Audit Engagement, Audit Program, Audit Documentation and Audit Evidence: formula sheet

Key formulas

Two preconditions for an audit

Acceptable financial reporting framework + management's acknowledgement of its responsibilities

Management's responsibilities: prepare statements per the framework, maintain internal control, give access to information and people.

Core contents of the engagement letter

Objective and scope + auditor's responsibilities + management's responsibilities + framework + expected form of reports

Also mention that the report may differ from expected form if conditions require.

Recurring audits

Assess need to revise terms; remind the entity of existing terms if needed

A new letter is not compulsory every year.

Changes in terms

Change requires reasonable justification; do not agree to a change that lowers assurance without it

If management will not allow continuation of the original engagement, the auditor withdraws where possible and considers reporting obligations.

Overall audit strategy

Scope + Timing + Direction of the audit

Sets the characteristics of the engagement, reporting objectives and the nature of resources needed. It guides the detailed plan.

Audit plan

Nature + Timing + Extent of procedures

Covers risk assessment procedures, further audit procedures, and other procedures needed to comply with the SAs.

Order of work

Strategy first, then plan; both updated as needed

Planning is continual and iterative. Changes in conditions or unexpected evidence may need changes to both.

Preliminary engagement activities

Continuance of client relationship + Ethical requirements incl. independence + Engagement terms understood

These are done at the start of the current audit, as required by SA 220 and SA 210, before the strategy is set.

Documentation under SA 300

Document the overall audit strategy, the audit plan, and any significant changes made during the audit with the reasons

Documentation is part of the audit file, not optional.

Audit programme (definition)

Audit programme = list of procedures + nature, timing and extent + responsible staff + working paper reference

Use this as your definition line in any written answer.

Plan vs programme

Audit plan = overall strategy and scope; Audit programme = detailed procedures that carry out the plan

Plan comes first. The programme is derived from it.

Types of programme

Fixed (pre-determined) programme and Flexible (progressive) programme

Also mention standard versus tailored programmes if the question asks for more types.

Programme vs note book

Programme = forward-looking instructions; Audit note book = record of points noted during the audit

A common comparison question.

Retention period

Retention ≥ 7 years from the date of the auditor's report (or, if later, the date of the group auditor's report)

SA 230 para A23. ISA 230 says five years; SA 230 says seven because the Chartered Accountants Act, 1949 and its regulations prescribe seven years for working papers.

Time limit for assembling the final file

Assembly ordinarily ≤ 60 days after the date of the auditor's report

SA 230 para A21. It is an 'ordinarily' limit, so do not call it an absolute legal deadline.

Duty on timely assembly

Assemble the file on a timely basis after the report date (para 14)

The assembly is administrative and must not involve new procedures or new conclusions (para A22).

No deletion after assembly

After assembly, no deletion or discarding before the retention period ends (para 15)

Applies to documentation of any nature.

Changes after assembly

Document: (a) specific reasons; (b) when and by whom made and reviewed (para 16)

Applies regardless of the nature of the modification or addition. Example in A24: clarifying documentation after comments from monitoring inspections.

Administrative changes allowed during assembly

Delete superseded documents; sort, collate, cross-reference; sign off checklists; document evidence already agreed before the report date

From para A22.

Audit evidence (SA 500)

Audit evidence = information in accounting records + other information

Accounting records alone are not sufficient evidence for an opinion.

Sufficiency

Sufficiency = quantity of evidence

Affected by assessed risk of misstatement and by the quality of the evidence.

Appropriateness

Appropriateness = relevance + reliability (quality)

Evidence must relate to the assertion tested and be trustworthy.

Risk and quantity

Higher assessed risk → more evidence needed; higher quality → less evidence needed

Quantity cannot compensate for poor quality.

Reliability hierarchy

External independent > internal with good controls > internal with weak controls; direct > indirect; documentary > oral; original > copy

These are general rules, and exceptions exist depending on circumstances.

Procedures listed in SA 500

Inspection, observation, confirmation, recalculation, reperformance, analytical procedures + inquiry

Use these exact names in answers. They may be combined.

Means of selecting items for testing

(a) 100% examination; (b) specific items; (c) audit sampling

Choice depends on risk of material misstatement, practicality and efficiency. One or a combination may be used.

Selecting specific items

Result cannot be projected to the whole population

It is not audit sampling and gives no evidence about the remaining items. It is subject to non-sampling risk.

Inquiry limitation

Inquiry alone ordinarily is not sufficient

Not sufficient for absence of material misstatement at assertion level, or for operating effectiveness of controls.

Inspection of tangible assets

Reliable for existence; not necessarily for rights, obligations or valuation

Frequent MCQ point.

Stages of audit procedures

Risk assessment procedures + further audit procedures (tests of controls, substantive procedures)

Substantive procedures = tests of details + substantive analytical procedures.

Management's expert: three evaluations (SA 500, para 8)

Competence, capabilities and objectivity + Understanding of the work + Appropriateness of the work as audit evidence

Applied to the extent necessary, having regard to the significance of the expert's work for the auditor's purposes.

Sources on the expert's competence (SA 500, A38)

Past experience | Discussions with the expert | Discussions with others | Qualifications, membership, licence | Published work | Auditor's expert

Learn these as a list of sources. Any one or a mix may be used.

Appropriateness of the expert's work (SA 500, A48)

Relevance and reasonableness of findings + Assumptions and methods + Source data

Findings must be consistent with other evidence and properly reflected in the financial statements. Source data is checked for relevance, completeness and accuracy.

Understanding the expert's agreement (SA 500, A46)

Nature, scope, objectives | Roles and responsibilities | Communication between management and expert

Applies where the expert is engaged by the entity and there is an engagement letter. For an employed expert (A47), inquiry of the expert and management may be the best way.

Means of selecting items for testing (SA 500, A52)

100% examination | Specific items | Audit sampling

One or a combination may be used, depending on the risk of material misstatement and practicality.

Written representations (SA 580 link)

Representation = supporting evidence, not a substitute for other evidence

Inform management early that representations will be expected (SA 210, A12).

Quick revision

• The engagement letter records scope, responsibilities, reporting and other agreed terms, and avoids misunderstanding between auditor and client.
• Audit strategy sets the overall scope, timing and direction; the audit program lists the detailed procedures.
• Planning is a continuing process, and the plan can be updated as the audit progresses.
• An audit program is a set of instructions that is reviewed and changed when circumstances change.
• Working papers are the auditor's record of work done, evidence obtained and conclusions reached.
• Working papers belong to the auditor and should be kept confidential and safe.
• Sufficiency is about the quantity of evidence; appropriateness is about its relevance and reliability.
• Evidence from external sources and obtained directly by the auditor is generally more reliable.
• Procedures include inspection, observation, inquiry, confirmation, recomputation, reperformance and analytical procedures.
• Inquiry alone is not enough to support a conclusion; corroborate it with other evidence.
• Written management representations support other evidence but cannot replace it.
• Original documents are generally more reliable than photocopies.

Common mistakes

• Saying the auditor prepares the financial statements Fix: Write that management prepares the statements and keeps internal control. The auditor gives an opinion.
• Treating the engagement letter as a legal necessity for every year Fix: For recurring audits, assess whether terms need revision or a reminder. A new letter is not always required.
• Treating planning as a one-time activity done only before fieldwork. Fix: Write that SA 300 calls planning a continual and iterative process that continues through the audit, with changes documented.
• Mixing up the strategy and the plan, or giving the same points for both. Fix: Use S-T-D for strategy and N-T-E for plan. Say the strategy guides the plan and the plan is more detailed.
• Treating audit plan and audit programme as the same thing. Fix: Remember: plan is overall strategy and scope; programme is detailed procedures. Write at least three points of difference.
• Confusing the audit programme with the audit note book. Fix: Programme tells the team what to do. The note book records points noticed during the work, such as queries and doubts.
• Writing five years as the retention period. Fix: Write seven years. SA 230 para A23 prescribes seven because the Chartered Accountants Act, 1949 and its regulations prescribe seven years for working papers.
• Counting retention or the 60 days from the balance sheet date or the end of the audit work. Fix: Both periods run from the date of the auditor's report. For group audits, retention runs from that date or, if later, the date of the group auditor's report.
• Treating sufficiency and appropriateness as the same thing. Fix: Sufficiency is quantity only. Appropriateness is quality, made of relevance and reliability.
• Saying a large quantity of evidence can make up for poor quality. Fix: State that quantity depends on risk and quality, but it cannot cure weak or irrelevant evidence.

Exam tips

• Learn the two preconditions as a pair: framework and management's responsibilities.
• For a 14-mark answer, give the letter contents as bullet points, then apply them to the case.
• In MCQs, look for the option that says management prepares the statements and the auditor reports on them.
• For recurring audit questions, use the words assess and remind. Avoid saying a new letter is always needed.
• If a scenario involves a request to change terms, test it for reasonable justification.
• In a scope-limitation scenario, check whether the audit is statutory before saying the auditor should decline.
• For difference questions, give at least four points in a clear two-column style using lines such as Strategy: ... and Plan: ...
• In case-based questions, quote the facts from the scenario and link each to a planning decision.