As a result of the study of Chapter 3, the student must:
• Principles and main stages of planning an audit;
• the main requirements of the standards for the preparation and content of the auditor's working documents, their basic requisites and the storage procedure;
• types, sources and methods of obtaining audit evidence;
• the composition and order of the analytical procedures;
• types and main stages of constructing the audit sample;
be able to
• perform all basic procedures for planning an audit;
• Draw up a contract for the provision of audit services;
• Generate working documents for the planning phase;
• the skills of planning an audit, the formation of a schedule and a working group of auditors;
• the skills of applying analytical procedures and methods for selecting documentation and records during inspections.
The stage preceding the auditors' entry into the organization for verification is important both from the point of identification and coordination of the circle of questions with the client, and for the audit team itself, which needs to be ready for the characteristics of the person being audited. This chapter examines the main steps in planning an audit, the specifics of the legal provision for contractual terms of the audit, as well as the importance of internal audit for the client's internal control system and the degree of its impact on the volume and cost of audit services.
FPSAD No.3 "Audit Planning" & " is developed taking into account the international standard of audit MCA 300 "Planning". The purpose of this standard is to establish uniform requirements for the planning of audit of accounting (financial) reporting. First of all, the standard applies to repeated inspections of the audited entity. To conduct an audit during the first year, the auditor is required to extend the planning process to include questions other than those specified in this standard.
The audit organization and the individual auditor are required to plan their work so that the audit was conducted effectively and effectively. When planning an audit, the following main steps are highlighted (Figure 3.1):
• Preliminary planning;
• preparing a general plan;
• Preparation of the audit program.
Fig. 3.1. Basic stages and stages of planning an audit
Neither the MCA 300 nor the FPSAD number 3 provide guidance on the preliminary planning. However, in practice this step is usually applied. Therefore, it is advisable to provide for preliminary audit planning as part of the internal standards of the audit firm.
At the stage of preliminary planning, the potential partners (the audit organization and the economic entity) are acquainted and the information is exchanged, which allows each of the parties to decide on the principal possibility and expediency of further cooperation in the field of audit.
Information on the planning of the audit work is reflected by the auditor in the audit documentation in accordance with FPSAD No. 2 "Audit Documentation". Documentation is understood as working documents and materials prepared by the auditor. The working documents should contain information reflecting the planning process, including the audit program and any changes to it.
At the preliminary planning stage, the auditor should examine all available information about the person being audited. To do this, he uses the materials stored in the permanent file of the subject of the audit activity, as well as information received from other subjects of audit activities and organizations. In order to clarify disputes, the auditor meets with the audited person, having previously agreed with him the list of issues to be discussed.
During the preliminary planning, the auditor should establish:
• the organizational and legal form of the entity being audited;
• the period of its functioning (history of development and formation);
• the presence of branches and representative offices;
• The structure of capital;
• number of employees;
• Wage system;
• the order of profit distribution;
• the presence of an internal control system;
• the state of the accounting system and the degree of automation;
• the form of accounting;
• features of functioning (privatization, reorganization, liquidation, bankruptcy procedure).
At the end of the preliminary planning, the auditor must have the following information:
• on external factors affecting the economic activities of the enterprise, reflecting the economic situation and industry peculiarities;
• about internal factors that affect the economic activities of an enterprise associated with its individual characteristics;
• on the independence of the audit firm in relation to the entity being audited.
In the process of preliminary planning, the auditor prepares the necessary information, which is summarized in the worksheets. Tables are constructed in such a way as to generate information on the following sections:
• Section 1 & "Accounting Reports & quot ;;
• Section 2 Organization Details & quot ;;
• Section 3 "Checking Control Systems";
• Section 4, "Doing Businesses";
• Section 5 Miscellaneous & quot ;;
• Section 6, "Managing and scheduling work."
Individual indicators obtained at the preliminary planning stage are specified and recorded during the audit.
In order to make a decision on the possibility of auditing financial (accounting) statements from an audited entity, the auditor needs to estimate the work costs. For this, the audit firm estimates:
• the number of fixed assets, the range of materials, finished products and goods;
• the composition of debtors and creditors;
• funding sources;
• financial performance indicators;
• the specifics of accounting (leasing, currency transactions, barter, transactions with related parties, bills of exchange, etc.);
• availability of tax incentives.
In order to obtain this information for information purposes, the auditor requests information in writing.
For the purpose of conducting an audit, an economic entity with a letter-proposal applies to the audit firm with a request to provide it with audit services. The audit organization, in turn, sends a letter to the client about the audit. Having received the written consent of the entity, the audit organization starts to plan further work.
Sometimes economic entities do not provide information until an audit service contract is concluded. If you are interested in the client, the auditor, without refusing to carry out the audit, marks this fact in the contract. During the preliminary planning, the audit organization decides whether it will work with the client. This decision is affected by a number of the following factors:
• The audit does not require the restoration of accounting records, and there are no facts that call into question the possibility of preparing a positive audit report;
• The client's reputation is checked, the presence (absence) of litigations and conflict situations, its solvency;
• the auditor evaluates his or her ability to conduct the audit.
By agreeing to conduct an audit, the audit firm should be confident in the quality of its work. At this stage, issues relating to normal working conditions for auditors are also addressed. Nm should be provided with a separate room, a safe for storing documents, a machine for copying from primary documents, sockets for connecting laptops, a printer, communication facilities and so on. If a positive decision is taken to conduct an audit of the client's accounts, an agreement is concluded with him on the provision of audit services.
If a positive decision is taken to conduct an audit of the client's account, the audit organization sends a letter to the economic entity about the audit, then an agreement on rendering audit services is concluded with it. In the event that the audit organization does not consider it possible to conduct an audit, it sends a letter to the economic entity about the refusal to conduct an audit.
Essentially, the audit begins with the agreement on the terms of the audit, which is governed by FSAS 12.
The complexity of the performance of audit services and their costs are specified in the contract for the provision of audit services.
After the preliminary planning, the development of a general audit plan begins, in which the expected scope and procedure for conducting the audit should be described. When developing a general plan and an audit program, the following principles can be singled out:
• the principle of complexity, which means ensuring coordination of all stages of work from preliminary planning to drawing up a plan and an audit program;
• the principle of continuity, expressed in the interrelation between strategic and tactical audit planning, especially when the audit firm with the client has been permanently working for a long time (a year or more);
• the principle of optimality, which involves the development of several options and the selection of the optimal plan;
• a mobilizing principle based on real, but effective norms of using the time of specialists.
The overall audit plan should be sufficiently detailed, since subsequently an audit program is developed on its basis. The form and content of the overall audit plan may vary depending on the scope and specificity of the entity's activities, the complexity of the audit and the specific techniques used by the auditor.
The overall audit plan is developed by the head of the audit organization based on the following data:
1) type of activity of the entity being audited, including:
- general economic factors and their impact on the activities of the entity being audited;
- the characteristics of the entity being audited, the state of its accounting (financial) reporting, taking into account changes that have occurred since the date of the previous audit;
- the overall level of leadership competence;
2) the organization of the accounting system and internal control, including:
- the accounting policy of the entity being audited and its changes;
- accounting of new regulatory legal acts in the organization of the accounting system of the audited entity;
3) risk and materiality, including:
- Expected estimates of inherent risk and control risk;
- establishing the levels of materiality for the audit;
- the possibility of material misstatement or unfair act;
- the identification of subjectivity in the work of the accountant;
4) type, time frame and scope of procedures, including:
- the particular importance of different accounting sections for conducting audits;
- the effect on the audit of the existence of a computer program of accounting and its specificity
- the presence of internal audit of the entity being audited and its impact on external audit;
5) coordination and direction of work, including:
- involvement of other auditors in the audit of branches and divisions of the audited entity;
- the involvement of outside experts;
- accounting for the number of territorially separate units of the audited entity and their territorial distance from each other;
- determination of the number and qualification of specialists needed to work with this audited entity;
6) Other issues, including:
- the possibility that the assumption of the continuity of the entity's activities may be in question;
- the presence of related parties, the possibility of bankruptcy, etc.,
- features of the contract on rendering of auditor services;
- the term of the auditor's employees and their participation in the provision of related services to an audited person, etc.
In the process of developing the plan, the auditor can, if necessary, assess the effectiveness of the internal control system. He adjusts the scope of the audit in case of revealing unreliable information in the process of internal control. If the revision of the general plan increases the work to a small extent, changes in the plan may be made by the lead auditor without informing the management of the economic entity. When, however, the revision of the general plan leads to a significant increase in the scope of work, changes to the plan must be made solely in agreement with the management of the organization.
In the plan, it is necessary to provide for a method of conducting an audit - continuous or selective. When deciding to conduct a selective audit, the order of the audit sample is determined. It can be based on statistical methods and professional experience in making managerial decisions. For qualitative work, it is necessary to develop tests of control tools and substantive procedures.
When developing a general plan, the auditor establishes an acceptable level of materiality in order to identify significant distortions. The concepts of materiality and its relationship with audit risk are established by FPSAD No. 4 "Materiality in the audit."
The main and final part of the work on the plan is the formation of a team of auditors, their distribution in accordance with their professional qualities and creativity in specific areas of the audit, briefing, familiarization with the audit plan and program.
The auditor needs to develop and document an audit program that determines the nature, timing and scope of the planned audit procedures required to implement the overall audit plan.
The audit program is drawn up on the basis of a general plan and should contain a list of procedures necessary for the implementation of the audit: it defines the tasks that must be achieved for its full implementation. The audit program may also include audit objectives for each of the areas and a time budget - the number of hours allocated to different areas or procedures.
The program is a set of instructions for the auditor performing the audit, as well as a means of monitoring and verifying proper performance of the work.
When preparing a program, the auditor should take into account the inherent risk assessment and the risk of controls. The procedures included in the program may include special tests designed to collect information, or methods (analytical procedures, detailed tests, substantive checks, inquiry and confirmation, counting, inspection of declarations, selection of large and key transactions, compliance analysis).
The audit program is a production task, and its violation is considered a violation of labor and production discipline.
The program is prepared before the audit: during the audit, the necessary adjustments may be made to it. The auditor's conclusions on each section of the plan and program are reflected in his working papers and serve as the basis for drawing up an opinion and forming an opinion on the reliability of the financial statements in all its significant aspects.
The auditor's conclusions for each section of the program documented in the working papers serve as the actual material for the report and the conclusion.
In the course of the work, the audit program can be specified and revised as necessary. The auditor schedules his work continuously throughout the duration of the audit due to various circumstances encountered or unexpected results. The reasons for making significant changes to the general plan and the audit program should be specified in the documents.
Audit organizations should create conditions for full trust on the part of users regarding the opinion expressed by them in the audit report. A distinctive feature of the audit profession is the assumption of the responsibility to act in the public interest. The responsibility of the auditor is not limited to meeting the needs of an individual client or audit organization. The auditor must observe and obey the requirements of the professional ethics of the auditor. In this regard, in 2012, two normative documents were adopted. This is the Code of Professional Ethics of Auditors (hereinafter - the Code of Professional Ethics) and the Rules for the Independence of Auditors and Audit Organizations (hereinafter - the Rules of Independence).
The Code of Professional Ethics is a set of rules of conduct that are mandatory for compliance by audit organizations and auditors in the course of their audit activities.
The rules of independence establish the requirements for the independence of auditors and audit organizations in the performance of audit tasks, review, during which the auditor expresses an opinion on the accounting (financial) statements as a whole or its individual parts.
The independence of the auditor implies:
• independence of thinking;
• The need to act honestly, to be objective and professional skepticism
• independence of behavior.
Independence of thinking implies a way of thinking that allows the auditor to express an opinion that does not depend on the influence of factors capable of compromising the professional judgment of the auditor.
Independence of behavior means a behavior style that avoids situations and circumstances so significant that a reasonable and well informed third party, weighing all the facts and circumstances, can reasonably believe that the integrity, objectivity or professional skepticism of the auditor has been compromised.>
The Code of Professional Ethics and the Rules of Independence establishes a conceptual approach to compliance with the requirements for independence, which is as follows: the auditor should identify threats to independence; to assess their significance; take precautionary measures. The rules of independence contain descriptions of specific circumstances and relationships that create or can create threats to independence.
The circumstances and relationships listed in the Rules of Independence are divided into several groups. The main, the most numerous group of potential threats implies the application of the measure by the audit organization that the significance of any threat should be assessed and, if necessary, precautionary measures should be taken to eliminate the threat or to bring it to an acceptable level. This group includes the following potential threats:
• business relationships;
• loans and guarantees;
• labor relations with an audited entity;
• kinship and personal relationships;
• temporary appointments;
• Providing services related to performing tasks that do not provide confidence;
• the recent provision of services to an audited entity;
• continuing interaction between senior audit staff and the entity being audited;
The next group of potential threats presupposes the most stringent measures on the part of the audit organization, consisting of:
• in stopping the implementation or in rejecting an audit task, or refusing to provide certain services (for example, including the development or implementation of information systems):
• in reviewing the compensation and evaluation process for this person;
• The fact that a person from the management of an audit organization or its specialist should not hold the position of a manager or be an officer of an audited entity and other measures.
This group includes the following potential threats:
• services related to information systems;
• principles for making compensation payments;
• labor relations with an audited person as a director or officer;
• Legal proceedings, existing or possible.