Audit Strategy and Planning Document WP Ref.

:
Prepared by:
Date:
Client:
Period:

Purpose
The purpose of this working paper is to obtain an understanding of the entity’s business. It
documents:

the entity’s objectives, strategies and the components of its business (i.e., markets,
products/services, customers, alliances)

the entity’s relevant external business drivers (i.e., general business environment, specific
industry characteristics and management’s response to the expectations of significant
constituencies).

how the entity formulates and implements its objectives and strategies (strategic management
process)

the business control environment management has created to support its objectives and
strategies

how computer information systems facilitate business processes and are utilised by the entity

the financial reporting environment

Critical Audit Areas / Significant Financial Statement Components

n Involvement of specialists and other parties

Logistical plan

This understanding will assist in understanding business risks that threaten the entity’s
objectives. Such as understanding should be reviewed with the entity’s management.
I Client Overview
(a) Client History and Background
Provide a description of relevant client background

(b) Client Business Objectives and Related Business Strategies

Management responds to external business drivers by developing objectives and
strategies to achieve those objectives. Provide a summary of the objectives,
strategies and method of implementing the strategies.

Business Objectives Related Business Strategies

1.

2.

3.
(c) Client Business Components
Feasible objectives and strategies need to reflect a client’s existing circumstances and
take into account its markets, products and services, relationship with customers and
alliances (including relationship with suppliers). Provide a description of these
components

(i) Major Markets

(ii) Major Products and Services

(iii) Major Customers

(iv) Major Competitors

(v) Alliances (including suppliers) and other relationships

(vi) SWOT Analysis (entity's and competitors')

Entity Competitors

Strengths

n n

n n

Weaknesses

n n

n n

Opportunities

n n

n n

Threats

n n

n n
II External Business Forces
External business drivers are forces created by a client’s:

n generalbusiness environment (PEST) and specific industry characteristics (Porter’s Five

Forces);

n significant stakeholders.
General business environment and specific industry characteristics (PEST and
Porter’s Five Forces)

Provide a discussion of current forces facing the client that may have an impact on
the client achieving its objectives and the relevance of those aspects of the
environment to the client, given its chosen strategies. Consider the following forces
in analysing the general business environment and specific industry characteristics

n PEST - political, economic, social, and technology forces;

n Porter’s
Five Forces - threat of new entrants, bargaining power of suppliers, bargaining
power of buyers, substitute products or services, rivalry amongst existing
competitors.

General Business Environment (PEST Analysis)

1. Political

Forces Relevance to the Client

2. Economic

Forces Relevance to the Client

3. Social

Forces Relevance to the Client

4. Technological

Forces Relevance to the Client

Specific Industry Characteristics (Porter's Five Forces)

1. Threat of New Entrants

Forces Relevance to the Client

2. Bargaining Powers of Suppliers

Forces Relevance to the Client

3. Bargaining Powers of Buyers

Forces Relevance to the Client

4. Substitute Services/ Products

Forces Relevance to the Client

5. Rivalry Among Existing Competitors

Forces Relevance to the Client

Significant Constituencies

Management may have incentives to manipulate the results of the business and the
impression given by the financial statements considering significant stakeholders.
Provide a discussion of individual stakeholders that management perceives as
significant and discuss how management responds to expectations of significant
stakeholders.

Constituency/ Management Response to the Expectations

Stakeholders
IV Business Control Environment
When analysing the business control environment understand the client’s:

n business structure;

n culture and ethics;

n remuneration management;

n personnel profiles;

n communication of information;

n risk assessment process;

n control environment

n monitoring and control activities

Business structure
Culture and ethics

Remuneration management

Personnel profiles
Communication of information

Risk Assessment Process

Control Environment

Monitoring and Control Activities

IX Audit programme overview
Financial Principal Risk Assessment Principal substantive
Statement Audit procedures
Caption Objectives
IR CR ROSM

Fixed assets VOP n Inspect assets & trace to

records

n Vouch additions & deletions

with supporting documents.

n Examine documents of title.

n Recompute gain/loss on
disposals.

n Check/recalculate
depreciation charge.

n Check impairment.

Capital work in EAV n Review board minutes

progress regarding significant
additions.

n Verify cost incurred with

supporting documents.

n Borrowing cost capitalized

are directly attributable to
construction, acquisition or
production.
 Financial Principal Risk Assessment Principal substantive
Statement Audit procedures
Caption Objectives
IR CR ROSM

Long term loans CEAP n Review agreements

n Circularise direct
confirmations.

n Recompute interest and

exchange loss.

n Check subsequent repayment

n Check disclosure.

Investments EVP n Inspect securities in hand and

evidence for title of securities
held.

n Review investments for

income reconciliation.

n Vouch sale and recompute

gain/loss.

n Review classification and

description.

n Vouch purchases made during

the year.

Cash & Bank CEA n Perform physical cash count.

Balances
n Circularize direct
confirmations.

n Obtain reconciliation
statements.

n Review age analysis of long

outstanding cheques.
 Financial Principal Risk Assessment Principal substantive
Statement Audit procedures
Caption Objectives
IR CR ROSM

Long term EP n Vouch deposits made during

deposits the year.

n Review classification and

description.

Store & Spares CEV n Perform physical

count/inspection.

n Investigate reasons for any

difference between the
physical and records.

n Check valuation as per

company’s policy.

n Identify slow moving items.

Trade Debtors CAV n Circularise direct

confirmations.

n Check subsequent clearance.

n Perform age analysis.

Commitment and CEA n Obtain list of commitment

Contingencies and contingencies

n Circularise direct
confirmations to legal
advisors.

n Review legal fees.

n Review minutes of Board of

Directors meeting.
 Financial Principal Risk Assessment Principal substantive
Statement Audit procedures
Caption Objectives
IR CR ROSM

Creditors CEA n Circularise direct

confirmations.

n Check subsequent clearance.

n Perform age analysis.

Loans CEAP n Review agreements

n Circularise direct
confirmations.

n Check interest and exchange

effects.

n Check subsequent repayment

n Check disclosure.

Deferred CEAP n Obtain actuarial report and

Liabilities- assess reasonableness of
Gratuity/ Pension assumptions

n Vouch payments during the

period to ensure completeness

n Ensure disclosure requirement

of IAS 19
 Financial Principal Risk Assessment Principal substantive
Statement Audit procedures
Caption Objectives
IR CR ROSM

Taxation-Current CEAP n Review updated tax position

& deferred
n Check working of provision
for taxation

n Vouch payments.

n Check working of deferred

taxation

n Ensure disclosure with IAS 12

Sales CEA n Perform analytical review

n Vouch sales on sample basis

Cost of sales CEA n Perform analytical review

n Vouch purchases on sample

basis

n Ensure classification in
appropriate heads

n Vouch consumptions made

during the period

n Ensure calculation of
overhead on reasonable basis

n Ensure appropriate treatment

of difference of actual cost
with standard cost
 Financial Principal Risk Assessment Principal substantive
Statement Audit procedures
Caption Objectives
IR CR ROSM

Admin & General CEA n Perform analytical review

Expenses
n Ensure classification in
appropriate heads

n Vouch expenses incurred

during the period

n Perform reasonableness test

on salary expense
X Logistical plan
Engagement team

Engagement Partner

Engagement Manager

Job-in-Charge

Team members

Key management personnel

Chief Executive

Finance Director/CFO

Manager Finance

Factory Manager

Sales Manager

Staff and allocation of work

Staff Allocated area

Key dates and deadlines

Activity Date

Kick off meeting

Initial meeting with client

Confirmation circularisation

Manager review

Partner review

Covering letter/Management Letter

Board meeting and Audit report

Reportings/ deliverables:
Location of client:
Telephone:
Fax:
Email:
Web site:
XII Audit Materiality
There are two aspects to materiality - Planning materiality, and Reporting materiality.

Planning materiality is concerned with whether a misstatement, or an aggregation of

misstatements, in an underlying financial statement item, account balance or class of transaction,
is likely to result in a material misstatement in the financial statements as a whole. Auditors use
planning materiality to determine which financial statement items, account balances and
transactions to test and which to not test. Financial statement items, account balances and
transactions, which equal or exceed their materiality level are selected for testing.
Level of Aggregation Materiality Level Evaluation
Financial statement level A misstatement of a financial Materiality at the financial
statement item is material statement level may be
when the misstatement, evaluated by reference to (i)
aggregated with reporting materiality and (ii)
misstatements of other the expected nature, number
financial statement items, is and value of financial
likely to equal or exceed the statement items included in
level of reporting materiality. the financial statements.
Account balance level A misstatement of an account Materiality at the account
balance underlying a financial balance level is evaluated by
statement item is material reference to (i) materiality at
when the misstatement, the financial statement level
aggregated with and (ii) the expected nature,
misstatements in other number and value of account
account balances underlying balances underlying the
the financial statement item, financial statement item.
is likely to result in a material
misstatement of the financial
statement item.
Class of transaction level A misstatement of a Materiality at the class of
transaction underlying an transaction level is evaluated
account balance is material by reference to (i) materiality
when the misstatement, at the account balance level
aggregated with and (ii) the expected nature,
misstatements in other volume and value of
transactions underlying the transactions underlying the
account balance, is likely to account balance.
result in the material
misstatement of the account
balance.

Whereas planning materiality is primarily concerned with the judgments of the auditor, reporting
materiality is primarily concerned with the auditor's evaluation of the judgments of users of
financial statements.

Reporting materiality refers to the extent of a misstatement.

Reporting materiality is concerned with whether a misstatement of a financial statement item, or
an aggregation of such misstatements, is likely to affect the judgments of users of financial
statements. It requires an evaluation by the auditor in both the client acceptance/ retention stage
and the opinion formulation stage.
In the client acceptance stage the auditor evaluates whether, if the client is accepted or retained,
the audit risk (the risk of a material misstatement in the audited financial statements) can be
reduced to an acceptable level. In this, the initial audit stage, "a material misstatement" refers to
the level of reporting materiality. Similarly in the final opinion formulation stage, the auditor
evaluates the likelihood of the audited financial statements containing a material misstatement.
Again, this evaluation is based on the level of reporting materiality.
Auditors to assess reporting materiality use the following materiality guidelines:
Pre-tax income 5-10%
Net (or after-tax) income 5-10%
Gross revenue 0.5-1%
Equity 5-10%
Total assets 0.5-1%

(This chart is only for guidance purposes)

Where an entity's results are expected to be "normal", then reporting materiality is based on after
tax income amounts. However, where the entity incurs losses, has potential going concern
problems or the results are in other ways unusual, materiality may be based on one or more of the
other factors referred to above. For example, if the entity is incurring losses, both before and after
tax, the auditor may use total assets or total revenue, whichever is the greater. The final
assessment of reporting materiality is subjective and depends on the auditor's perception of, for
example, what information is relevant, who the users of the financial statements are, what
decisions the users may make and what would influence those decisions.

Note that financial statements may be materially misstated as a result of either a quantitative
misstatement (in relation to its monetary value) or a qualitative misstatement (in relation to its
accuracy of presentation, disclosure, description).