Audit Strategy, Audit Planning and Audit Programme – CA Inter Audit Notes

Audit Strategy, Audit Planning and Audit Programme – CA Inter Audit Notes is designed strictly as per the latest syllabus and exam pattern.

Audit Strategy, Audit Planning and Audit Programme – CA Inter Auditing Notes

Question 1.
“The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business” Discuss stating clearly the broad points you would be covering in framing plan to conduct audit in an efficient and effective manner. [MTP-March 18, March 19]
Or
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. Discuss stating clearly the broad points you would be covering in framing plan to conduct audit in an efficient and effective manner. [MTP-Oct. 18]
Or
The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business. Explain. [RTP-Nov. 18]
Or
Plans should be made to cover acquiring knowledge of the client’s accounting systems, policies and internal control procedures. Explain. [RTP-Nov. 19]
Answer:
Points to be covered in framing audit plan:

Planning in auditing encompasses developing an overall plan for the expected scope and conduct of the audit and developing an audit programme showing the nature, timing and extent (NTE) of audit procedures.
The audit planning is necessary to conduct an effective audit in an efficient and timely manner.
SA 300 “Planning an Audit of Financial Statements” deals with the auditor’s responsibility to plan an audit of financial statements.
Plans should be made to cover, among other things:
(a) acquiring knowledge of the client’s accounting systems, policies and internal control procedures;
(b) establishing the expected degree of reliance to be placed on internal control;
(c) determining and programming the nature, timing, and extent of the audit procedures to be performed;
(d) coordinating the work to be performed.

Question 2.
Write short note on: Usefulness of careful and adequate audit planning.
Or
Surya and Chand Ltd is a manufacturing company engaged in the production of miscellaneous electrical goods. Trilochan and Co. has been appointed as the auditors to carry out its audit. Au¬ditor thinks that Planning an audit would involve establishing the overall audit strategy for the engagement and developing an audit plan. Also, Adequate planning benefits the audit of financial statements in several ways. Analyse and Advise explaining the benefits of adequate planning. [RTP-May 18]
Or
“An adequate planning benefits the audit of financial statements.” Discuss. [Nov. 18 (5 Marks)]
Or
Explain the benefits of planning in the audit of financial statements. [RTP-May 19]
Or
Engagement partner of Audit Firm MKC AND COMPANY thinks that Planning an audit would involve establishing the overall audit strategy for the engagement and developing an audit plan. Also, Ade¬quate planning would benefit the audit of financial statements in several ways. Analyse explaining the benefits of adequate planning. [RTP-Nov. 19]
Answer:
Usefulness of Careful and Adequate Audit Planning:

To ensure that appropriate attention is devoted to important areas of the audit: This is done through formal written audit plan, laying down the objectives and the procedures to be followed in order to meet those objectives.
To facilitate review: Work should be delegated to staff with the appropriate level of experience. All work should be properly supervised and reviewed by a senior member of staff.
To ensure that potential problems are identified: The auditor must ensure that resources are directed towards material/high risk areas.
To assist in the proper assignment of work: This may be to members of the audit team or to experts or other auditors. It helps the audit to proceed in a timely and efficient manner.
Coordination of work done by auditors of components and experts.

Question 3.
In performing an audit of financial statements, the auditor shall have or obtain knowledge of the business. Explain in the light of SA 315. [May 04 (8 Marks), MTP-Oct. 19]
Or
State the matters to be considered for acquiring knowledge of the business of the client by the auditor. [May 05 (6 Marks)]
Or
Write short note on: Knowledge of Client’s Business. [May 09 (5 Marks)]
Or
‘Knowledge of Client business’ is one of the important principles in developing an overall audit plan. Explain. [Nov. 17 {6 Marks)]
Answer:
Knowledge of Client’s Business:
Knowledge of client’s business is one of the important principles in developing an overall audit plan. In fact, without adequate knowledge of client’s business, a proper audit is not possible.
As per SA 315 “Identifying and Assessing the Risk of Material Misstatements through understanding the entity and its environment” auditor is required to obtain an understating of following as a part of risk assessment procedures:
(a) Industry, regulatory, and other external factors including applicable financial reporting framework,

(b) The nature of the entity, including:

its operations;
its ownership and governance structures;
the types of investments that the entity is making and plan to make; &
the way that the entity is structured and how it is financed;

(d) The entity’s objectives and strategies, and those related business risks that may result in risks of material misstatement.

(e) The measurement and review of the entity’s financial performance.

Question 4.
Knowledge of the Client’s business is one of the important principles in developing an overall audit plan. In fact without adequate knowledge of client’s business, a proper audit is not possible. As per SA-315, “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and Its Environment”, the auditor shall obtain an understanding of the relevant industry, regulatory and other external factors including the applicable financial reporting framework. Substantiate with the help of examples. [RTP-May 20]
Answer:
Examples of industry, regulatory and other external factors including the applicable FRF:

The competitive environment, including demand, capacity, product and price competition as well as cyclical or seasonal activity.
Supplier and customer relationships, such as types of suppliers and customers (e.g., related parties, unified buying groups) and the related contracts with those entities.
Technological developments, such as those related to the entity’s products, energy supply and cost.
The effect of regulation on entity operations.

Question 5.
“The Nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors.” Explain.
The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. Explain the factors due to which above varies. [MTP-May 20, RTP-Nov. 20]
Answer:
Planning the Direction and Supervision of Engagement Team:
As per SA 300 “Planning an Audit of Financial Statements” the auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work.

The nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors, including:
(a) The size and complexity of the entity.
(b) The area of the audit.
(c) The assessed risks of material misstatement (for example, an increase in the assessed risk of material misstatement for a given area of the audit ordinarily requires a corresponding increase in the extent and timeliness of direction and supervision of engagement team members, and a more detailed review of their work],
(d) The capabilities and competence of the individual team members performing the audit work.

Question 6.
“Planning is not a discrete phase of an audit, butrather a continual and iterative process”. Discuss.
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement. Analyse and Explain. [RTP-Nov. 19]
Answer:
Planning – a continuous process:
Planning is not a discrete phase of an audit but rather a continuous process. It often begins shortly after (or in connection with] the completion of the previous audit and continues until the completion of the current audit engagement.

Planning, however, includes consideration of the timing of certain activities and audit procedures that need to be completed prior to the performance of further audit procedures. For example, planning includes the need to consider, prior to the auditor’s identification and assessment of the risks of material misstatement, such matters as:

The analytical procedures to be applied as risk assessment procedures.
Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.
The determination of materiality.
The involvement of experts.
The performance of other risk assessment procedures.

Question 7.
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. Explain. [RTP-Nov. 18]
Or
As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results of audit procedures, the auditor may need to modify the overall audit strategy and audit plan. Explain. [RTP-Nov. 19]
Or
Plans should be further developed and revised as necessary during the course edit. Explain. [RTP-May 20]
Answer:
Changes to Planning decisions:
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. The auditor may need to modify the overall audit strategy and audit plan as a result of:

unexpected events,
changes in conditions, or
the audit evidence obtained from the results of audit procedures.

Based on the revised consideration of assessed risks, auditor need to modify the nature, timing and extent of further audit procedures. This may be the case when information comes to the auditor’s attention that differs significantly from the information available when the auditor planned the audit procedures. For example, audit evidence obtained through the performance of substantive procedures may contradict the audit evidence obtained through tests of controls.

Question 8.
The auditor shall document the overall audit strategy, the audit plan, and any significant changes i made during the audit engagement to the overall audit strategy or the audit plan, and the reasons [ for such changes. Explain, [MTP-Aug. 18, RTP-Nov. 18, Nov. 20]
Answer:
Documentation of Audit Plan:
The auditor shall document:
[a] The overall audit strategy;
[b] The audit plan; and
[c] Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes.

Documentation of the overall audit strategy is a record ofthe key decisions considered necessary to properly plan the audit and to communicate significant matters to the engagement team.

Documentation ofthe audit plan is a record oftheplanned NTRofRAPsand FAPs at the assertion level in response to the assessed risks. It also serves as a record of the proper planning ofthe audit procedures that can be reviewed and approved prior to their performance.

Record of the significant changes to the overall audit strategy and the audit plan, and resulting changes to the planned NTE of audit procedures, explains why the significant changes were made, and the overall strategy and audit plan finally adopted for the audit.
Examples of Audit Documentation:
(a) Summary of discussions with the entity’s key decision makers.
(b) Documentation of audit committee pre-approval of services, where required.
(c) Audit documentation access letters.
(d) Other communications or agreements with management or TCWG regarding the scope, or changes in scope, of services.
(e) Auditor’s report on the entity’s financial statements.
(f) Other reports as specified in the engagement agreement.

Question 9.
Write short note on: Factors to be considered in the development of overall audit plan.
Or
A & Co. was appointed as auditor of Great Airways Ltd. As the audit partner what factors shall be considered in the development of overall audit plan?
Or
M & Co. was appointed as auditor of IGI Ltd. As an auditor what are the factors that would be con¬sidered in the development of overall audit plan? [May 18 (5 Marks), MTP-April 19]
Or
Your firm has been appointed as an auditor to audit the accounts of an auto parts manufacturer, ABC Ltd. Elucidate the matters to be considered by an auditor in developing his overall plan for the expected scope and conduct of audit. [MTP-Oct. 20]
Answer:
Factors to be considered in development of overall Plan:

Terms of his engagement and any statutory responsibilities.
Nature and timing of reports or other communications.
Applicable Legal or Statutory requirements,
Accounting policies adopted by the clients and changes, if any, in those policies.
The effects of new accounting and auditing pronouncement on the audit.
Identification of significant audit areas.
Setting of materiality levels for the audit purpose.
Conditions requiring special attention such as the possibility of material error or fraud or involvement of parties in whom directors or persons who are substantial owners of the entity are interested and with whom transactions are likely.
Degree of reliance to be placed on the accounting system and internal control.
Possible rotation of emphasis on specific audit areas.
Nature and extent of audit evidence to be obtained.
Work of the internal auditors and the extent of reliance on their work, if any in the audit.
Involvement of other auditors in the audit of subsidiaries or branches of the client and involvement of experts.
Allocation of works to be undertaken between joint auditors and the procedures for its control and review.
Establishing and coordinating staffing requirements.

Question 10.
The process of establishing the overall audit strategy assists the auditor to determine certain mat¬ters with respect of team resource. Explain those matters.
Or
Auditor of ABC Ltd. is worried as to management of key resources to be employed to conduct audit. How the audit strategy would be helpful to the auditor?
Or
The engagement partner of AST AND ASSOCIATES, firm of Chartered Accountants appointed as auditor of Fabric India Ltd is considering as to management of key resources to be employed to conduct audit. Discuss how overall audit strategy would assist the auditor. [MTP-March 18]
Or
Describe how the process of establishing the overall audit strategy assists the auditor in marshalling his human resources. [May 19 [4 Marks)]
Or
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan. The process of establishing the overall audit strategy assists the auditor to determine such matters as for example – the resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters. Explain the other three such matters. [RTP-May 20J
Answer:
Benefits of Audit Strategy:

Employment of Qualitative Resources:
Audit strategy helps in deploying the appropriate resources for specific audit areas, such as the use of experienced team members for high risk areas or the involvement of experts on complex matters.
Allocation of Quantity of Resources:
Audit strategy helps in allocating the appropriate number of resources to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas.
Timing of Deployment of Resources:
Audit strategy helps in determining the timing of deploying the resources, such as whether at an interim audit stage or at key cut-off dates.
Management of Resources:
Audit strategy helps in managing, directing, supervising the resources, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place [for example, on-site or off-site), and whether to complete engagement quality control reviews.

Question 11.
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.
Discuss stating the process of establishing the overall audit strategy that would assist the auditor to determine key matters. [RTP-Nov. 18]
Answer:
Process of establishing the overall audit strategy:
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.

The process of establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditor’s risk assessment procedures, such matters as:

The resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters;
The amount of resources to allocate to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas;
When these resources are to be deployed, such as whether at an interim audit stage or at key cut-off dates; and
How such resources are managed, directed and supervised, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place (for example, on-site or off-site), and whether to complete engagement quality control reviews.

Question 12.
Comment on the following in relation to SAs: Auditor shall establish an overall strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan. [May 11 (5 Marks)]
Or
Discuss the factors the auditor will consider while establishing the overall strategy.
Answer:
Establishment of Audit Strategy:
(a) SA 300 “Planning an Audit of Financial Statements” requires that the auditor shall establish an
overall audit strategy that sets the scope, timing and direction of the audit, and that guides the
development of the audit plan.

(b) In establishing the overall audit strategy, the auditor shall;

Identify the characteristics of the engagement that define its scope;
Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required;
Consider the factors that are significant in directing the engagement team’s efforts;
Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and
Ascertain the NTE of procedures necessary to perform.

Question 13.
Discuss the relationship between overall audit strategy and audit plan.
Or
“Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy”. Discuss.
Or
The establishment of the overall audit strategy and the detailed audit plan are closely inter-related. Explain. [MTP-March 19]
Answer:
Relationship between the Overall Audit Strategy and the Audit Plan:

Audit strategy and audit plan are interrelated to each other because change in one would result into change in the other.
The audit strategy is prepared before the audit plan. The audit plan contains more details than the overall audit strategy.
The audit strategy provides the guidelines for developing the audit plan. Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy.
Audit strategy establishes the scope, timing and direction of the audit and thereby works as basis for developing a detailed audit plan.
Detailed audit plan would include the nature, timing and extent of the audit procedures so as to obtain sufficient appropriate audit evidence.

Question 14.
In establishing overall audit strategy, the auditor shall ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. Elucidate those cases by which auditor can ascertain the reporting objectives of the engagement. [Nov. 19 (4 Marks)]
Answer:
Cases by which by which auditor can ascertain the reporting objectives of the engagement:
As per SA 300 “Planning an Audit of Financial Statements” the auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan. In establishing the overall audit strategy, the auditor shall, among other ascertain the reporting objectives of the engagement to plan the timing of the audit. Various cases through which auditor can ascertain the reporting objectives of the engagement are:

The entity’s timetable for reporting, such as at interim and final stages.
The organization of meetings with management and those charged with
Governance to discuss the nature, timing and extent of the audit work.
The discussion with management and those charged with governance regarding the expected type and timing of reports to be issued and other communications, both written and oral, including the auditor’s report, management letters and communications to those charged with governance.
The discussion with management regarding the expected communications on the status of audit work throughout the engagement.

Question 15.
Write short note on: Audit Programme. [Nov. 06 (4 Marks)]
Or
“An audit programme is a detailed plan of applying the audit procedure in the given circumstance for accomplishing the audit objectives”. Discuss.
Answer:
Audit Programme:

An Audit programme is a detailed plan of work, prepared by the auditor for carrying out an audit.
It is comprised of a set of techniques and procedures, which the auditor plans to apply in the given audit for forming an opinion about the client’s statement of account.
It not only constitutes the plan of the work but also provides a basis for the supervision and control of the audit work.
The programme may also contain the audit objectives for each audit step.
It should be sufficient in detail to serve as a set of instructions to the audit staff involved in the audit and also as a means to control the proper execution of the work.

Advantages of Audit Programme:

It provides guidance and instructions on the work to be carried out e.g. manner of picking up transactions for sample test.
It provides a clear record of the work to be carried out by the individual staff assigned on the audit.
The progress of audit work can be reviewed by the audit managers or the partners.
Chances of duplication of work are eliminated.
Chances of overlooking the important areas of audit are also eliminated.
Evidence of work done is available when the auditor is to defend his performance against charge of negligence.
It serves as a guide for audits to be carried out in the succeeding year.

Question 16.
Explain the significant points auditor would consider while developing an audit programme. [RTP-May 19]
Or
List out the points that should be kept in mind by the auditor for the purpose of constructing an audit programme. [May 19 (3 Marks)]
Or
Discuss the points to be considered by auditor for the purpose of constructing an audit programme. [Nov. 19 (4 Marks)]
Answer:
Points to be considered in constructing Audit Programme:
For the purpose of programme construction, the following points should be kept in mind:

Be within the scope and limitation of the assignment.
Determine the evidence reasonably available and identify the best evidence for deriving the necessary assurance.
Only those techniques and procedures which are useful in accomplishing the verification purpose should be applied.
Consideration of all possibilities of errors and fraud.
Co-ordinate the procedures to be applied to related items.

Question 17.
Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques.
Analyse and explain with the help of example of evidence in respect of Sales. [RTP-May 20]
Answer:
Audit Programme-Designed to provide Audit Evidence:

Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques.
Whatisbestevidencefortestingtheaccuracyofanyassertionisamatterofexpertknowledgeand experience. This is the primary task before the auditor when he draws up the audit programme.
Transactions are varied in nature and impact; procedures to be prescribed depend on prior knowledge of what evidence is reasonably available in respect of each transaction.
Example, sales are evidenced by:
- invoices raised by the client;
- price list;
- forwarding notes to client;
- inventory-issue records;
- sales managers’ advice to the inventory section;
- acknowledgements of the receipt of goods by the customers; and collection of money against sales by the client.

Question 18.
Discuss the following: Despite of several disadvantages, audit programme is required to start an audit. [Nov. 13 (5 Marks)]
Or
How does an audit programme help to plan and perform the audit?
Answer:
Requirement of Audit Programme:
The audit programme is required to start an audit due to the following considerations:

The audit programme lists down areas of audit before commencement.
Audit programme covers the audit timings and hence it becomes a schedule of audit plan.
Audit programme allocates the work among the staff members and thereby fixes a responsibility over them.
It specifies the procedures to be performed during the audit.
Audit programme acts as a check list during the performance of audit.
The working papers of the audit staff can be reviewed against the audit programme to evaluate the performance before reporting on the financial statements.
It also works as a basis for billing the clients for the time and manpower involved in the audit.

Question 19.
Arpana Hospitals Ltd having Gross Professional Charges of ? 50 crores is engaged in providing healthcare services. STP & Co., a firm of auditors is appointed as its auditors.
Advise what special points to be kept in mind for the purpose of construction of an Audit programme. Explain. [RTP-May 18]
Answer:
Points to be considered in constructing Audit Programme:
For the purpose of programme construction, the following points should be kept in mind:

Be within the scope and limitation of the assignment.
Determine the evidence reasonably available and identify the best evidence for deriving the necessary assurance.
Only those techniques and procedures which are useful in accomplishing the verification purpose should be applied.
Consideration of all possibilities of errors and fraud.
Co-ordinate the procedures to be applied to related items.

Question 20.
“The utility of the audit programme can be retained and enhanced only by keeping the programme sand also the Client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme may be removed”. Explain. [RTP-May 19]
Answer:
Periodic Review of The Audit Programme
Periodic review of the audit programme is required to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions. If periodic review is not done, any change in the business policy of the client may not be adequately known, and consequently, audit work may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences.

It was held in the case of Pacific Acceptance Corporation Ltd. v. Forsyth and Others, that if the audit programme for the audit of a branch of a financing house, drawn up a number of years ago, fails to take into consideration that the previous policy of financing of a vehicle has been changed to financing of real estate acquisition, the whole audit conducted thereunder would be entirely misdirected and may even result into nothing more than a farce.

The utility of the audit programme can be retained and enhanced only by keeping the programme as also the client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme maybe removed. However, as a basic feature, audit programme not only lists the tasks to be carried out but also contains a few relevant instructions, like the extent of checking, the sampling plan, etc.

Question 21.
What are the disadvantages of the use of an Audit Programme. [May 07 (4 Marks)]
Or
Write short note on: Disadvantages of the use of an Audit Programme. [May 12 (4 Marks)]
Answer:
Disadvantages of Audit Programme:
(a) The audit work tends to become mechanical and monotonous, unless the audit objectives for each step are clear to the person/staff deployed.
(b) The audit work may be partially accomplished but may give an impression that the audit has been fully done if the programme does not record evidence of performing the work.
(c) If the client’s system of business line has changed but the programme has not been tailored to the changes, it may fail to serve the intended purpose and an audit failure may result.
(d) The initiative of the audit staff is dampened if the programme is to be rigidly followed.
(e) The clients staff may become aware of the scope of audit as per programme and this may provide them an opportunity for manipulation of records or for committing fraud since they become aware about the auditor’s approach.

Question 22.
Evolving one audit programme applicable to all audit engagements under all circumstances is not practicable. Explain [RTP-May 18, May 19, Nov. 20]
Answer:
Uniform Audit Programme applicable to all audit assignments:
Evolving one audit programme applicable to all audit engagements under all circumstances is not practicable due to following reasons:

Businesses vary in nature, size and composition;
Work which is suitable to one business may not be suitable to others;
Efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor differs from assignment to assignment.

However, it is an essential requirement that audit programme, specify in detail, the nature of work to be done so that no time will be wasted on matters not pertinent to the engagement and any special matter or any specific situation can be taken care of.

Question 23.
Explain concept of materiality and factors which act as guiding factors to this concept. [Nov. 09 (6 Marks)]
Or
State the factors which are to be considered in determining materiality. [Nov. 15 (4 Marks)]
Answer:
Concept of Materiality:

SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality and its relationship with audit risk. As per SA 320 information is material if its misstatement (i.e. omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information.
The concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of financial information in conformity with recognised accounting policies and practices.
The auditor considers materiality at both the overall financial information level and in relation to individual account balances and classes of transactions. The concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of financial information in conformity with recognised accounting policies and practices.

Factors influencing materiality: Materiality may be influenced by

Legal and regulatory requirements, non-compliance of which may have a significant bearing on the financial information, and
Considerations which may have a significant bearing on the financial information, and
Considerations relating to individual account balances and relationships. These factors may result in different levels of materiality depending on the matter being audited.

Question 24.
State the factors which are to be considered in determining materiality. [Nov. 15 (4 Marks)]
Answer:
Factors influencing materiality:

Legal and regulatory requirements, non-compliance of which may have a significant bearing on the financial information, and
Considerations which may have a significant bearing on the financial information, and
Considerations relating to individual account balances and relationships.
These factors may result in different levels of materiality depending on the matter being audited.

Question 25.
Write short note on: Materiality and Audit Risk. [Nov. 14 (4 Marks)]
Answer:
Materiality and Audit Risk:
SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality and its relationship with audit risk. Accordingly,

In conducting an audit of financial statements, the overall objectives of the auditor are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings.
The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
Audit riskis the riskthatthe auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Audit risk is a function of the risks of material misstatement and detection risk. Materiality and audit risk are considered throughout the audit, in particular, when:
(a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures; and
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report

Question 26.
Write short note on: Factors affecting the identification of an appropriate benchmark in determining materiality.
Or
Mr. X was appointed as the auditor of M/s Easy Go Ltd. and intends to apply the concept of materi¬ality for the financial statements as a whole. Please guide him as to the factors that may affect the identification of an appropriate benchmark for this purpose.
“Determining materiality involves the exercise of professional judgment”. Discuss stating the factors that may affect the identification of an appropriate benchmark. Also give examples. [RTP-May 18]
Or
With reference to SA 320 indicate the factors which may affect the identification of an appropriate benchmark in determining materiality for the financial statements as a whole. [Nov. 15 (5 Marks)]
Or
With reference to SA 320 “Materiality in planning and performing an audit” Indicate the factors
which may effect the identification of an appropriate benchmark while determining materiality for the financial statements as a whole. [Nov. 20 (4 Marks)]
Answer:
Factors affecting identification of appropriate benchmark as per SA 320:
Determining materiality involves the exercise of professional judgment. Apercentage is often applied
to a chosen benchmark as a starting point in determining materiality for the financial statements as a
whole. Factors that may affect the identification of an appropriate benchmark include the following:

The elements of the financial statements [for example, assets, liabilities, equity, revenue, expenses);
Whether there are items on which the attention of the users of the particular entity’s financial statements tends to be focused [for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates;
The entity’s ownership structure and the way it is financed [for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings); and
The relative volatility of the benchmark.

Question 27.
As an auditor of RST Ltd. Mr. P applied the concept of materiality for the financial statements as a whole. On the basis of obtaining additional information of significant contractual arrangements that draw attention to a particular aspect of a company’s business, he wants to re-evaluate the materiality concept. Please guide him.
Or
Materiality for the financial statements as a whole may need to be revised as a result of a change in circumstances that occurred during the audit. Explain with the help of example. [MTP-Olt. 19]
Answer:
Revision as the Audit Progresses

SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality.
As per SA 320, auditor shall revise materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially.
If the auditor concludes that a lower materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate.

Example: If during the audit it appears as though actual financial results are likely to be substantially different from the anticipated period end financial results that were used initially to determine materiality for the financial statements as a whole, the auditor revises that materiality.

Materiality is an important consideration for an auditor to evaluate whether the financial statements reflect a true or fair view or not. SA 320 on “Materiality in Planning and Performing an Audit” requires that an auditor should consider materiality and its relationship with audit risk while conducting an audit.
When planning the audit, the auditor considers what would make the financial information materially misstated. The auditor’s preliminary assessment of materiality related to specific account balances and classes of transactions helps the auditor decide such questions as what items to examine and whether to use sampling and analytical procedures.
This enables the auditor to select audit procedures that, in combination, can be expected to support the audit opinion at an acceptably low degree of audit risk.
It may be noted that the auditor’s assessment of materiality and audit risk may be different at the time of initially planning of the audit than at the time of evaluating the results of audit procedures.

Objective Type Questions (Correct/Incorrect)

Question 1.
SA 315 has a purpose to establish standards to form procedures to be followed to have an understanding of the entity and its environment.
Answer:
Statement is correct.
SA 315 “Identifying and Assessing the Risk of Material Misstatements through Understanding the Entity and its Environment” deals with the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements, through understanding the entity and its environment, including the entity’s internal control.

Question 2.
The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely inter-related since changes in one may result in consequential changes to the other.
Answer:
Statement is correct.

Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking into account the need to achieve the audit objectives through the efficient use of the auditor’s resources.
The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely inter-related since changes in one may result in consequential changes to the other.

Question 3.
Establishing an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan is prerogative of the management.
Answer:
Statement is incorrect.
As per SA 3 0 0 “Planning an Audit of Financial Statements” to establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan is the part of audit planning activities.

Question 4.
Planning is a discrete phase of an audit.
Answer:
Statement is incorrect.
As per SA 300 “Planning an Audit of Financial Statements” planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.

Question 5.
Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures)does not need any revision.
Answer:
Statement is incorrect.
As per SA 320 “Materiality in Planning and Performing an Audit” materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures] may need to be revised as a result of

a change in circumstances that occurred during the audit (for example, a decision to dispose of a major part of the entity’s business],
new information, or
a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures.

Question 6.
There is direct relationship between materiality and the degree of audit risk. [RTP-May 18]
Answer:
Statement is incorrect.

As per SA 3 2 0 “Materiality in Planning and Performing an Audit” there is an inverse relationship between materiality and the degree of audit risk.
The higher the materiality level, the lower the audit risk and vice versa. For example, the risk that a particular account balance or class of transactions could be misstated by an extremely large amount might be very low but the risk that it could be misstated by an extremely small amount might be very high.

Question 7.
There is no relation between Audit Plans and knowledge of the client’s business. [RTP-May 19]
Answer:
Statement is incorrect.

The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner.
Plans should be based on knowledge of the client’s business

Question 8.
Planning is not a discrete phase of an audit, but rather a continual and iterative process. [RTP-May 19]
Answer:
Statement is correct.

As per SA-300, “Planning an Audit of Financial Statements”, planning is not a discrete phase of an audit, but rather a continual and iterative process.
Planning often begins shortly after (or in connection with] the completion of the previous audit and continues until the completion of the current audit engagement.

Question 9.
A well designed and drafted audit plan and audit strategy which takes care of all the uncertainties and conditions, need not be changed during the course of audit. [Nov. 18 (2 Marks)]
Answer:
Statement is incorrect.
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit.

The auditor may need to modify the overall audit strategy and audit plan as a result of:

unexpected events,
changes in conditions, or
the audit evidence obtained from the results of audit procedures.
Planning, however, includes consideration of the timing of certain activities and audit procedures that need to be completed prior to the performance of further audit procedures.

Question 10.
The auditor need not discuss elements of planning with the entity’s management in any case. [RTP-Nov. 19]
Answer:
Statements is incorrect.
The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and management of the audit engagement.

Question 11.
Planning is a discrete phase of an audit. [RTP-Nov. 19]
Answer:
Statement is incorrect.

As per SA-300, “Planning an Audit of Financial Statements”, planning is not a discrete phase of an audit, but rather a continual and iterative process.
Planning often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.

Question 12.
Under a properly framed audit programme by the auditor, the danger is significantly less and audit can proceed systematically. [Nov. 19 (2 Marks)]
Answer:
Statement is correct.

Without a written and pre-determined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records.
Under a properly framed programme, the danger is significantly less and the audit can proceed systematically.

Question 13.
In the planning stage, analytical procedures would not in any way assist the auditor. [RTP-May 20]
Answer:
Statement is incorrect.

In the planning stage, analytical procedures assist the auditor in understanding the client’s business and in identifying areas of potential risk by indicating aspects of and developments in the entity’s business of which he was previously unaware.
This information will assist the auditor in determining the nature, timing and extent of his other audit procedures.
Analytical procedures in planning the audit use both financial data and non-financial information, such as number of employees, square feet of selling space, volume of goods produced and similar information.

Question 14.
A detailed Audit Programme once prepared for a business can be used for all business under all circumstances. [MTP-Oct. 20]
Answer:
Statement is incorrect.

Evolving one audit programme applicable to all business under all circumstances is not practicable as businesses vary in nature, size and composition, work which is suitable to one business may not be suitable to others.
Efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor are the other factors that vary from engagement to engagement.

Question 15.
Overall audit plan sets the scope, timing and direction of the audit, and guides the development of the more detailed audit strategy. [RTP-Nov. 20]
Answer:
Statement is incorrect.
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.

Question 16.
It is not necessary for the auditor to periodically review the audit programme. [Nov. 20 (2 Marks)]
Answer:
Statement is incorrect.

There should be periodic review of the audit programme to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions.
Unless this is done, any change in the business policy of the client may not be adequately known, and consequently, audit work may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences.

Question 17.
The audit plan is more detailed than the overall audit strategy. [Nov. 20 (2 Marks)]
Answer:
Statement is correct.

Audit strategy and audit plan are inter-related to each other because change in one would result into change in the other.
The audit strategy is prepared before the audit plan. The audit plan contains more details than the overall audit strategy.
The audit strategy provides the guidelines for developing the audit plan. Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy.

Audit Strategy, Audit Planning and Audit Programme – CA Inter Auditing Notes

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