The Six Steps followed in Planning the Audit

The Six Steps followed in Planning the Audit

Consider the first standard of field work (adequate planning and proper supervision). The amount of audit planning is a direct function of the size and complexity of the client. It is also an inverse function of the auditor’s knowledge of and experience with the client. Audit planning involves the development of an overall strategy or game plan for expected conduct and scope of the audit. The following steps are involved in audit planning:

(a) Obtaining an understanding of the client’s business and industry: An auditor must understand to perform effectively in an audit. Key sues to focus on are:

management goals and objectives
entity resources of all types including financial, asset-based, human, information and intangible
products and services, markets, customers, and competition
regulatory forces
core processes and operating cycle
investing and financing cycle

(b) Performing Analytical Procedures: Analytical procedures are ‘evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.” Analytical procedures are used for:

to obtain a better understanding of the client and its industry.
to detect financial difficulty
to assist in planning the nature, timing, and extent of other auditing procedures.

(c) Make preliminary judgments about materiality level: The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person involving on the information would have been changed or influenced by the omission or misstatement.

In applying this definition, the auditor is required to consider both –

the circumstances pertaining to the entity and
the information needs of those who will rely on the audited financial statements.

(d) Consider audit risk: Audit risk is the risk that the auditor may unknowingly fail to modify his or her opinion on financial statements that were materially misstated. The four components of audit risk are:

inherent risk
control risk
analytical procedures risk and
Test of details risk.

(e) Develop preliminary audit strategies for significant assertions: A preliminary audit strategy represents the auditor’s preliminary judgments about an audit approach and is based on certain assumptions about the conduct of the audit. It is not a detailed specification of auditing procedures to be performed.

Four alternative preliminary audit strategies are:

A primarily substantive approach emphasizing tests of details
A lowered assessed level of control risk approach
A primarily substantive approach emphasizing analytical procedures
An emphasis on inherent risk and analytical procedures

(f) Obtain the understanding of client’s control structure: An entity’s system of internal control consists of policies and procedures designed to provide management with reasonable assurance that the company achieves its objectives and goals, including –