Audits of Small Entities

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Fundamentals of Auditing ACC 311

Lesson 43

AUDIT PLANNING

(Establishing Overall Audit Strategy)

Audits of Small Entities

In audits of small entities, the entire audit may be conducted by a very small audit team. Many audits

of small entities involve the audit engagement partner (who may be a sole practitioner) working with

one engagement team member (or without any engagement team members). With a smaller team,

coordination and communication between team members are easier. Establishing the overall audit

strategy for the audit of a small entity need not be a complex or time-consuming exercise; it varies

according to the size of the entity and the complexity of the audit. For example, a brief memorandum

prepared at the completion of the previous audit, based on a review of the working papers and

highlighting issues identified in the audit just completed, updated and changed in the current period

based on discussions with the owner-manager, can serve as the basis for planning the current audit

engagement.

Communications with those charged with Governance and Management

The auditor may discuss elements of planning with those charged with governance and the entity's

management. These discussions may be a part of overall communications required to be made to

those charged with governance of the entity or may be made to improve the effectiveness and

efficiency of the audit. Discussions with those charged with governance ordinarily include

· The overall audit strategy and timing of the audit, including any limitations thereon, or

any additional requirements.

When discussions of matters included in the overall audit strategy or audit plan occur, care is required

in order to not compromise the effectiveness of the audit. For example, the auditor considers whether

discussing the nature and timing of detailed audit procedures with management compromises the

effectiveness of the audit by making the audit procedures too predictable.

Additional Considerations in Initial Audit Engagements

The auditor should perform the following activities prior to starting an initial audit:

(a)

Perform procedures regarding the acceptance of the client relationship and the specific audit

engagement.

(b)

Communicate with the previous auditor, where there has been a change of auditors, in

compliance with relevant ethical requirements.

For initial audits, additional matters the auditor may consider in developing the overall audit strategy

and audit plan include the following:

Unless prohibited by law or regulation, an arrangement to be made with the previous auditor for

example to review the previous auditor's working papers.

Any major issues discussed with management in connection with the initial selection as auditors, the

communication of these matters to those charged with governance and how these matters affect the

overall audit strategy and audit plan.

The planned audit procedures to obtain sufficient appropriate audit evidence regarding opening

balances.

The assignment of firm personnel with appropriate levels of capabilities and competence to respond

to anticipated significant risks.

Other procedures required by the firm's system of quality control for initial audit engagements (for

example, the firm's system of quality control may require the involvement of another partner or

senior individual to review the overall audit strategy prior to commencing significant audit procedures

or to review reports prior to their issuance).

Examples of Matters the Auditor May Consider In Establishing the Overall Audit Strategy

Following are the examples of matters the auditor may consider in establishing the overall audit

strategy:

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1. Scope of the audit engagement

2. Reporting objectives

3. Direction of the audit

Scope of the Audit Engagement

The auditor may consider the following matters when establishing the scope of the audit engagement:

· The financial reporting framework on which the financial information to be audited has been

prepared, including any need for reconciliations to another financial reporting framework.

· Industry-specific reporting requirements such as reports mandated by industry regulators.

· The expected audit coverage, including the number and locations of components to be

included.

· The nature of the control relationships between a parent and its components that determine

how the group is to be consolidated.

· The extent to which components are audited by other auditors.

· The nature of the business segments to be audited, including the need for specialized

knowledge.

· The reporting currency to be used, including any need for currency translation for the

financial information audited.

· The need for a statutory audit of standalone financial statements in addition to an audit for

consolidation purposes.

· The availability of the work of internal auditors and the extent of the auditor's potential

reliance on such work.

· The entity's use of service organizations and how the auditor may obtain evidence

concerning the design or operation of controls performed by them.

· The expected use of audit evidence obtained in prior audits, for example, audit evidence

related to risk assessment procedures and tests of controls.

· The effect of information technology on the audit procedures, including the availability of

data and the expected use of computer-assisted audit techniques.

· The coordination of the expected coverage and timing of the audit work with any reviews of

interim financial information and the effect on the audit of the information obtained during

such reviews.

· The discussion of matters that may affect the audit with firm personnel responsible for

performing other services to the entity.

· The availability of client personnel and data.

Reporting objectives, timing of the audit and communications required

The auditor may consider the following matters when ascertaining the reporting objectives of the

engagement, the timing of the audit and the nature of communications required:

· 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, extent and timing 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 and the expected deliverables resulting from the audit

procedures.

· Communication with auditors of components regarding the expected types and timing of

reports to be issued and other communications in connection with the audit of components.

· The expected nature and timing of communications among engagement team members,

including the nature and timing of team meetings and timing of the review of work

performed.

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Fundamentals of Auditing ACC 311

Whether there are any other expected communications with third parties, including any

statutory or contractual reporting responsibilities arising from the audit.

Direction of the Audit

The auditor may consider the following matters when setting the direction of the audit:

· With respect to materiality:

· Setting materiality for planning purposes.

· Setting and communicating materiality for auditors of components.

· Reconsidering materiality as audit procedures are performed during the course of the audit.

· Identifying the material components and account balances.

· Audit areas where there is a higher risk of material misstatement.

· The impact of the assessed risk of material misstatement at the overall financial statement

level on direction, supervision and review.

· The selection of the engagement team (including, where necessary, the engagement quality

control reviewer) and the assignment of audit work to the team members, including the

assignment of appropriately experienced team members to areas where there may be

higher risks of material misstatement.

· Engagement budgeting, including considering the appropriate amount of time to set aside

for areas where there may be higher risks of material misstatement.

· The manner in which the auditor emphasizes to engagement team members the need to

maintain a questioning mind and to exercise professional skepticism in gathering and

evaluating audit evidence.

· Results of previous audits that involved evaluating the operating effectiveness of internal

control, including the nature of identified weaknesses and action taken to address them.

· Evidence of management's commitment to the design and operation of sound internal

control, including evidence of appropriate documentation of such internal control.

· Volume of transactions, which may determine whether it is more efficient for the auditor

to rely on internal control.

· Importance attached to internal control throughout the entity to the successful operation

of the business.

· Significant business developments affecting the entity, including changes in information

technology and business processes, changes in key management, and acquisitions, mergers

and divestments.

· Significant industry developments such as changes in industry regulations and new

reporting requirements.

· Significant changes in the financial reporting framework, such as changes in accounting

standards.

· Other significant relevant developments, such as changes in the legal environment

affecting the entity.

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