Auditing Standard

Auditing Standard

follow SA 300*
PLANNING AN AUDIT OF
FINANCIAL STATEMENTS
(Effective for audits of financial statements
for periods beginning on or after April 1, 2008)
Contents
Paragraph(s)
Introduction
Scope of this SA …………………………………………………………………………… 1
Effective Date ……………………………………………………………………………. 2
Objective …………………………………………………………………………… 3
Requirements
Involvement of Key Engagement Team Member ………………………………. 4
Preliminary Engagement Activities …………………………………………………. 5
Planning Activities …………………………………………………………………….6-10
Documentation ………………………………………………………………………….. 11
Additional Considerations in Initial Audit Engagements …………………… 12
Application and Other Explanatory Material
The Role and Timing of Planning ……………………………………………..A1-A4
Involvement of Key Engagement Team Members ……………………………A5
Preliminary Engagement Activities …………………………………………..A6-A8
Planning Activities ………………………………………………………………..A9-A16
Documentation ………………………………………………………………….A17-A20
Additional Considerations in Initial Audit Engagements ………………….A21
Modifications to ISA 300, ‘‘Planning an Audit of Financial Statements’’
Appendix: Considerations in Establishing the Overall Audit Strategy
*Published in December, 2007 issue of the Journal.
Planning an Audit of Financial Statements
363 SA 300
Standard on Auditing (SA) 300, “Planning an Audit of Financial Statements”
should be read in the context of the “Preface to the Standards on Quality Control,
Auditing, Review, Other Assurance and Related Services1,” which sets out the
authority of Standards on Auditing (SAs) and SA 200, “Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards
on Auditing”2.
1 Published in July, 2007 issue of the Journal.
2 Published in March, 2010 issue of the Journal.
Handbook of Auditing Pronouncements-I.A
SA 300 364
Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditor’s responsibility to
plan an audit of financial statements. This SA is framed in the context of
recurring audits. Additional considerations in initial audit engagements are
separately identified. (Ref: Para. A1-A4)
Effective Date
2. This SA is effective for audits of financial statements for periods beginning
on or after 1st April 2008.
Objective
3. The objective of the auditor is to plan the audit so that it will be performed in
an effective manner.
Requirements
Involvement of Key Engagement Team Members
4. The engagement partner and other key members of the engagement team
shall be involved in planning the audit, including planning and participating in the
discussion among engagement team members. (Ref: Para. A5)
Preliminary Engagement Activities
5. The auditor shall undertake the following activities at the beginning of the
current audit engagement:
(a) Performing procedures required by SA 2203, “Quality Control for an Audit of
Financial Statements” regarding the continuance of the client relationship
and the specific audit engagement;
(b) Evaluating compliance with ethical requirements, including independence,
as required by SA 2204; and
(c) Establishing an understanding of the terms of the engagement, as required
by SA 2105. (Ref: Para. A6-A8)
3 SA 220, paragraph 12-13.
4 SA 220, paragraph 9-11.
5 SA 210, “Agreeing the Terms of Audit Engagements,” paragraphs 9-13.
Planning an Audit of Financial Statements
365 SA 300
Planning Activities
6. The auditor shall establish an overall audit strategy that sets the scope,
timing and direction of the audit, and that guides the development of the audit
plan.
7. In establishing the overall audit strategy, the auditor shall:
(a) Identify the characteristics of the engagement that define its scope;
(b) Ascertain the reporting objectives of the engagement to plan the timing of
the audit and the nature of the communications required;
(c) Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts;
(d) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other engagements performed by
the engagement partner for the entity is relevant; and
(e) Ascertain the nature, timing and extent of resources necessary to perform
the engagement. (Ref: Para. A9-A12)
8. The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures, as
determined under SA 315 “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment”.
(b) The nature, timing and extent of planned further audit procedures at the
assertion level, as determined under SA 330 “The Auditor’s Responses to
Assessed Risks”.
(c) Other planned audit procedures that are required to be carried out so that
the engagement complies with SAs. (Ref: Para. A13)
9. The auditor shall update and change the overall audit strategy and the audit
plan as necessary during the course of the audit. (Ref: Para. A14)
10. The auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their work. (Ref:
Para. A15-A16)
Documentation
11. The auditor shall document:
(a) The overall audit strategy;
(b) The audit plan; and
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SA 300 366
(c) Any significant changes made during the audit engagement to the
overall audit strategy or the audit plan, and the reasons for such
changes. (Ref: Para. A17-A20)
Additional Considerations in Initial Audit Engagements
12. The auditor shall undertake the following activities prior to starting an initial
audit:
(a) Performing procedures required by SA 220 regarding the acceptance of the
client relationship and the specific audit engagement6; and
(b) Communicating with the predecessor auditor, where there has been a
change of auditors, in compliance with relevant ethical requirements. (Ref:
Para. A21)
***
Application and Other Explanatory Material
The Role and Timing of Planning (Ref: Para. 1)
A1. Planning an audit involves establishing the overall audit strategy for the
engagement and developing an audit plan. Adequate planning benefits the audit
of financial statements in several ways, including the following:
 Helping the auditor to devote appropriate attention to important areas of the
audit.
 Helping the auditor identify and resolve potential problems on a timely basis.
 Helping the auditor properly organize and manage the audit engagement so
that it is performed in an effective and efficient manner.
 Assisting in the selection of engagement team members with appropriate
levels of capabilities and competence to respond to anticipated risks, and
the proper assignment of work to them.
 Facilitating the direction and supervision of engagement team members and
the review of their work.
 Assisting, where applicable, in coordination of work done by auditors of
components and experts.
A2. The nature and extent of planning activities will vary according to the size
and complexity of the entity, the key engagement team members’ previous
experience with the entity, and changes in circumstances that occur during the
audit engagement.
6 SA 220, paragraphs 12-13.
Planning an Audit of Financial Statements
367 SA 300
A3. Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the current
audit engagement. Planning, however, includes consideration of the timing of
certain activities and audit procedures that need to be completed prior to the
performance of further audit procedures. For example, planning includes the
need to consider, prior to the auditor’s identification and assessment of the risks
of material misstatement, such matters as:
 The analytical procedures to be applied as risk assessment procedures.
 Obtaining a general understanding of the legal and regulatory framework
applicable to the entity and how the entity is complying with that framework.
 The determination of materiality.
 The involvement of experts.
 The performance of other risk assessment procedures.
A4. The auditor may decide to discuss elements of planning with the entity’s
management to facilitate the conduct and management of the audit engagement
(for example, to coordinate some of the planned audit procedures with the work
of the entity’s personnel). Although these discussions often occur, the overall
audit strategy and the audit plan remain the auditor’s responsibility. When
discussing matters included in the overall audit strategy or audit plan, care is
required in order not to compromise the effectiveness of the audit. For example,
discussing the nature and timing of detailed audit procedures with management
may compromise the effectiveness of the audit by making the audit procedures
too predictable.
Involvement of Key Engagement Team Members (Ref: Para. 4)
A5. The involvement of the engagement partner and other key members of the
engagement team in planning the audit draws on their experience and insight,
thereby enhancing the effectiveness and efficiency of the planning process7.
Preliminary Engagement Activities (Ref: Para. 5)
7 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding
the Entity and Its Environment”, paragraph 10, establishes requirements and provides guidance on
the engagement team’s discussion of the susceptibility of the entity to material misstatements of
the financial statements. SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial Statements”, paragraph 15 provides guidance on the emphasis given during this
discussion to the susceptibility of the entity’s financial statements to material misstatement due to
fraud.
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SA 300 368
A6. Performing the preliminary engagement activities specified in paragraph 5
at the beginning of the current audit engagement assists the auditor in identifying
and evaluating events or circumstances that may adversely affect the auditor’s
ability to plan and perform the audit engagement.
A7. Performing these preliminary engagement activities enables the auditor to
plan an audit engagement for which, for example:
 The auditor maintains the necessary independence and ability to perform
the engagement.
 There are no issues with management integrity that may affect the auditor’s
willingness to continue the engagement.
 There is no misunderstanding with the client as to the terms of the
engagement.
A8. The auditor’s consideration of client continuance and ethical requirements,
including independence, occurs throughout the audit engagement as changes in
conditions and circumstances occur. Performing initial procedures on both client
continuance and evaluation of ethical requirements (including independence) at
the beginning of the current audit engagement means that they are completed
prior to the performance of other significant activities for the current audit
engagement. For continuing audit engagements, such initial procedures often
occur shortly after (or in connection with) the completion of the previous audit.
Planning Activities
The Overall Audit Strategy (Ref: Para. 6-7)
A9. The process of establishing the overall audit strategy assists the auditor to
determine, subject to the completion of the auditor’s risk assessment procedures,
such matters as:
 The resources to deploy for specific audit areas, such as the use of
appropriately experienced team members for high risk areas or the
involvement of experts on complex matters;
 The amount of resources to allocate to specific audit areas, such as the
number of team members assigned to observe the inventory count at
material locations, the extent of review of other auditors’ work in the case of
group audits, or the audit budget in hours to allocate to high risk areas;
 When these resources are to be deployed, such as whether at an interim
audit stage or at key cut-off dates; and
 How such resources are managed, directed and supervised, such as when
team briefing and debriefing meetings are expected to be held, how
Planning an Audit of Financial Statements
369 SA 300
engagement partner and manager reviews are expected to take place (for
example, on-site or off-site), and whether to complete engagement quality
control reviews.
A10. The Appendix lists examples of considerations in establishing the overall
audit strategy.
A11. Once the overall audit strategy has been established, an audit plan can be
developed to address the various matters identified in the overall audit strategy,
taking into account the need to achieve the audit objectives through the efficient
use of the auditor’s resources. The establishment of the overall audit strategy
and the detailed audit plan are not necessarily discrete or sequential processes,
but are closely inter-related since changes in one may result in consequential
changes to the other.
Considerations Specific to Smaller Entities
A12. In audits of small entities, the entire audit may be conducted by a very small
audit team. Many audits of small entities involve the engagement partner (who
may be a sole practitioner) working with one engagement team member (or
without any engagement team members). With a smaller team, co-ordination of,
and communication between, team members are easier. Establishing the overall
audit strategy for the audit of a small entity need not be a complex or timeconsuming
exercise; it varies according to the size of the entity, the complexity of
the audit, and the size of the engagement team. For example, a brief
memorandum prepared at the completion of the previous audit, based on a
review of the working papers and highlighting issues identified in the audit just
completed, updated in the current period based on discussions with the ownermanager,
can serve as the documented audit strategy for the current audit
engagement if it covers the matters noted in paragraph 7.
The Audit Plan (Ref: Para. 8)
A13. The audit plan is more detailed than the overall audit strategy that includes
the nature, timing and extent of audit procedures to be performed by
engagement team members. Planning for these audit procedures takes place
over the course of the audit as the audit plan for the engagement develops. For
example, planning of the auditor’s risk assessment procedures occurs early in
the audit process. However, planning the nature, timing and extent of specific
further audit procedures depends on the outcome of those risk assessment
procedures. In addition, the auditor may begin the execution of further audit
procedures for some classes of transactions, account balances and disclosures
before planning all remaining further audit procedures.
Handbook of Auditing Pronouncements-I.A
SA 300 370
Changes to Planning Decisions During the Course of the Audit (Ref: Para.
9)
A14. As a result of unexpected events, changes in conditions, or the audit
evidence obtained from the results of audit procedures, the auditor may need to
modify the overall audit strategy and audit plan and thereby the resulting planned
nature, timing and extent of further audit procedures, based on the revised
consideration of assessed risks. This may be the case when information comes
to the auditor’s attention that differs significantly from the information available
when the auditor planned the audit procedures. For example, audit evidence
obtained through the performance of substantive procedures may contradict the
audit evidence obtained through tests of controls.
Direction, Supervision and Review (Ref: Para. 10)
A15. The nature, timing and extent of the direction and supervision of
engagement team members and review of their work vary depending on many
factors, including:
 The size and complexity of the entity.
 The area of the audit.
 The assessed risks of material misstatement (for example, an increase in
the assessed risk of material misstatement for a given area of the audit
ordinarily requires a corresponding increase in the extent and timeliness of
direction and supervision of engagement team members, and a more
detailed review of their work).
 The capabilities and competence of the individual team members performing
the audit work.
SA 220 contains further guidance on the direction, supervision and review of
audit work8.
Considerations Specific to Smaller Entities
A16. When an audit is carried out entirely by the engagement partner,
questions of direction and supervision of engagement team members and
review of their work do not arise. In such cases, the engagement partner,
having personally conducted all aspects of the work, will be aware of all
material issues. Forming an objective view on the appropriateness of the
judgments made in the course of the audit can present practical problems
when the same individual also performs the entire audit. When particularly
8 SA 220, paragraphs 15-17.
Planning an Audit of Financial Statements
371 SA 300
complex or unusual issues are involved, and the audit is performed by a sole
practitioner, it may be desirable to consult with other suitably-experienced
auditors or the auditor’s professional body9.
Documentation (Ref: Para. 11)
A17. The documentation of the overall audit strategy is a record of the key
decisions considered necessary to properly plan the audit and to communicate
significant matters to the engagement team. For example, the auditor may
summarize the overall audit strategy in the form of a memorandum that contains
key decisions regarding the overall scope, timing and conduct of the audit.
A18. The documentation of the audit plan is a record of the planned nature,
timing and extent of risk assessment procedures and further audit procedures at
the assertion level in response to the assessed risks. It also serves as a record
of the proper planning of the audit procedures that can be reviewed and
approved prior to their performance. The auditor may use standard audit
programs and/or audit completion checklists, tailored as needed to reflect the
particular engagement circumstances.
A19. A record of the significant changes to the overall audit strategy and the
audit plan, and resulting changes to the planned nature, timing and extent of
audit procedures, explains why the significant changes were made, and the
overall strategy and audit plan finally adopted for the audit. It also reflects the
appropriate response to the significant changes occurring during the audit.
Considerations Specific to Smaller Entities
A20. As discussed in paragraph A12, a suitable, brief memorandum may serve
as the documented strategy for the audit of a smaller entity. For the audit plan,
standard audit programs and/or checklists (see paragraph A18) drawn up on the
assumption of few relevant control activities, as is likely to be the case in a
smaller entity, may be used provided that they are tailored to the circumstances
of the engagement, including the auditor’s risk assessments.
Additional Considerations in Initial Audit Engagements (Ref: Para. 12)
A21. The purpose and objective of planning the audit are the same whether the
audit is an initial or recurring engagement. However, for an initial audit, the
auditor may need to expand the planning activities because the auditor does not
ordinarily have the previous experience with the entity that is considered when
planning recurring engagements. For initial audits, additional matters the auditor
9 In India, the Institute of Chartered Accountants of India governs the accountancy profession to
provide services of high quality in the public interest which are accepted worldwide.
Handbook of Auditing Pronouncements-I.A
SA 300 372
may consider in establishing the overall audit strategy and audit plan include the
following:
 Unless prohibited by law or regulation, arrangements to be made with the
predecessor auditor, for example, to review the predecessor auditor’s
working papers.
 Any major issues (including the application of accounting principles or of
auditing and reporting standards) discussed with management in connection
with the initial selection as auditor, the communication of these matters to
those charged with governance and how these matters affect the overall
audit strategy and audit plan.
 The audit procedures necessary to obtain sufficient appropriate audit
evidence regarding opening balances (see SA 51010 “Initial Audit
Engagements–Opening Balances”).
 Other procedures required by the firm’s system of quality control for initial
audit engagements (for example, the firm’s system of quality control may
require the involvement of another partner or senior individual to review the
overall audit strategy prior to commencing significant audit procedures or to
review reports prior to their issuance).
Modifications to ISA 300, “Planning an Audit of Financial
Statements”
SA 300, “Planning an Audit of Financial Statements” does not contain any
modifications vis a vis ISA 300.
10 SA 510, “Initial Audit Engagements—Opening Balances”.
Planning an Audit of Financial Statements
373 SA 300
Appendix
(Ref: Para. 6-7 and A9-A12)
Considerations in Establishing the Overall Audit Strategy
This appendix provides examples of matters the auditor may consider in
establishing the overall audit strategy. Many of these matters will also influence
the auditor’s detailed audit plan. The examples provided cover a broad range of
matters applicable to many engagements. While some of the matters referred to
below may be required by other SAs, not all matters are relevant to every audit
engagement and the list is not necessarily complete.
Characteristics of the Engagement
 The financial reporting framework on which the financial information to be
audited has been prepared, including any need for reconciliations to another
financial reporting framework.
 Industry-specific reporting requirements such as reports mandated by
industry regulators.
 The expected audit coverage, including the number and locations of
components to be included.
 The nature of the control relationships between a parent and its components
that determine how the group is to be consolidated.
 The extent to which components are audited by other auditors.
 The nature of the business segments to be audited, including the need for
specialized knowledge.
 The reporting currency to be used, including any need for currency
translation for the financial information audited.
 The need for a statutory audit of standalone financial statements in addition
to an audit for consolidation purposes.
 The availability of the work of internal auditors and the extent of the auditor’s
potential reliance on such work.
 The entity’s use of service organizations and how the auditor may obtain
evidence concerning the design or operation of controls performed by them.
 The expected use of audit evidence obtained in previous audits, for
example, audit evidence related to risk assessment procedures and tests of
controls.
Handbook of Auditing Pronouncements-I.A
SA 300 374
 The effect of information technology on the audit procedures, including the
availability of data and the expected use of computer-assisted audit
techniques.
 The coordination of the expected coverage and timing of the audit work with
any reviews of interim financial information and the effect on the audit of the
information obtained during such reviews.
 The availability of client personnel and data.
Reporting Objectives, Timing of the Audit, and Nature of
Communications
 The entity’s timetable for reporting, such as at interim and final stages.
 The organization of meetings with management and those charged with
governance to discuss the nature, timing and extent of the audit work.
 The discussion with management and those charged with governance
regarding the expected type and timing of reports to be issued and other
communications, both written and oral, including the auditor’s report,
management letters and communications to those charged with governance.
 The discussion with management regarding the expected communications
on the status of audit work throughout the engagement.
 Communication with auditors of components regarding the expected types
and timing of reports to be issued and other communications in connection
with the audit of components.
 The expected nature and timing of communications among engagement
team members, including the nature and timing of team meetings and timing
of the review of work performed.
 Whether there are any other expected communications with third parties,
including any statutory or contractual reporting responsibilities arising from
the audit.
Significant Factors, Preliminary Engagement Activities, and
Knowledge Gained on Other Engagements
 The determination of materiality in accordance with SA 32011, and, where
applicable:
 Determination of materiality for components and communication
11 SA 320, “Materiality in Planning and Performing an Audit”.
Planning an Audit of Financial Statements
375 SA 300
thereof to component auditors.
 Preliminary identification of significant components and material
classes of transactions, account balances and disclosures
 Preliminary identification of areas where there may be a higher risk of
material misstatement.
 The impact of the assessed risk of material misstatement at the overall
financial statement level on direction, supervision and review.
 The manner in which the auditor emphasizes to engagement team members
the need to maintain a questioning mind and to exercise professional
skepticism in gathering and evaluating audit evidence.
 Results of previous audits that involved evaluating the operating
effectiveness of internal control, including the nature of identified
deficiencies and action taken to address them.
 The discussion of matters that may affect the audit with firm personnel
responsible for performing other services to the entity.
 Evidence of management’s commitment to the design, implementation and
maintenance of sound internal control, including evidence of appropriate
documentation of such internal control.
 Volume of transactions, which may determine whether it is more efficient for
the auditor to rely on internal control.
 Importance attached to internal control throughout the entity to the
successful operation of the business.
 Significant business developments affecting the entity, including changes in
information technology and business processes, changes in key
management, and acquisitions, mergers and divestments.
 Significant industry developments such as changes in industry regulations
and new reporting requirements.
 Significant changes in the financial reporting framework, such as changes in
accounting standards.
 Other significant relevant developments, such as changes in the legal
environment affecting the entity.
Nature, Timing and Extent of Resources
 The selection of the engagement team (including, where necessary, the
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SA 300 376
engagement quality control reviewer) and the assignment of audit work to
the team members, including the assignment of appropriately experienced
team members to areas where there may be higher risks of material
misstatement.
 Engagement budgeting, including considering the appropriate amount of
time to set aside for areas where there may be higher risks of material
misstatement.



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