Audit Planning and Documentation for ACCA Audit and Assurance

What this chapter covers

Audit planning and documentation: topics in the order to study them

1. 1Preliminary Engagement Activities and Engagement LettersThis is the first step of any audit, so learn acceptance, ethics checks and the letter's contents before anything else.
2. 2Understanding the Entity and Its EnvironmentEvery risk you identify later comes from knowing the business, its industry, its controls and its reporting framework.
3. 3Audit Strategy and Audit PlanOnce you understand the entity, you learn how the overall approach and the detailed procedures are set and how they differ.
4. 4Materiality and Performance MaterialityYou need materiality to decide what matters, and it feeds directly into risk assessment and the extent of testing.
5. 5Audit Risk and Risk of Material MisstatementThis brings together the model of inherent, control and detection risk, and it is the heart of the chapter.
6. 6Analytical Procedures in PlanningRatios and trends are a main tool for spotting risk areas, so study them after you understand what risk means.
7. 7Fraud, Laws and Going Concern at Planning StageThese are specific risk areas with their own responsibilities, best learned once the general risk model is clear.
8. 8Audit DocumentationFinish with how the planning work is recorded, reviewed and retained, since it applies to everything you have just learned.

How to prepare Audit planning and documentation

1. Read each topic once in study order and write a one-line purpose for it, so you see how the steps connect.
2. Learn the key lists as short prompts, such as the contents of an engagement letter and the factors that affect risk, then test yourself from memory.
3. Practise materiality: calculate it from a benchmark, then explain in words why a given misstatement is or is not material, including nature as well as size.
4. Do ratio and trend questions by calculating first, then writing the risk each change suggests. State the possible cause, not only the movement.
5. Practise scenario risk questions using a three-part answer: the risk, why it arises from the facts, and the audit response.
6. Answer objective test cases under time pressure, as each question is all or nothing and gives no partial credit.
7. Write at least two full constructed response answers on planning, then compare them with a model answer for layout, headings and use of scenario facts.

Common mistakes in Audit planning and documentation

• Listing generic risks that ignore the scenario.

  Fix: Underline each fact in the scenario that could cause misstatement, then write the risk, the reason it arises and the audit response for it.

• Confusing the audit strategy with the audit plan.

  Fix: Remember that the strategy is the overall approach, timing and direction, while the plan is the detailed nature, timing and extent of procedures.

• Treating materiality as a fixed percentage and ignoring its nature.

  Fix: Use a benchmark as a starting point, then add that small items can be material if they affect, for example, legal compliance or key performance targets.

• Mixing up inherent risk, control risk and detection risk.

  Fix: Ask who controls each: the entity's nature gives inherent risk, its systems give control risk, and the auditor's procedures give detection risk.

• Stating a ratio change without explaining what it means.

  Fix: After each ratio, give a likely cause, say whether it signals a misstatement risk, and name the procedure you would use in response.

• Writing thin or over-long answers on documentation and engagement letters.

  Fix: Answer only what the requirement asks, use short points linked to the context, and note the purpose of each item to earn the mark.

Last-day revision: Audit planning and documentation

• ✓The engagement letter is agreed before the audit starts and sets out scope, responsibilities, the framework and the form of the report.
• ✓Management is responsible for the financial statements and internal control. The auditor is responsible for the audit opinion.
• ✓The audit strategy sets the overall approach. The audit plan sets the detailed procedures.
• ✓Materiality is a judgement. Benchmarks such as profit or revenue are a starting point, and nature matters as well as size.
• ✓Performance materiality is set below materiality to reduce the chance that uncorrected and undetected errors add up to a material amount.
• ✓Audit risk = risk of material misstatement × detection risk. The risk of material misstatement is inherent risk combined with control risk.
• ✓Inherent and control risks belong to the entity. The auditor cannot change them, only assess them.
• ✓Lower detection risk means more or better audit work.
• ✓In analytical procedures, calculate the ratio, spot the change, then give possible causes and the audit response.
• ✓The auditor must plan with professional scepticism and discuss fraud risk within the team.
• ✓Going concern is assessed by management first. The auditor considers whether management's assessment is appropriate.
• ✓Documentation must let an experienced auditor with no prior link to the audit understand the work done, the evidence obtained and the conclusions.

Audit planning and documentation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• ACCA Strategic ProfessionalPlanning, materiality and assessing the risk of material misstatement
• CMA IntermediateAudit Engagement, Audit Program, Audit Documentation and Audit Evidence
• CA FinalMateriality, Risk Assessment and Internal Control
• CS ProfessionalAudit Engagement