to influence the users of theFinancial Statements”.

Assessing materiality is an importantaspect of modern systems-based audits.This form provides guidelines andsuggestions for assessing an appropriatemateriality amount for the audit at hand.Note: For a comprehensive discussion onMateriality, see section 7.3.l and AppendixD of FAM.

5.13 Expected Aggregate Error and PlannedPrecision FormOther values which are important indetermining appropriate sample size and inevaluating the results of the audit are expectedaggregate error and planned precision. Thisform provides detailed instructions for arrivingat these values for the audit at hand.

5.14 Audit Risk Assessment FormIt is important that the audit teamestablish an appropriate level of risk forthe audit. The concept of risk is veryimportant in planning system-based auditsand is discussed in detail in sections 7.7and 7.8 of FAM.

This form is used to identify whether thereare any particular factors that would causethe auditor to reduce the level of risk he orshe is willing to accept, therefore requiringadditional audit work to be planned so asto raise the level of audit assurance.

5.15 Inherent Risk Assessment FormInherent risk is the chance of materialerror occurring in the first place assumingthat there are no internal controls in place.“Material error” may be a single error orthe sum of multiple smaller errors.

This form indicates some factors which mayinfluence the auditor‟s assessment of inherent risk.Inherent risk should be assessed for each FinancialAudit and compliance with authority objective.However, because the auditor‟s assessment ofinherent risk may be the same for multipleobjectives or components, this form can be used tocapture risk for each group of objectives orcomponents that the auditor wishes to treat in thesame manner.

5.16 Internal Control Questionnaire –Controls for Overall EnvironmentThis form is used to guide the auditor inconsidering the overall internal controlenvironment in the entity. The better theapparent system of internal control, the lessdetailed checking of individual transactions willbe necessary. Internal controls are discussed atlength in section 7.4 of FAM.

The internal control questionnaireprovides many questions for the auditor'sreview. The auditor should decide whatquestions are relevant to the present auditand is free to add further questionswherever required.

Also, the auditor should be aware of the work carried outby the Internal and external auditors where applicable.Reliance on their work can only be placed when theauditor assures him/herself that their work has beencarried out according to the relevant auditing standards.The auditor should make efforts to obtain the copies ofthe audit reports, management letters and other relevantobservations made by the internal and external auditors.Wherever the auditor uses the work of the internal andexternal auditors, it should be duly acknowledged in hisrecord.

The auditor must be honest in the assessment of internalcontrols operating in overall environment, general computerenvironment and specific computer based financial applications.If the controls are weak or non-existent, the auditor shouldinform the entity management of the need to makeimprovements and should also offer suggestions. In the first fewyears of transition to the new auditing paradigm, it is to beexpected that the control environment will be weak in mostentities. Identifying the weaknesses will be the starting point fordeveloping stronger controls for the future.

5.17 Internal Control Questionnaire – General ComputerControlsThis form is used to guide the auditor in considering theinternal controls operating in the entity's computerizedenvironment. Internal controls are discussed at length insection 7.4 of FAM. The internal control questionnaireprovides many questions for the auditor's review. Theauditor should decide what questions are relevant to thepresent audit and is free to add further questionswherever required.

5.18 Internal Control Questionnaire – ApplicationControls This form is used to guide the auditor inconsidering the internal controls operating inspecific computer-based financial applications.Internal controls are discussed at length in section7.4 of FAM. The internal control questionnaireprovides many questions for the auditor's review.The auditor should decide what questions arerelevant to the present audit and is free to addfurther questions wherever required.

5.19 Control Risk Assessment FormsThis form is used by the auditor tosummarise the assessment of risk in thegeneral control environment, the overallcomputer environment and in specificcomputer applications (from the previousthree forms).

The risks identified through the assessment of controlsmay impact different components differently, so theauditor should consider control risk separately for eachcomponent (or group of similar components). Theassessment of risk is very much a matter of professionaljudgment. In general, during the first few years followingthe introduction of new auditing paradigm, it is suggestedthat all control risks are assumed to be high unless thereis sufficient evidence to support lowering thatassessment.

5.20 Analytical Procedures Assurance Form Theaudit team leader uses this form to documentthe analytical procedure(s) that are planned foreach component. The type of procedureselected is important as different procedures(i.e. comparative, predictive, statistical or overallverification procedures) provide a different levelof assurance when it comes to planningsubstantive tests of details.

Detailed instructions are provided with theform.Note: A detailed discussion on analyticalprocedures is provided in the Financial AuditManual, section 7.8 and Appendix E.

Comment your valuable

suggestions