You are certainly familiar with the term "audit." Audit can be described as a systematic examination process of financial reports generated by individuals or companies. The purpose of this activity is to review and ensure the accuracy of the data contained in the financial reports. Before conducting an audit, there is a planning phase to ensure a smooth audit process. What are the steps involved in audit planning? Read on to find out more.

 

What is Audit Planning?

Audit planning refers to the initial stage that an auditor goes through before conducting an audit. Effective planning greatly influences the execution of the audit. Therefore, audit planning should be well-designed to achieve the audit objectives within the set timeframe.

 

Audit planning involves the development of comprehensive strategies to plan the implementation of an audit within a specific audit scope. This stage is heavily influenced by the initial information obtained during the consideration of the audit assignment. The audit assignment typically begins with the initial appointment or reappointment of auditors by the client. Subsequently, auditors perform a series of activities to develop an overall audit strategy.

 

The Importance of Audit Planning for Business Sustainability

As you may know, the purpose of an audit is not only to present more accurate financial reports but also to identify fraud or actions that may harm a company's finances. From this perspective, you can understand the importance of audits for business sustainability.

 

Audit activities are inseparable from the planning process. Audit planning is a vital stage in the audit process. As the initial stage of the audit process, effective planning can create a quality, cost-effective, efficient, and effective audit. Therefore, the audit planning phase should receive serious attention from auditors.

 

How to Conduct Effective Audit Planning Procedures?

In essence, audit planning serves as a bridge to testing work, which involves various procedures. These procedures need to be performed to achieve effective audit planning. Generally, there are eight stages involved in the audit planning procedure that you need to follow.

 

1. Conducting Client Acceptance and Continuance Procedures

This includes the decision to accept or continue auditing a client, whether it is a new or existing client. According to ISQC 1 (International Standard on Quality Control), every audit firm must have policies and procedures for deciding on client acceptance. Typically, these policies and procedures cover:

  1. Background information about the client's company.

  2. Ethical requirements of the client's company.

  3. Communication with the previous auditor (if the previous year's audit was conducted by a different auditor).

  4. The need for specialized expertise.

  5. Selection of engagement team members.

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  6. Engagement letter acquisition.

 

2. Obtaining Understanding of the Audit Process with the Client

The second stage in audit planning involves understanding the roles and responsibilities of each party involved in the audit process, as well as the terms and conditions of the engagement. Generally, these elements are specified in the engagement letter or other forms of documentation.

 

3. Developing Overall Audit Strategy

The development of an audit strategy aims to respond to the risks of material misstatement in financial reporting. This activity is carried out by considering the results of analytical procedures on the client's business conditions and environment. The audit strategy may change during the audit process if there are potential changes or amendments that may result in different information from the initial expectations. Generally, an audit strategy includes the following:

  1. Relevant characteristics of the audit process, such as the reporting framework used.

  2. Reporting date.

  3. Materiality level.

  4. Risk assessment and the decision to assess the effectiveness of internal controls.

  5. Plan for resource utilization.

 

4. Selecting Engagement Team Members

The selection of engagement team members should consider their competence in the industry in which the client operates. In addition to technical competence, engagement team members are also expected to understand professional standards and ethical codes for accountants. Generally, the engagement team consists of partners, managers, senior audit staff, and junior audit staff.

 

5. Considering the Use of Expert Assistance

ISA 620 (International Standard of Auditing) specifically defines an expert as an individual who possesses the necessary skills, expertise, and experience beyond a specific field, outside of accounting. When developing an audit strategy, auditors need to consider whether to involve experts, especially regarding the valuation of specific accounts in the material financial statements.

 

6. Understanding the Client's Business Environment

As stated in ISA 310, the client's business environment includes both internal and external business factors, economic industry conditions, financial reporting regulations, and business competition. Understanding the overall business activities of the client is crucial in the auditor's risk assessment process since each industry and company has different risks of material misstatement. The results of this risk assessment will be used to determine the sufficiency of audit evidence required.

 

7. Risk Assessment

This stage is performed after the auditor has gained sufficient understanding of the client's business conditions. Generally, risk assessment is conducted by identifying the effectiveness of the implementation of internal controls based on the COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework.

 

8. Performing Analytical Procedures

ISA 520 regarding Analytical Procedures states that in performing analytical procedures, auditors should consider the client's financial reports in relation to:

  1. Company expectations (demonstrated through budgets or forecast reports) and auditor expectations (expressed through auditor calculations regarding estimated depreciation expenses).

  2. Financial information of the client's company in similar industries. For example, auditors can compare the sales-to-receivables ratio of the client's company with other similar-sized companies in the same industry.

  3. Financial information of the client's company in previous periods. This is done to identify significant increases or decreases in specific accounts, enabling auditors to design specific procedures to address such issues.

 

Conclusion

Based on the discussion above, it can be concluded that audit planning is an initial stage of the audit process that significantly affects the success of audit objectives. To achieve effective audit planning, you need to follow the procedures that consist of eight stages. The procedures involved in audit planning require serious attention from auditors. This is because failure to plan the audit assignment properly can lead to the issuance of inaccurate audit reports, resulting in an ineffective and inefficient audit.

 

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