AUDIT PLANNING, CONTROLLING AND RECORDING

Audit planning, controlling and recording

Planning
Refer to ISA 300
Planning refers to developing a general strategy and a detailed approach for the expected nature,
timing and extent of the audit.
The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. The form and nature of the planning required for an audit will be affected by the
size and complexity of the organization, the commercial environment in which it operates,
method of processing transactions and reporting requirements to which it is subject.
Advantages of good audit planning
i. It establishes the intended means of achieving the objectives of the audit.
ii. It assists in the direction and control of the work. A good plan assists in the proper utilization
of assistants and in the coordination of work done by other auditors and specialists.
iii. It helps to ensure that attention is devoted to important areas of the audit. The planning
process identifies potential problematic areas. E.g. areas with weak internal controls where
more detailed substantive testing should be carried out.
iv. It helps to ensure that audit work is completed expeditiously through more efficient use of
time and proper allocation of work to audit staff.
v. Ensures proper division of work between interim and final audit to avoid repetition of work
already done.
vi. The audit plan takes into consideration times when information needed for audit purposes is
available and when the client is not very busy. This encourages co-operation by ensuring less
disruption of client’s work.

In order to plan his work adequately the auditor need to understand the nature of the clients
business, its organization, its methods of operating and the industry in which it operates. This is
to enable the auditor appreciate which events and transactions are likely to have a significant
effect on the financial statements.

Sources of information on the nature of client’s business

Refer to ISA 310
In performing an audit on the financial statements, the auditor should have or obtain knowledge
of the business sufficient to enable him to identify and understand events, transactions and
practices that in the auditor’s judgment may have significant effect on the financial statements or
on the audit report. Prior to accepting an engagement, the auditor would obtain a preliminary
knowledge of the industry and of the ownership, management and operations of the entity to be
audited. After accepting to act as the company’s auditor, further and more detailed information
would be obtained. Obtaining the required knowledge of the business is a continuous and
cumulative process. The auditor can obtain knowledge of the industry and the client from a
number of sources;
● Previous experience with the entity and the industry;
● Discussion with people within the entity e.g. directors and employees;
● Discussion with internal audit personnel and review of internal audit reports;
● Discussion with other auditors and with legal and other advisors who have provided services
to the entity;
● Publications related to the industry e.g. journals;
● Visits to the entity’s place of business and plant facilities
● Documents such as minutes of meetings, annual financial reports, operations & systems
manuals, budgets, marketing and sales plans.

The auditor should ensure that assistants to an audit engagement obtain sufficient knowledge of
the business to enable them to carry the audit work delegated to them.

Factors to consider when formulating the audit plan

The auditor should consider the audit approach he wishes to adopt, including the extent to which
he may rely on internal controls and any aspects of the audits, which need particular attention.
Matters to consider by the auditor in developing overall audit plan include;
● Understanding the accounting and internal control systems
● the auditor should seek to understand the accounting policies adopted by the entity and
changes in these policies. The auditor’s cumulative knowledge of the accounting and internal
control systems and the relative emphasis expected to be placed on tests of control and
substantive procedures.
● Reviewing matters raised in the previous year’s audit, which may have continuing relevance
in the current year. This is done by reviewing previous year’s working papers. The auditor
will be able to identify areas noted as having weak controls or specific accounting problems.
Attention should be paid to such areas in the audit plan.
● Assessing the effects of any changes in legislation or accounting practice affecting the
financial statements of the company. The audit plan should include a review of these changes
and whether the client has complied.
● The auditor should consult with management and staff of the organization about current
trading circumstances and any significant changes in the business carried on and the
management of the enterprise. E.g. changes in management might weaken the internal
control system.
● Identify any significant changes in the clients accounting procedures such as installation of a
new computer information system. Changes to a computerized system could result in weak
controls.
● Conditions requiring special attention such as the existence of related parties.
● Consider any current or impending financial difficulties, which could face the company. E.g.
shortage of raw materials or failure to raise working capital.
● The auditor should check the nature and timing of reports and other communications with the
client so that the audit plan accommodates such timings e.g. he should consider the dates of
the annual general meeting, stock taking, dates when management reports are available.
● Set materiality levels for audit purposes and in particular identify areas with material
transactions, which call for more audit work.
● The assessment of internal audit department and level of reliance to be place on its work.
● The auditor should also determine the number of audit staff required, experience and special
skills required and the timing of the audit visits.
Audit planning memorandum
Having considered the above factors the auditor should prepare the audit-planning memorandum.
This sets out;
The outline audit approach;
● How, by whom and when each item in the financial statements will be audited;
● Timing requirements to be met for each item;
● Staff usage with time budgets for each set of audit work
● Contents of an audit-planning memorandum

The nature of information contained in an audit-planning memorandum will vary from one audit
to the other, but generally may include:

● A summary of the terms of engagement to lay out the nature and scope of the work;
● Job timetable giving the provisional dates of the timing of the audit e.g. date of planned
commencement of the audit.
● Record of any changes in the client since the last audit e.g. changes in the nature of the
client’s business, change in management structure;
● Details of the planning decisions such as areas identified as having weak internal controls
requiring more detailed audit work, areas where the advise of an expert is needed e.t.c
● Extent of reliance expected on internal audit;

Audit programs
Refer to ISA 300 Para 10 & 11
ISA 300 Para 10 “the auditor should develop and document an audit program setting out the
nature, timing and extent of planned audit procedures required to implement the overall audit
plan. The program serves the following purposes;
● As a set of instructions to audit assistants involved in the audit;
● As a means to control and record the proper execution of the work

An audit program contains;

● The audit objectives for each area being audited;

● The audit procedures to be carried out in meeting the objective;
● A time budget in which hours are budgeted for the various audit areas or procedures

Problems encountered in developing and implementing audit plans

● A firm may have many clients with similar year- end making time and staff allocation
difficult.
● Abrupt changes in the client’s business may call for more audit time outside the planned time
e.g. changes in accounting and internal control systems.
● Lack of co-operation from the client e.g. providing information in good time.
● Staff turnover.

Steps to safeguard these problems

● Close liason with the client. This will aid in reducing delays in receiving the required
information for the audit.
● Continuous staff recruitment by the firm.
● Long term strategic project planning.

Audit controlling
Refer to ISA 220 – Quality control for audit work
Audit control refers to the various policies and procedures put in place by the auditor to ensure
that all audits conducted by the firm meet the quality standards set by the accounting profession
and the firm’s own quality standards.

ISA 220 Para 2 “ quality control policies and procedures should be implemented at both the level
of the audit firm and on individual audits”

Objectives of quality control policies and procedures at the level of the audit firm
(a) To meet professional requirements- audit staff employed by the firm should adhere to the
principles of independence, objectivity, confidentiality and professional behavior.
(b) Skills and competence
The audit firm should be staffed by personnel who have attained and maintain the technical
standards and professional competence required to enable them to fulfil their responsibilities
with due care.
(c) Assignment
Audit work is to be assigned to personnel who have the degree of technical training and
proficiency required in the circumstances.
(d) Delegation
There should be sufficient direction, supervision and review of work at all levels to provide
reasonable assurance that the work performed meets appropriate standards of quality.
(e) Consultation
where necessary consultations within or outside the firm should be carried out with those
with appropriate knowledge.
(f) Acceptance and retention of clients
an evaluation of prospective clients and a review on an ongoing basis, of existing clients
should be conducted. In making a decision to accept or retain a client, the firm’s
independence and ability to serve the client properly. The integrity of the client’s
management should be considered.
(g) Monitoring
The firm should continuously monitor the adequacy and operational effectiveness of quality
control policies and procedures.

The firm’s general quality control policies and procedures should be communicated to its
personnel in a manner that provides reasonable assurance that the policies and procedures are
understood and implemented.

Quality control policies and procedures at individual audit

The following factors should be considered;
● Delegation
Audit work should be delegated by the reporting partner to staff who have appropriate
experience, training, proficiency and independence. This will provide reasonable assurance
that such work will be performed with due care by persons having the required technical
competence required.
● Direction
Audit assistants to whom work is delegated should be given appropriate
instructions/directions. This involves informing assistants of their responsibilities and the
objectives of the procedures they are to perform. This also involves informing them of
matters such as the nature of the entity’s business and possible accounting and auditing
problems that may affect the nature, timing and extent of audit procedures to be performed.
● Supervision
This involves;
o Monitoring the progress of the audit to consider whether assistants have the necessary
skills and competence to carry out their assigned tasks.
o Establish whether assistants understand the audit instructions
o Ensure that work is being carried out in accordance with the overall audit plan and the
audit program.
o To identify and address any significant accounting and auditing questions raised during
the audit.
o Resolve any differences of professional judgment between personnel

● Review
Work performed by each staff member should be reviewed by a person of equal or higher
competence, to consider;

▪ The work has been performed in accordance with the audit program
▪ The work performed and the results obtained have been adequately documented.
▪ All significant audit matters have been resolved or are reflected in audit conclusions.
▪ The objectives of the audit procedures have been achieved; and
▪ The conclusions expressed are consistent with the results of the work performed and
support the audit opinion.

Peer review
Peer review may be described as an independent review of a firm’s accounting and auditing
practices. It is intended that the review be done by practitioners upon fellow practitioners hence
the term “peer review”.
The work of the review is limited to: -
Professional aspects of the practice.
Overall total quality control policies.
Professional aspects of firm’s accounting and auditing practices like maintenance of working
papers work products such as financial statements.

Objectives of Peer Review

1. To promote compliance with professional standards and other technical pronouncements.
2. To provide reasonable assurance to users of financial statements that professional standards
have been complied with in the performance of audit and related services.
3. To gain increased user confidence in the reliability of audited financial statements.
4. To promote uniform application of generally accepted methods of professional practice.
5. To establish a mechanism of continuous quality improvement in professional practice and a
self-regulatory framework for policies and procedures.
6. To enhance the status and image of CPA’s to the public through the assurance of compliance
and quality in the performance of audit and related services.
7. To help ensure that auditors are competent and independent and to identify potential
problems in these regards at an early stage for necessary corrective action to be taken.
8. To help identify weaknesses in the audit process and provide technical assistance for
professional development.

Reasons for introducing peer review

a. There is a desire on the part of professional bodies worldwide today to ensure that their
members apply and observe professional standards.
b. The institute deems it appropriate to ensure adherence to existing technical standards
through this mechanism of monitoring compliance.
c. It is better for professional bodies to be self-regulating than to be government regulated.

Audit recording
Refer to ISA 230- documentation
Recording refers to documentation in the form of working papers prepared or obtained by the
auditor and retained by him in connection with the performance of his audit. Audit working
papers should always be sufficiently complete and detailed to enable an experienced auditor
having no previous connection with the audit to ascertain the work that was performed supports
the conclusions reached.
The auditor should record all relevant information known to him at the time, the conclusions
reached based on that information and the views of management.

Why the need for preparing good working papers?

(a) The reporting partner needs to satisfy himself that work delegated by him has been properly
performed. This is only possible by reviewing detailed working papers prepared by the audit
staff who performed the work. This also aids in supervision and review of work done by
audit assistants.
(b) Working papers provide details of problems encountered together with evidence of work
performed and conclusions drawn there from in arriving at the conclusions reached. These
details can also serve as a good reference point for future audits.
(c) Preparation of working papers encourages the auditor to adopt a methodical approach to his
work.
(d) Working papers assist in the planning and performance of audits in future financial periods.
(e) If sued for negligence working papers act as evidence of work done.
(f) They are used for training of audit staff. Working papers contain audit programs and
specimen schedules, which audit assistants can refer to when conducting an audit.
Working papers are subdivided into the current audit file (CAF) and the permanent audit file
(PAF).

The Permanent File

The permanent file usually contains documents and matters of continuing importance, which are
required for more than one financial period. Information contained in a PAF include:
a. Statutory material: governing the conduct, accounts and audit of the enterprise for
companies a Companies Act (Cap 486). For a quoted company a copy of the Nairobi
Stock Exchange regulations (NSE) is required.
b. Rules and regulations of the enterprise. The Memorandum and Articles of Association.
For a partnership, a partnership agreement.
c. Copies of documents of continuing importance and relevance to the auditor.

● Letter of engagement and minutes of appointment of the auditor.

● Trade license.
● Debenture deeds.
● Leases.
● Guarantees and indemnities entered into.

d. Addresses of the registered office and all other premises with a short description of the
work carried on at each.
e. An organisation chart showing: -
● Principal departments and subdivision thereof.
● Names of responsible officials showing lines of responsibility.
f. List of books and other records and where they are kept names, positions, specimen
signatures and initials of persons responsible for books and documents account codes and
classifications should be held.
g. An outline of history of the organisation special mention or reserves, share capital,
h. Prospectus, acquisitions of businesses and provisions.
i. Accounting policies used for material areas such as stock, work in progress,
depreciation, research and development.
Notes of interviews and correspondence of internal control matters and all past
management letters.A note of the position the company in the group and all subsidiaries
and associated
companies with holding therein.
j. A list of directors their shareholdings and service contracts.
k. A list of company’s advisors, bankers, stockbrokers, solicitors, valuers.

The Current File

This file will contain matters pertinent to the current year’s audit. It will contain:
1. A copy of the accounts being audited signed by the directors.
2. An index to the file.
3. A description of the internal control system inform of questionnaires, flowcharts or
written documents together with specimen documents.
4. Audit programme.
5. A schedule of each item in the balance sheet. Each schedule should show:
 ● Balance at the beginning of the year, changes during the year and balance at the end
of the year.
● Details of its existence, ownership and appropriate disclosure have been verified.
6. A schedule for each item in the profit and loss account showing its make up.
7. Check list for compliance with statutory disclosure requirements. Accounting standards
and auditing standards.
8. Record of queries raised during the audit and coming forward from previous audit.
9. Schedule of important statistics e.g. output, net profit margin, gross profit margin, sales
composition, liquidity ratios.
1. A record or abstract from the minutes of:
● The company
● The directors
● Any internal committee of the company whose deliberations are important to the
auditor.
11. Letters to the client setting out weaknesses in the internal control.
12. Letters of representation.

Other Working Papers

a) Manuals: Most audit firms of any size have printed audit manuals which complement
internal instruction given to staff. They contain general instructions on the firm’s method
of auditing in each area and on the audit firm’s procedures generally.
b) Audit notebooks. These were common at one time but now most notes made by audit
staff are incorporated in the current or permanent files.
c) Time sheets: These are not strictly a part of the audit working papers but are of great
importance in controlling the work of audit staff and making proper change to the clients.
d) Audit control and review sheets. These again are usually incorporated in the working
files.

Standardization working papers

This refers to predetermined format of presenting/documenting audit findings formulated by
individual audit firms e.g. specimen letters, checklists e.t.c
Advantages of using standardized working papers
● This improves the efficiency the efficiency with which they are prepared.
● They act as guidelines or instructions to audit staff and facilitates delegation of work
● They provide a means to control the quality of audit work by ensuring that minimum quality
standards are maintained.
● Ensures that all relevant issues in the audit area are addressed.
Disadvantages
● It is not appropriate to follow mechanically a standardized approach to the conduct and
documentation of the audit work without regard to the need to exercise judgment.
● Work becomes mechanical
● Client’s staff may become familiar with the method.
● The initiative of the audit staff may be stifled.