IPCC,Paper 6, Chapter 3

CA .Kamal Garg

Audit planning

Audit programme

Control of quality of audit work

Delegation and supervision of audit work.

Audit planning includes:

Obtaining knowledge of

client’s business;

Extent to which Internal Control System can be

relied upon;

Determining nature, timing and extent of

audit procedures to be performed;

Coordinating the audit work

One of the Basic Principle as per SA 200R;

This enables the auditor to identify the events, transactions and practices that in his judgment may have a significant effect on the financial information;

Events: For example, pending litigations and claims against the entity, etc.

Transactions: For example, purchase of raw material vs. purchase of fixed assets, etc.

Practices: For example, the practice of given credit period to the debtors, practice of giving Diwali bonus to the workers, etc.

the client's annual report to its shareholders;

minutes of meetings of shareholders, Board of Directors etc;

internal financial management reports;

previous year's audit working papers;

discussion with client;

the client's policy and procedures manual;

consideration to the state of economy and its affect on client's business; and

visit of the client’s premises and plant facilities.

1. Its a process designed, implemented and maintained by those charged with governance, management and other personnel;

2. It provides reasonable assurance about the achievement of an entity’s objectives with regard to:

• Reliability of financial reporting; • Effectiveness and efficiency of operations; • Safeguarding of assets; • Compliance with applicable laws & regulations

• The nature of a planned audit procedure refers to both the type of procedure and method used to gather the evidence; Nature:

• The timing of a planned audit procedure refers to when the audit procedure is to be performed. Audit procedures may be performed prior to balance date (e.g. during interim visits), on balance date or after balance date (e.g. during final visit);

Timing:

• The extent of planned audit procedures simply refers to the extent of the nature of the procedures. For example, How many purchases invoices require vouching? How many computations (e.g. quantity on hand x unit cost) should be checked?

Extent:

Internal check is a part of the overall internal control system and operates as a built-in device as far as the organisation of the staff and job allocation aspects of the control system are concerned;

A system of internal check in accounting implies organisation of system of book keeping and arrangement of staff duties in such a manner that no one person can completely carry through a transaction and record every aspect thereof.

No single person should have an independent control over any important aspect of the business.

The duties of members of the staff should be changed from time to time without any previous notice so that the same officer or subordinate does not, without a break, perform the same function for a considerable length of time.

Persons having physical custody of assets must not be permitted to have access to the books of account.

To prevent loss or misappropriation of cash, mechanical devices, such as the automatic cash register, should be employed.

Budgetary control would enable the management to review from time to time the progress of trading activities.

The financial and administrative powers should be distributed very judiciously among different officers and the manner in which these are actually exercised should be reviewed periodically.

Accounting procedures should be reviewed periodically, for, even well-designed and carefully installed procedures, in course of time, cease to be effective.

Surprise checks are a part of normal audit, and the results of such checks are therefore important to the auditor in deciding the scope of his audit and submission of his report. An element of surprise can significantly improve the audit effectiveness;

Surprise checks also determine whether errors, or frauds exist, and if they exist, bring the matter promptly to the attention of the management so that corrective action can be taken at the earliest;

Surprise checks are very effective in case of organizations having weak internal control system, very large, diversified and well spread out organizations, etc.

Frequency and extent of surprise checks would depend on the extent to which the auditor feels necessary, depending upon system of internal control complications of transactions, importance of items like cash, investments, stock, etc. The results of surprise checks should be communicated to the management if internal control weakness, fraud, or error is found

SA 610 SA 620 SA 600

Relying upon the work of Internal Auditor

Using the work of an Expert

Using the work of Another Auditor

• Statutory Auditor will remain responsible for his opinion

• Professional competence, Independence and Integrity of others to be considered

• Proper documentation by Statutory Auditor

• Proper follow up should be there • Extent of other’s duties, responsibilities and scope of work should be

clearly specified

• Individual/ organisation possessing expertise in the field other than accounting and auditing;

Expert:

• An expert (external or internal) used by the auditor to assist him in obtaining sufficient & appropriate audit evidence;

Auditor’s Expert:

• An expert used by the entity to assist it in preparing the F.S.;

Management’s Expert:

• Skills, knowledge and experience in a particular field Expertise:

• of an auditor’s expert are the factors that significantly affect the adequacy of expert’s work for audit purposes;

Competence, Capabilities and

Objectivity

• Relates to nature & level of expertise of auditor’s expert; Competence

• Relates to ability of auditor’s expert to exercise that competence in the circumstances of the engagement;

Capability

• Relates to possible effects of various factors on professional/ business judgement of auditor’s expert

Objectivity

As per SA 300, the auditor should prepare a written audit programme setting forth the

procedures that are needed to be implemented while carrying out the audit plan

An audit programme is a detailed plan:

of the auditing work to be performed;

specifying the procedures to be followed in

verification of each item; and

the financial statements and the estimated time

required

An audit programme may be classified into two categories:

General Audit Programme: Programme common to all types of audit. For example, checking of books of

accounts; and

Special Audit Programme: Special programme containing the work relating to a particular audit. For example, the

audit programme for a partnership firm would be different from that of a company

Type of Audit Statutory Audit / Tax Audit/ Internal Audit etc.

M/s XYZ for the Month/ Financial Year….. Audit Programme for the Month/Financial Year

Staff Involved Mr .A(Head) Mr. B(Audit Assistant)……….

Particular

Remarks Time Taken Signature of Audit Head

Obtain Management Confirm Letter

Cash Book

Bank Statement

Bank Reconciliation Statement

Purchase Book

Sales Book

Bills Register

Journal

Fixed Assests Register

Debtors/Creditors Confirmation

• involves the detailed examination of all the transactions by the auditor continuously throughout the year or at regular intervals;

Continuous audit

• is also called as Completed Audit or Periodical Audit. Final audit is done after the close of the financial year. In this type of audit, the client gives the possession of books of accounts to the auditor for audit

A final audit

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The objective of this standard is to establish standards on quality control as to:

the policies and procedures of an audit firm for audit

work generally, and

procedures regarding the work delegated to

assistants on an individual audit.

ICAI has issued SA 220 in this regard;

‘Auditor’ = the person with final responsibility for the audit;

‘Audit firm’ = a partnership firm or sole practitioner providing audit service;

‘Personnel’ = all partners and professional staff engaged in the audit practiced of the firm;

‘Assistants’ = personnel involved in an individual audit other than auditor.

• Adherence to basic principles such as independence, integrity, objectivity, confidentiality, etc.

Professional Requirements

• Audit personnel should have required degree of skill and competence.

Skills and competence

• Audit work should be assigned only to competent personnel. Assignment

• There is to be sufficient direction, supervision and review of work at all levels.

Delegation

• Whenever necessary, consultancy within and outside the firm with experts.

Consultation

• Evaluation of prospective client and review of existing client should be done on an ongoing basis.

Acceptance and Retention

of clients

• Continued adequacy and operational effectiveness of quality control policies and procedures should be monitored.

Monitoring

Quality control policies and procedures should be implemented at both the level of audit firm and on individual audits;

The firm's quality control policies & procedures should be effectively communicated to its personnel

Network:

A larger structure:

That is aimed at cooperation; and

That is clearly aimed at profit or cost sharing;

or

Sharing of common ownership, control,

management, business strategy, brand name or significant part of

professional resources.

Engagement partner:

the partner or other person in the firm who is a member of ICAI and is in full time practice and is responsible:

for the engagement and its performance, and

for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a

professional, legal or regulatory body.

a process designed to provide an objective evaluation, before the report is issued, of the significant judgments the engagement team

made and the conclusions they reached in formulating the report.

Engagement quality control review:

Engagement quality control reviewer:

a partner, other person in the firm, suitably qualified external person (e.g.

expert), or a team made up of such individuals,

with sufficient and appropriate experience and authority to objectively

evaluate, before the report is issued, the significant judgments the engagement team made and the conclusions they

reached in formulating the report;

However, in case the review is done by a team of individuals, such team should be headed by

a member of the Institute.

The “Letter of Engagement” should be entered in between auditor and the

client to:

clearly define the scope of audit;

so that the possibility of misunderstanding

can be avoided

Terms of Audit Engagement:

Regulatory Requirements;

Sample Checking;

Their Responsibility;

Audit Opinion;

No Disclosure (confidentiality);

Terms of Audit Engagement:

Data Access;

Fees;

Assistance;

Terms Accepted

Once agreed can be revised subsequently to clear off the misunderstandings and/ or to change the scope of audit examination

We would be glad to offer our statutory audit services to M/s ABC Limited for the financial year 2011-2012 subjected to following terms and conditions:

1.That our audit would be carried out as per the regulatory requirements under Companies Act and various rules & regulations issued there under;

2.That our audit may be conducted on the basis of sample checking as per the principles mentioned in S A 530 issued by ICAI;

3.That the Financial statement s, Accounting system and related internal controls would be primarily the responsibility of management of the company.

4.That our responsibility would be to express an audit opinions on the financial statements being examined by us;

5.That we assure to maintain full confidentiality of information obtained by us during the course of the assignment but subjected to legal and professional duties to disclose such information;

6.That we would be given access to books of accounts and other relevant records at all reasonable times as may be required for the audit examination.

7.That the fees for this assignment would be Rs. XYZ for the financial year 2011-2012;

8.That we expect full cooperation and assistance from the employees and other staff members for the purpose of audit examination ;

9.That if the above mentioned terms and conditions are acceptable to you ,Please reply us at the earliest possible;

Thank you

Yours Faith fully

________________

The auditor need not consider the efficiency and effectiveness of Internal Control System in his Audit Plan?

The auditor must be aware of nature of the business but need not have the awareness about the ownership of the entity?

The audit programme prepared by the Auditor is binding upon the client?

Once audit work is delegated, the auditor is relieved of his reporting responsibilities and he not liable for the negligence of such delegatees?

The staff of the CA Firm need not be competent as they work under the supervision of expert Chartered Accountants?

The internal auditor can be appointed as statutory auditor of same entity?

The internal auditor can be appointed as tax auditor of the same entity?

The auditor cannot challenge the methods and assumptions used by the expert?