Audit plan states the strategies, audit procedure and methods to be followed for carrying out an audit. It is the first step of an audit. Audit plan states the audit procedures to be applied for conducting an audit and obtaining sufficient and appropriate audit evidence. It includes the information regarding client’s business, audit team members, work allocation between team members, nature, timing, and extent of audit procedures, etc.
It enables members of the audit team in identifying where special attention is required, the materiality of evidence, coordinating with team members and management and effectiveness of internal control.
The objective of the auditor is to plan the audit in such a way so that audit can be performed in an effective and efficient manner considering all the material things.
The auditor should consider the following matters before planning for an audit:
1.Terms of Engagement and any Statutory Responsibilities:
While preparing an audit plan, the auditor should consider his terms of appointment and responsibilities cast on him by various other applicable laws.
2. Nature and Timing of Report or other Communications:
The auditor should determine the time and form of audit. It enables the auditor to allocate work between team members and complete the work on schedule.
3. Accounting Policies followed by the Enterprise and Change in those Policies:
While preparing audit plan auditor should check whether there is any change in accounting policy that an entity (auditee) follows and if there is any change he should duly consider the areas affected by such change.
4. Effect of New Accounting or Auditing Requirements:
While preparing audit plan auditor should give due importance to the change in accounting standards (AS) and auditing standards (SA’s) which may affect the scope of the audit or the manner of conducting such an audit.
5. Identification of Significant Audit Areas:
It is very important for the auditor to identify the areas where the audit risk is high; so that he can plan the audit in such a way that overall audit risk reduces to the minimum. Identifying the areas having high audit risk is based on the professional judgment of auditor.
6. The setting of Materiality Levels for Audit Purposes:
Auditor sets the materiality levels. For Example – Auditor may consider that in case of audit of sales, he will examine all sales transaction above 10000 or in case of purchase he will examine all purchase transactions above 5000.
7. The degree of Reliance expected to be placed on Accounting System and Internal Control:
While preparing an audit plan, the auditor should consider the effectiveness of internal control. The auditor should assess and decide whether he can apply a test check method or needs to apply extensive checking of transactions.
8. Nature and Extent of Audit Evidence:
Nature and extent of audit evidence vary according to various auditing situations. For example: – In one case he may rely more on physical verification, external confirmations whereas in another case he may rely on the basis of examination of documentary evidence, management confirmation.
9. Work of Internal Auditors:
The statutory auditor should evaluate the work performed by the internal auditor to determine how much reliance he can place on such work. This also helps auditor in determining the audit risk and scope of his work.
(source – kaseya)
10. Establishing and Coordinating Staffing Requirements:
The auditor should allocate the work between team members. The auditor should take care that the work is performed under the proper supervision of a senior and experienced member. He shall also determine the broad estimated time for performing such work.
Solved Example For You:
Question: What are the points that an auditor should keep in mind before preparing an audit plan?
Ans. An auditor shall prepare an audit plan considering the following: –
- Nature, timing, and extent of various risk assessment procedures.
- The nature, timing, and extent of audit procedures
- Various other planned audit procedures need to apply in accordance with applicable Standard on Auditing (SA)
- Terms of engagement and statutory responsibilities
- Accounting policies followed by the auditee and any change in such policies, If any.
- Setting materiality levels
- Risk of internal control
- Various other applicable laws regulation on auditee.