Audit planning PPT for B.Com. LPU

1. Learning Outcome
• Establish basic preliminaries to be completed before an audit
• Understand the various types of risk in auditing

2. News
• Jet Airways audit shows diversion of funds, fraudulent billing

3. Audit planning & preparation
• Planning is a process of doing a job in a systematic and methodical
manner. It is being defines:
• (a) What to do?
• (b) How to do?
• (c) When to do?
• (d) Who will do?
Planning is an organised approach to complete a task in minimum time
at minimum cost and with maximum efficiency

4. Audit planning & preparation
• Planning the audit includes establishing the overall audit strategy for
the engagement and developing an audit plan.
• Planning is not a discrete phase of an audit but, rather, a continual
and iterative process that might begin shortly after (or in connection
with) the completion of the previous audit and continues until the
completion of the current audit.

5. PURPOSE
• 1. To work with each other and with the people who will carry out the
plans
• 2. To clarify objectives
• 3. To set goals for each division
• 4. To establish policies and standard methods to guide those who do the
work
• 5. To develop programmes, strategies and schedules to keep the work
moving towards the objectives
• 6. To decide who should participate in formulating policies
• 7. To determine how much freedom of action should be given to
subordinates.

6. Considerations Before the Audit
• • Clearly defined objectives and scope for the audit?
• • Team identification and assignments?
• • Specific audit plan for the audit including timing?
• • Flowcharts or maps of the processes, areas and activities about to be
examined?
• • Review and preliminary analysis of the formal (documented)
requirements?
• • Communication and agreement with the parties about to be audited?
• • Work papers prepared to guide the auditors in conducting the audit?

7. Preliminaries before company audit
• A person, who is qualified under Section 226, will be appointed as auditor to
company under Section 224, Before Commencing the Audit work the following
preliminary steps are to be executed.
7

8. i. Verification of Appointment: First of all auditor has to conform whether his appointment
is properly made or not. If appointment is not proper, he can claim remuneration, if he is
appointed by share holders, he has to see whether the procedure specified under Section
224, is properly followed or not. If he is appointed by directors he has to go through the
resolution made by the court.
ii. Verification of Memorandum: Memorandum is started of the company. It deals with
external affairs of the company. Out of its clauses, the information written under objects
clause, liability clause and capital clause is useful to auditor. Therefore he should refer to
memorandum and such information should be taken to audit notebook.
8

9. iii. Verification of Articles: Articles read about internal affair of the Company. It
includes calls on share, transfer of shares, transmission of shares, reserves,
payment of dividend etc. All these things are useful to Company auditor and hence
abstracts from articles should be taken to audit notebook.
iv. Verification of Prospectus: Before commencing the audit work, auditor should
refer to prospectus also to obtain information relating to minimum subscription,
preliminary expenses, underwriters commission, terms of issue etc.
9

10. v. Verification of Contract Deeds: On account of legal entity company can enter
into contracts. Auditor should refer to those contract deeds to know about names
of parties to the Contract, Contract prices, other terms etc.
vi. Verification of Certificate of incorporation and certificate of Commencement
of business: If it is first audit of the company, auditor should refer to Certificate of
Incorporation and Certificate of Commencement of Business issued by registrar of
Companies to conform that the company has got formed properly in accordance
with requirements of companies act.
10

11. vii. Verification of Internal Check System: Internal check means arrangement of
staff in such a way where work done by one clerk automatically gets checked by the
other. Well planned internal check system minimizes scope for frauds and errors. In
presence of well designed internal check system, auditor can follow shortcut
methods like test checking etc. Good internal check system reduces the work load
of auditor.
viii. List of Books: Auditor should obtain list of books maintained by the company.
Company maintains several statutory books or compulsory books, Statistical or
Optional books, Cost records, financial records etc. All those books are to be listed.
11

12. ix. List of Offices: Auditor should refer to organization chart of the company and
key positions are to be found. Here auditor has to gather names, rights, duties,
specimen signatures etc. of staff members employed at such key positions.
12

13. Steps

14. Steps
• 1. Determine Audit Subject : Identifying area to be audited , it include
location, function, system .
• 2. Define Audit Objective :Identifying the purpose of audit i.e. to
determine whether the program changes occur in well defined and
controlled env.
• 3. Set audit scope : Identifying the specific system, function and unit
of organization. It include detailed information regarding subject
chosen for audit.

15. Steps
• 4. Perform pre audit planning :Conducting a risk management,which
is critical in setting final scope of risk based audit. For other types of
audits, conducting a risk assesment is a good practice because the
results help audit team to justify the scope and further preplanning
focus.
• Identifying regulatory compliance requirements.
• Once subject, objective and scope are defined, the audit team can
identify the resources that will be needed to perform the audit work.

16. Steps
• 5. Determine steps for data gathering : At this stage of audit process,
audit team should have enough information to identify and select
audit approaches/ strategy and start developing the audit program.
• Identify and obtain department policies,standards and guidelines for
review.
• Identifying methods to perform the evaluation.
• Develop audit tools and methodology to test and verify controls
Identifying criteria for evaluating test.
• Define a methodology to evaluate that test and its result ‘s accuracy.

17. Audit Procedures
• Audit procedures are used by auditors to determine the quality of the financial
information being provided by their clients.
• The exact procedures used will vary by client, depending on the nature of the
business and the audit assertions that the auditors want to prove.
17

18. General classifications of audit procedures
1. Classification testing- Audit procedures are used to decide
whether transactions were classified correctly in the accounting records. For example,
purchase records for fixed assets can be reviewed to see if they were correctly
classified within the right fixed asset account.
2. Completeness testing. Audit procedures can test to see if any transactions are
missing from the accounting records. For example, the client's bank statements could
be perused to see if any payments to suppliers were not recorded in the books, or if
cash receipts from customers were not recorded.
18

19. 3. Cutoff testing- Audit procedures are used to determine whether transactions
have been recorded within the correct reporting period. For example, the shipping
log can be reviewed to see if shipments to customers on the last day of the month
were recorded within the correct period.
4. Occurrence testing- Audit procedures can be constructed to determine whether
the transactions that a client is claiming have actually occurred. For example, one
procedure might require the client to show specific invoices that are listed on
the sales ledger, along with supporting documentation such as a customer order
and shipping documentation.
19

20. 5. Existence testing- Audit procedures are used to determine whether assets exist.
For example, the auditors can observe an inventory being taken, to see if
the inventory stated in the accounting records actually exists.
6. Rights and obligations testing. Audit procedures can be followed to see if a client
actually owns all of its assets.For example, inquiries can be made to see if inventory
is actually owned by the client, or if it is instead being held on consignment from a
third party.
20

21. 7. Valuation testing- Audit procedures are used to determine whether the
valuations at which assets and liabilities are recorded in a client's books are correct.
For example, one procedure would be to check market pricing data to see if the
ending values of marketable securities are correct.
A complete set of audit procedures is needed before the auditor has enough
information to decide whether a client's financial statements fairly represent its
financial results, financial position, and cash flows.
21

22. How to Prepare for an Audit
• Notification of Audit
• Entrance Conference
• Preliminary Survey
• Audit Work
• Exit Conference
• Issuance of the Audit Report
• Follow-up on Responses
22

23. A. Notification of Audit
• Prior to the start of each audit, the director sends a letter of notification to the
appropriate official(s) in the area being audited.
• The letter of notification gives the name of the auditor in charge, the nature of
the audit, the audit objectives, and asks for the cooperation of the responsible
official.
23

24. B. Entrance Conference
• It is customary for the Director or Associate Director and the auditor in charge to
meet with the responsible official in the department being audited prior to the
beginning of the audit.
• This meeting is used to introduce the audit staff, to communicate to the
responsible official the nature of the audit, establish a person as the key contact
in the area being audited, and agree on a time when the audit will commence.
24

25. C. Preliminary Survey
• The auditor makes a preliminary survey of the area under
review in order to become familiar with the policies and
procedures which might impact the area being audited.
• Gain understanding of existing procedures through observation, by
discussions with staff, or review of documentation
• Identify existing internal and accounting controls applicable to the
area being audited
• Establish the scope of the audit based on information obtained and
risk assessment
• Review applicable policies and/or procedures
• Prepare an audit program which outlines the nature and the extent
of audit tests that will be performed
25

26. D. Audit Work
• Perform audit tests
• Document the audit work performed
• Discuss audit "findings" with appropriate officials
• Draft audit report
• Review audit work
• Circulate draft audit report
26

27. E. Exit Conference
• An exit conference will be held so that the audit team and appropriate officials
can discuss the draft audit report and review management responses.
• Every effort is made to correct statements that may be misleading or subject to a
wrong interpretation.
• This is an opportunity to discuss how the audit went and any remaining issues.
27

28. F. Issuance of the Audit Report
• The auditor in charge is responsible for preparing a final version of the audit
report.
• Once the final report has been approved by the Director, copies of the report are
sent to the President, the Senior Vice President for Administration and Finance,
and to all involved Institute officials.
28

29. G. Follow-up on Responses
• The follow-up may be informal observations of corrective action or, in some
instances, may take the form of a subsequent audit.
• The nature of the follow-up will be dictated by the seriousness and complexity of
the deficiencies noted.
29

30. 5C’s
Each audit finding within the body of the report may contain five elements,
sometimes called the "5 C’s”:
• Condition: What is the particular problem identified?
• Criteria: What is the standard that was not met? The standard may be a
company policy or other benchmark.
• Cause: Why did the problem occur?
• Consequence: What is the risk/negative outcome (or opportunity foregone)
because of the finding?
• Corrective action: What should management do about the finding? What
have they agreed to do and by when?
30

31. Quality of Internal Audit Report
• Objectivity - The comments and opinions expressed in the Report should be
objective and unbiased.
• Clarity - The language used should be simple and straightforward.
• Accuracy - The information contained in the report should be accurate.
• Brief - The report should be concise. (Brief but comprehensive)
• Timeliness - The report should be released promptly immediately after the
audit is concluded, within a month.
31

32. Reliance Industries Auditors Report
• https://www.business-standard.com/company/reliance-inds-
476/annual-report/auditors-report

33. Audit Risk
• Audit risk is the risk that the financial statements are materially incorrect, even
though the audit opinion states that the financial reports are free of any material
misstatements.
• Because creditors, investors, and other stakeholders rely on the financial
statements, audit risk may carry legal liability for a CPA firm performing audit
work.
• Audit risk (also referred to as residual risk) refers to the risk that an auditor may
issue an unqualified report due to the auditor's failure to detect material
misstatement either due to error or fraud.
33

34. A. Types of Audit Risk
1. Inherent risk (IR), the risk involved in the nature of business or
transaction. Example, transactions involving exchange of cash may have
higher IR than transactions involving settlement by cheques. The
term inherent risk may have other definitions in other contexts.
2. Control risk (CR), the risk that a misstatement may not be prevented
or detected and corrected due to weakness in the entity's internal
control mechanism. Example, control risk assessment may be higher in
an entity where separation of duties is not well defined.
3. Detection risk (DR), the probability that the audit procedures may fail
to detect existence of a material error or fraud. Detection risk may be
due to sampling error or non-sampling error.
34

35. B. Formula for Audit Risk
35

36. There are Four Big Audit Firms in India:
• Deloitte
• KPMG (Klynveld Peat Marwick Goerdeler)
• EY (Ernst and Young) (Also known as SRBC and Co. LLP)
• PWC(Price Water Coopers)

37. • https://pcaobus.org/Standards/Auditing/Pages/AS2101.aspx

38. MCQ
• _________ is a technical term which refers to the inspection of
documentary evidence supporting and
• substantiating a transaction.
• A. Checking
• B. Vouching
• C. Valuation
• D. Routine checking

39. MCQ
• Which of the following statement is generally, correct about the
reliability of audit evidence?
• A. To be reliable, evidence should conclusive rather than persuasive
• B. Effective internal control system provides reliable audit evidence
• C. Evidence obtained from outside sources routed through the
client
• D. Information collected within in organization can be accepted

40. MCQ
• Test checking implies ________.
• A. checking only a few items in detail
• B. checking each and every item
• C. checking a part of books
• D. checking a representative sample of items.