CHAPTER FOUR

CLIENT ACCEPTANCE AND PLANNING THE AUDIT

 Why Planning?
• The purpose of planning is to perform the audit in an
effective manner.
• Audits are potentially complex, risky and expensive. They
must be planned carefully.
• An effective and efficient audit relies on proper planning
procedures.
• Planning ensures that the risk of performing poor quality
audit and issuing an inappropriate opinion (audit risk) is
reduced to an acceptable level.
 Importance of planning audit
• Audits are planned to:
• Help the auditor devote appropriate attention to important
areas of the audit
• Help the auditor identify and resolve potential problems on a
timely basis
• Help the auditor properly organize and manage the audit so it is
performed in an effective manner
• Assist in the selection of appropriate team members and
assignment of work to them
• Facilitate the direction, supervision and review of work
• Assist in co-ordination of work done by auditors of components
and experts
 The planning process
• Planning consists of a number of elements. They can be
summarized as:
1. Preliminary engagement activities:
• Performing procedures regarding the continuance of the client
engagement.
• Evaluating compliance with ethical requirements.
• Ensuring there are no misunderstandings with the client as to the terms
of the engagement.
2. Planning activities:
• Developing the audit strategy
• Developing an audit plan.
1. Preliminary engagement activities: Client Acceptance
• Client acceptance refers to an audit engagement or entering into
contractual agreement with the client.
• An audit can only be accepted, if:
1. Preconditions for audit are met
• The financial reporting framework for the preparation of financial
statements is present
• Management acknowledges its responsibilities
• Prepare financial statements
• Maintain proper internal control procedures
• Provide the auditor information necessary for the audit
2. There is a common understanding of the terms of the audit
engagement
1. Preliminary engagement activities:
Engagement Letter
•Engagement letter specifies the nature of the
contract between the firm and the client.
•Purpose of the Engagement Letter
• Minimize the risk of any misunderstanding between the
auditor and client
• Confirm acceptance of the engagement
• Setout the terms and conditions of the engagement
 Contents of an Engagement Letter
• Objectives and scope of the audit of financial statements
• Responsibility of the auditor
• Responsibility of the management
• Identification of the applicable financial reporting framework for
preparation of financial statements
• Reference to professional standards, regulations and legislations
applicable to the audit
• Limitations of an audit]
• Basis on which audit fees are computed…
 2. Planning activities
• The planning activities determine the nature, timing and
extent of audit procedures (evidences).
• Nature: what audit procedures to be used to gather evidence
• Timing: when the audit procedures and evidences will be
gathered.
• Interim audit: audit visit in the mid term
• Final audit: audit visit after the end of reporting period
• Extent: how much evidence is to be collected
• There will be a plan for every account or group of accounts
in the financial statements, called audit program.
2. Planning activities: Involves
Understanding the client

Identifying ROMM

Apply audit risk model

Develop response to assessed risks

Design audit strategy and approach

Design audit plan

 The audit Strategy
• The overall audit strategy provides a broad overview of
how the audit will be performed in response to
assessed risks.
• The audit strategy sets the scope, timing and direction
of audit and guides the development of more detailed
audit plan.
 The audit Strategy
The audit strategy sets the scope, timing and direction of
audit.
•Scope (what): the range of activities to be covered
by the audit.
• The type of audit procedures to be performed to gather
evidences regarding the fair presentation of financial
statements.
 The audit Strategy
The audit strategy sets the scope, timing and direction of audit.
• Timing: when will the audit procedures be performed
• Interim audit: Procedures are likely to include:
• Analytical procedures
• Tests of controls
• Updating risk assessments
• Review of relevant internal auditor's reports
• Substantive testing (of transactions in first part of year)
• Final audit: Procedures are likely to include:
• Completion of tests of controls and substantive tests of transactions started at interim
• Analytical procedures on financial statements
• Detailed substantive testing of financial statements
• At the final audit stage a set of draft financial statements or at least a trial
balance will be available.
 The audit Strategy
The audit strategy sets the scope, timing and direction of audit.
•Direction (How): Focus areas
• Based on the auditor’s assessment, which areas should the auditor focus
and why?
• E.g. is there any going concern issue?
• What are the significant class of transactions or account balances?
• Areas with high risk of material misstatements
Purposes of the audit Strategy
❑The audit strategy allows the auditor to
determine:
• The resources to deploy for specific audit areas: e.g staff
experience level
• The amount of resources to allocate: e.g. number of
team members
• When the resources are to be deployed
• How the resources are to be managed, directed and
supervised
• Timing of meetings, debriefs and reviews
Designing the overall audit strategy: Issues to Consider
1. Characteristics of the Engagement
• The financial reporting framework used
• Industry-specific law and regulation requirements
• The nature of business segments to be audited: including the
need for specialized knowledge
• The expected audit coverage: number and locations of the
components of the entity to be included
• Reliance on the work of internal audit.
• Use of information technology on the audit procedures e.g.
Computer assisted audit techniques (CAATs)
• Availability of client staff and data
Designing the overall audit strategy: Issues to Consider
2. Reporting Objectives, Timing of the Audit, Nature
of Communications
• The entity's timetable for reporting at interim and final stages
• The organization of meetings with management and those
charged with governance to discuss the nature, extent and
timing of the audit work
Designing the overall audit strategy: Issues to Consider
3. Considering the important factors that will determine the focus
of the engagement team’s efforts:
• determination of appropriate materiality levels,
• preliminary identification of areas where there may be higher risks
of material misstatement,
• preliminary identification of material components and account
balances,
• evaluation of whether the auditor may plan to obtain evidence
regarding the effectiveness of internal control.
• The auditor should also consider the results of preliminary
engagement activities and, where practicable, experience
gained on other engagements performed for the entity.
Designing the overall audit strategy: Issues to Consider
4. Nature, timing and extent of resources
• Developing the overall audit strategy helps the auditor to
ascertain the nature timing and extent of resources necessary
to perform the engagement.
• Selection of engagement team: considering the riskiness of areas
• Assignment of work to team members
• Engagement budgeting
• When these resources are deployed, such as whether at an interim
audit stage or at key cut-off dates
 The Audit Plan
• After developing the overall audit strategy, the auditor should
develop a specific, detailed plan to address how the various matters
identified in the overall strategy will be applied.
• The audit plan is more detailed than the overall audit strategy and
includes the nature, timing and extent of audit procedures to be
performed by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level.
Relationship between Overall Strategy and Audit Plan
• Once the overall audit strategy has been established, the auditor is
able to start the development of a more detailed audit plan 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.
• Although the auditor ordinarily establishes the overall audit
strategy before developing the detailed audit plan, the two
planning activities are not necessarily discrete or sequential
processes but are closely inter-related since changes in one may
result in consequential changes to the other.
The audit plan
• The audit plan should include specific descriptions of:
➢The nature, timing and extent of risk assessment
procedures.
➢The nature, timing and extent of further audit
procedures, including:
✓What audit procedures are to be carried out
✓Who should do them
✓How much work should be done (sample sizes, etc.)
✓When the work should be done (interim vs. final)
➢Any other procedures necessary to conform to ISAs