ISA 300 Planning an Audit of Financial Statements

ACCA Director Author

ISA 300 Planning an Audit of Financial Statements

Planning activities:

1. Audit strategy:

This sets the scope, timing and resources and direction of the audit.

Audit strategy should be documented (known as audit strategy document) and should be approved by the engagement partner.

Scope of audit work
Elements	Example
Applicable accounting standards	IFRS
Applicable auditing standards	ISA
Specific industry requirement	The EU Non-Financial Reporting Directive – applicable to large companies for human rights information disclosure
Components of audit client and their locations	Number of subsidiaries, sub-subsidiaries and branches. Highly risky branches shall be visited every year whereas lowly risky branches can be visited at least every three years.
Other information to be read	Interim and annual reports Internal auditors’ reports on internal controls Evidence from external experts
Other considerations	External auditors shall be present at all material locations regarding the inventory count whereas their internal auditors could be requested to be present at remaining locations. Client’s internal audit work is reliable. The use of data analytics during the audit (the impact of IT on audit). The use of internal auditors (such as results from periodic inventory counts, allocation of overheads among costs of sales, distribution expenses and administration expenses) or experts (determine fair value, stage of completion of contract in progress, valuation of work in progress). Consider whether clients functions have been outsourced – consider type one (description of internal control system) or type two report (description and evaluation of internal control system) from the service provider’s internal auditor. What evidence from previous audit could be used – if there are no major changes in its internal control system.

Timing of the audit work
Elements	Example
When to publish annual report	By xx/xx/xxxx
Interim audit – before client’s Financial Statements year end:
Set up audit strategy and detailed audit plan - By xx/xx/xxxx Timing of inventory count and branches visit - - By xx/xx/xxxx Communication with those charged with governance - By xx/xx/xxxx Meetings with the audit team or experts- By xx/xx/xxxx Communication with the outgoing (previous) auditor- By xx/xx/xxxx
Final audit – after client’s Financial Statements year end:
Review the audit work - - By xx/xx/xxxx Submit audit report - By xx/xx/xxxx

Resources – such as personnel
Position	Name	Responsibilities
Audit partner	xx	Sign audit report Review
Audit manager	xx	Daily engagement management Coordination
Audit senior	xx	Audit evidence
Audit juniors	xx	Audit evidence

Direction of the audit work
Elements	Example
Overall materiality	Include performance materiality, trivial materiality and materiality for particular transactions.
Risks of material misstatements (ROMM)	Inherent risks – complex accounting; change in industry and problem with client. Control risks – change in accounting system.
Decide audit approach	More or less tests of details

2. Audit plan:

1. Pre-designed audit plans (standard questionnaires and checklists):

Internal Control Questionnaires (ICQ) – whether procedure has been done

Internal Control Evaluation Questionnaires (ICEQ) – valuate whether control system is effective

Checklist on inventory counting

Checklist on subsequent events

Checklist on going concern assessment

Checklist on disclosure

Checklist on completion of audit

2. Tailored audit plans:

These are further audit procedures to check the figures (income, expense, asset, liability and equity); and the control procedure (known as test of control).

These are specific procedures and are specific to each client.

3. Review plan:

Hot review - The review is usually done in three levels:

ISA 220 Quality Management for an Audit of Financial Statements

Level one: Accountant in charge – perform detailed review, usually on a daily basis, on the audit junior’s work and raise queries of what work has not been done. Audit juniors shall answer queries raised by accountant in charge.

Level two: Audit manager – perform detailed review, usually on a weekly basis, on the accountant in charge’s work and raise queries of what work has not been done. Accountant in charge shall answer queries raised by accountant in charge.

Level three: Engagement partner – perform higher level review, regarding planning, interim and final audit working papers. It then raises queries of what work has not been done where audit manager shall answer these queries.

Second partner review:

This is usually completed by another engagement partner in the same firm.

The aim is to seek the input on a risky and complicated area during the audit such as a risky area arising from the implementation of new accounting or auditing standard.

Engagement Quality Control Review:

ISQC 1 (International Standard on Quality Control) Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements

Applicable to whom - to all listed clients.

What to review – firm’s independence, significant and complex audit areas, communication with those charged with governance.

Review by whom – internal auditor who is independent of the team.

Pre/Post Issuance Review:

The International Ethics Standards Board for Accountants (IESBA) code

Applicable to whom - to Public Interest Entities (Insurance companies, banks, public utilities companies) where their fees are more than 15% of the firm’s total fees for two consecutive years. Both audit and review clients apply.

What to review – firm’s independence, significant and complex audit areas, communication with those charged with governance.

Review by whom – external auditor who is not the member of the firm.

Exam rehearsal question

Which of the following should be included in the overall audit strategy document?

(1) Economic factors and industry conditions affecting the company

(2) The nature, timing and extent of audit procedures

(3) Management’s responsibility for the financial statements

(4) Determination of materiality in line with the ISAs

A 1,2 and 4

B 3 and 4

C 1 and 4 only

D 2 and 3

Answer: C

This question tested candidates’ knowledge of the documents produced during audit planning. This question was the least well-answered multiple-choice question in the March 2016 paper by a significant margin. Candidates are advised to understand the specific information and planning documents that ISA 300 Planning an Audit of Financial Statements requires the auditor to produce in the planning stage of the audit. The audit strategy document contains the general information relating to planning the audit such as the financial reporting framework, industry specific reporting requirements and materiality considerations.

The audit strategy document then guides the development of the audit plan; a much more detailed document that includes specific guidance on, for example, timetables, staff allocations and audit procedures. (1) and (4) would be found in the audit strategy document as assessing the economic factors and industry conditions and also determining materiality are part of establishing the overall audit strategy. (2) The detail of the audit procedures for each material class of transactions, account balance or disclosure would be included in the audit plan (3) Confirmation of management’s responsibility for the financial statements is contained in the letter of engagement. Therefore the correct answer is C (1 and 4 only) Future candidates should therefore understand the specific information included in both the audit strategy and the audit plan documents, as well as the matters included in an engagement letter.

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Categories: : Audit and Assurance (AA)