Audit Planning, Strategy and Execution: formula sheet

Key formulas

Objective of SA 300

Plan the audit so that it is performed in an effective manner

Planning is continual and iterative, not a one-time phase.

Preliminary engagement activities (three)

1) Quality management procedures on client continuance and engagement; 2) Evaluate ethical compliance including independence; 3) Establish understanding of terms of engagement (SA 210)

Done at the beginning of the current audit engagement.

Overall audit strategy

Sets scope, timing and direction of the audit and guides the audit plan

Covers characteristics of the engagement, reporting objectives, significant factors, preliminary activities and nature, timing and extent of resources.

Audit plan contents

Nature, timing and extent of (a) risk assessment procedures, (b) further audit procedures, (c) other planned procedures to comply with SAs

The plan is more detailed than the strategy.

Documentation

Document (a) overall audit strategy, (b) audit plan, (c) any significant changes made during the audit and the reasons

Form and extent depend on entity size and complexity.

Direction, supervision and review

Plan the nature, timing and extent of direction and supervision of team members and review of their work

Depends on factors such as entity complexity, assessed risks and team capabilities.

Overall audit strategy

Strategy = scope + timing + direction of the audit

It guides the development of the detailed audit plan.

Audit plan

Plan = risk assessment procedures + further audit procedures + other procedures, each with nature, timing and extent

It is more detailed than the strategy and sets out the procedures to be performed.

Order of work

Establish strategy → develop plan → perform and update both as needed

Both are changed as necessary during the audit, and significant changes and reasons are documented.

Direction, supervision and review

Plan the nature, timing and extent of direction and supervision of team members and the review of their work

This depends on factors such as the entity's size and complexity, the areas of audit, assessed risks and the capabilities of the team members.

Documentation required

Document: overall audit strategy + audit plan + significant changes to either during the audit + reasons for those changes

Documentation of planning must be sufficient to support the auditor's work.

Professional judgment

Judgment = training + knowledge + experience, applied within auditing and ethical standards

Needed for materiality, risk assessment, evidence sufficiency and estimates. It must be exercised, not assumed, and be documented where significant.

Direction of the team

Direction = responsibilities + objectives + nature of business + risks + problems + detailed approach

Given to team members at the start of the engagement. Use this as a checklist in written answers.

Supervision

Supervision = track progress + check understanding and competence + resolve significant matters + guide team

Extent depends on size, complexity, assessed risk and team capability.

Review

Review = work performed + adequate + supports conclusions + documented

Done by more experienced members on less experienced members' work. The partner reviews critical areas and significant judgments.

Communication with TCWG on planning

Discuss scope, timing and significant risks; do not compromise effectiveness; responsibility for strategy and plan stays with the auditor

Detailed procedures should not be shared in a way that makes the audit predictable.

Clearly trivial

Clearly trivial ≠ Immaterial; threshold is set well below materiality

Items at or below the threshold need not be accumulated. If in doubt, the item is not clearly trivial.

Projected misstatement

Projected misstatement = Misstatement in sample ÷ Sample value × Population value

Simple ratio extrapolation. Use it only when the sample is representative and the population is homogeneous. Any method must suit the audit sampling approach.

Aggregate uncorrected misstatements

Factual + Judgmental + Projected (uncorrected) vs Materiality

Compare the total, and also each item individually, with materiality. Also weigh qualitative factors.

Core requirements

Accumulate → Communicate on a timely basis → Request correction → Evaluate uncorrected → Represent

The auditor requests a written representation from management and, where appropriate, those charged with governance, that the effects of uncorrected misstatements are immaterial. A summary of the uncorrected items is attached or included.

Prior period effect

Evaluate uncorrected misstatements of prior periods that affect the current period

Consider the effect on current period financial statements, as well as the effect of the current period items on aggregate.

Responsibility rule

Responsibility for the audit opinion = external auditor alone

Using internal audit work or direct assistance never reduces or shares it.

Threshold test for using the function's work

Objectivity + Competence + Systematic and disciplined approach (all three) → work may be used

If any one is missing, you do not use the function's work.

Direct assistance prohibition

If law or regulation prohibits direct assistance, or the objectivity or competence of the internal auditors is a significant concern that safeguards cannot reduce to an acceptable level → do not use direct assistance. Otherwise, before using it, obtain written agreement from the entity's authorised representative and from the internal auditors, and communicate with those charged with governance.

You assess the threats to objectivity and the level of competence, and whether safeguards can reduce the concern to an acceptable level. The authorised representative agrees in writing that the internal auditors may follow your instructions and that the entity will not intervene in their work. The internal auditors agree in writing to keep matters confidential and follow your instructions. You also communicate with those charged with governance under SA 260 about the nature and extent of the planned use.

Judgment areas

Higher judgment and higher assessed risk → less use of internal audit work and more work done directly by you

This is a planning rule for using the function's work. The absolute bar on significant judgments applies to direct assistance.

Evaluating work used

Evaluate adequacy of work + Perform audit procedures on the work as a whole

This includes re-performing some of the work to check conclusions and evidence.

Direct assistance limit

Internal auditors must not make judgments on significant matters or perform procedures involving them

Examples are assessing significant risks, evaluating sufficiency of evidence and deciding on key estimates.

Risk factors for an estimate

Inherent risk of estimate depends on: estimation uncertainty + complexity + subjectivity (and susceptibility to bias)

Higher levels mean higher assessed risk. Higher risk means more persuasive evidence is needed.

Response to assessed risks

Further procedures must respond to the assessed risks of material misstatement at the assertion level, and may include: (a) events up to report date; (b) testing management's method, assumptions and data; (c) developing auditor's point estimate or range

Use one or more approaches, as needed to address each assessed risk. The choice depends on the nature of the estimate and the risks identified. Reasonableness is the conclusion you reach in the evaluation step, not a separate procedure.

Auditor's range

If you use a range, narrow it until all outcomes within it are considered reasonable. A management point estimate within the range does not, by that test alone, indicate a misstatement.

If management's point estimate is outside the auditor's range, the misstatement is the difference between management's point estimate and the nearest point of the auditor's range. Still consider bias even when the estimate is within the range.

Misstatement classification

Misstatement = difference between recorded estimate and an amount supported by the evidence in the applicable framework

A point estimate within the auditor's range is not by itself a misstatement, but still consider bias. Consider SA 450 for misstatements, including projecting misstatements in estimates where relevant, and evaluate them in aggregate.

Significant risk extras

For estimates with significant risk, evaluate management's selection of significant assumptions and significant judgments: whether they are reasonable in the framework, whether management considered alternatives, and whether they indicate possible bias

Where assumptions depend on management's intent and ability to carry out actions, evaluate whether they are supported. Also evaluate adequacy of disclosure of estimation uncertainty.

Quick revision

• SA 300: planning is not a discrete phase but a continual and iterative process, often beginning soon after completion of the previous audit and continuing until the current audit is complete.
• Planning involves key engagement team members and may involve other experts as needed.
• The overall audit strategy sets scope, timing and direction. The audit plan is more detailed and describes procedures.
• Changes to strategy or plan during the audit, and the reasons, should be documented.
• Direction, supervision and review are linked. The engagement partner is responsible for direction, supervision and performance of the engagement.
• Professional judgment must be applied and documented in a way that an experienced auditor can understand.
• SA 450: accumulate misstatements other than those clearly trivial, and clearly trivial is not the same as immaterial.
• The auditor shall determine whether the overall audit strategy and audit plan need to be revised when either condition is met: the nature of the misstatements and circumstances of their occurrence indicate that other misstatements may exist that, when aggregated with misstatements accumulated during the audit, could be material, or the aggregate of misstatements accumulated approaches materiality determined under SA 320.
• Communicate misstatements on a timely basis to the appropriate level of management and ask for correction.
• Reassess materiality before evaluating uncorrected misstatements.
• Evaluate uncorrected misstatements by size and nature, individually and in aggregate, and obtain a written representation on them.
• SA 610: the auditor remains solely responsible for the opinion and cannot reduce this by using internal auditors.
• SA 610: first determine whether the internal audit function's work can be used for audit purposes, which includes evaluating its objectivity, competence and systematic approach.
• SA 540: the auditor tests estimates through risk assessment, responses and evaluation, watching for signs of management bias.

Common mistakes

• Treating planning as a one-time phase done before fieldwork. Fix: Write that planning is continual and iterative, and can be revised as unexpected events or evidence arise.
• Confusing overall audit strategy with audit plan. Fix: Strategy is the broad scope, timing and direction. The plan is the detailed procedures. The plan is developed after and guided by the strategy.
• Treating strategy and plan as the same document or as identical in detail. Fix: Remember that the strategy is the high-level scope, timing and direction, and the plan is the detailed set of procedures that follows it.
• Saying planning is a one-time phase done before fieldwork. Fix: State that planning is continuous and iterative, and that changes are made during the audit as new information arises.
• Treating direction, supervision and review as the same thing. Fix: Remember the order: direction tells people what to do, supervision watches while they do it, review checks it after it is done.
• Saying the auditor must share the full audit plan with TCWG. Fix: Say that planning matters may be discussed, but detailed procedures should not be revealed in a way that makes the audit predictable. The plan stays the auditor's responsibility.
• Treating clearly trivial as the same as immaterial or as equal to materiality Fix: Say the clearly trivial threshold is much lower than materiality and is a different test. Trivial items are of an entirely different order of magnitude.
• Ignoring projected misstatements when totalling Fix: Extrapolate the sample error to the population and include it in the aggregate, along with judgmental differences.
• Saying the external auditor can share responsibility with internal auditors. Fix: Always state that responsibility for the opinion stays solely with the external auditor, however much work is used.
• Treating direct assistance and using the function's work as the same thing. Fix: Direct assistance means they work under your direction, supervision and review. Using the function's work means relying on its own work product, which you evaluate.

Exam tips

• For 'preliminary engagement activities', always give the three items in order and add one line on why each matters.
• In case-based MCQs, watch for options that call planning a discrete phase or mix up strategy and plan. These are usually wrong.
• For documentation questions, include strategy, plan and significant changes with reasons, and mention that form and extent depend on entity size and complexity.
• In written answers, use provision, facts, conclusion. Quote the requirement, apply the facts, then give a clear conclusion.
• Link planning to risk assessment, materiality and team direction in a line or two. It shows integrated understanding.
• For a distinction question, write two short columns in prose: scope, timing, direction for the strategy versus nature, timing, extent of procedures for the plan.
• In case questions, always say planning is continuous and iterative, and link the case event to a change in the strategy, the plan or both.
• Add one line on documentation of the strategy, plan, significant changes and reasons. It is an easy mark.