Audit strategy, audit plan and assertions

Accounting Ahead | Original study resource | accountingahead.com.au

Audit strategy, audit plan and assertions

MODULE 2 | 2.3.1 | STUDENT COMPANION

Planning is continuous: it starts before fieldwork and is revised whenever new information arrives. The

overall audit strategy decides the audit's scope, timing and direction; the audit plan maps each

procedure in detail: what, when and how much. The approach to evidence ranges from relying on tested

controls to a predominantly substantive approach. The assertions describe exactly what could be

wrong, and the direction of a test decides which assertion it addresses.

Why planning matters

The planning standard requires the auditor to plan so that the audit is performed effectively. Good planning helps

the team focus on the important areas, spot and resolve problems early, organise the work and the people, and

direct and supervise the team properly. How much planning is needed depends on the entity's size and

complexity, the team's past experience with it, and changes in its circumstances, and the plan keeps changing

as new information emerges.

The audit strategy and the detailed plan

Overall audit strategy

Decides the audit's scope, timing and direction

Characteristics of the engagement: the reporting

framework, the locations to visit

Reporting objectives and deadlines

Significant factors that direct the effort: materiality,

the areas of highest risk

Resources: who's on the team, and whether experts are

needed

Audit plan

What, when and how much (nature, timing and extent) for:

Planned risk assessment procedures

Further audit procedures for each relevant assertion

Any other procedures the standards require

guides

Audit program

A checklist of procedures for each area, signed off as each is

done

The strategy decides where the audit is going and with whom; the plan maps every step of the route. Both are documented, with any

significant changes

ADVANCED AUDIT AND ASSURANCE | M2 | 2.3.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Two approaches to evidence

Most audits mix the two, area by area. At Voltana, the new system went live in February, so relying on controls

would mean testing them in both the old and the new system; a mostly substantive approach to revenue may be

more efficient this year.

Combined (lower control risk) approach Predominantly substantive approach

Understanding of

controls

Thorough Only what the standards require

Tests of controls Yes, for the controls the auditor intends to rely

on

None

Assessed control risk Below high, if the tests support it High

Substantive testing Reduced, because tested controls supply part

of the evidence

Most of the evidence comes from testing

transactions and balances directly

Early decisions at Voltana (imagined)

Decision Why it can't wait

Interim visit in May Update the understanding of the business, and test the

controls the team plans to rely on

Staff booked to attend the 30 June stocktakes at the factory

and the main warehouse

Nobody can count last June's batteries in September

An engineer arranged to help with the warranty provision Experts need to be engaged before the work starts

Final visit planned for August So the report can be signed before the deadline for

Voltana's annual report

Team planning discussion; the partner assigns the most

experienced people to the riskiest areas

Direction and supervision follow the risks

The financial statement assertions

Classes of transactions and events

For example, sales

Occurrence Recorded transactions really happened and

relate to the entity

Completeness Nothing that should have been recorded

was left out

Accuracy Amounts and details were recorded

correctly

Cut-off Recorded in the right period

Classification Recorded in the right accounts

Presentation Suitably grouped or separated, clearly

described and understandably disclosed

Account balances at the period end

For example, receivables

Existence The recorded assets, liabilities and equity

really exist

Completeness Nothing that should have been recorded

was left out

Accuracy, valuation

and allocation

Carried at appropriate amounts, with any

adjustments recorded

Rights and

obligations

The entity controls the assets and owes the

liabilities

Classification Recorded in the right accounts

Presentation Suitably grouped or separated, clearly

described and understandably disclosed

Occurrence is the transactions' version of existence; completeness, classification and presentation appear in both groups

ADVANCED AUDIT AND ASSURANCE | M2 | 2.3.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Assertions are the claims, explicit or implied, that management makes when it presents financial statements.

The auditor uses them to think about the different ways the statements could be misstated, and then designs

procedures aimed at the assertions most at risk.

The assertions at work at Voltana

Situation Assertions at risk

Sales staff earn commission when a contract is signed, but

revenue should be recognised when the battery is installed

Occurrence (sales recorded before any installation) and

cut-off around 30 June

The ten-year warranty provision Valuation and allocation

Battery cells shipped from overseas but still at sea on 30

June

Cut-off, and rights and obligations, depending on when

ownership passes under the shipping terms

Stock sitting in the warehouse Existence, and valuation if newer designs make older stock

harder to sell

The factory lease from the chief executive's company Presentation: the related party relationship must be

disclosed

Why the direction of testing matters

Sales ledger

What has been recorded

Signed installation completion form

Evidence that the sale happened

Vouching: tests occurrence

Start with a sale recorded in the ledger and go back to the evidence. Is each recorded sale real?

Sales ledger

What has been recorded

Installation schedule or delivery

records

Evidence that something happened

Tracing: tests completeness

Start with evidence that something happened and follow it forward into the ledger. Was every installation recorded?

Vouching only ever looks at what's recorded, so it can never find a sale that was left out. To test completeness, reverse the direction.

Vouching starts with an item in the records and looks back for the evidence behind it, so it tests whether

recorded items are real (occurrence or existence). Tracing starts with evidence that something happened and

follows it forward into the records, so it tests completeness. Tracing a delivery record into the sales ledger is

therefore a test of completeness: the direction is the whole point.

ADVANCED AUDIT AND ASSURANCE | M2 | 2.3.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 2 | 2.3.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Strategy or plan?

Southfin Seafoods Ltd (imagined) processes and exports seafood. Sort each of its auditor's eight planning

decisions into the overall audit strategy or the audit plan, and say why.

Planning decision Strategy or

plan?

Why

(a) The audit will cover the parent company and its two

subsidiaries, with visits to the processing plants at Port

Lincoln and Hobart.

(b) Overall materiality will be based on profit before tax.

(c) Select 40 sales invoices from the last two weeks of June

and agree each to a signed delivery docket dated on or

before 30 June.

(d) The board wants the signed auditor's report by 28

August, and the audit committee meets on 20 August.

(e) An independent valuer will help the team assess the

value of the company's fishing quota.

(f) Send confirmation requests to the ten largest export

customers at 30 June.

(g) During planning, compare each month's gross margin

by product with last year's, looking for unusual movements.

(h) The manager with the most seafood industry experience

will lead the inventory work, the riskiest area.

ADVANCED AUDIT AND ASSURANCE | M2 | 2.3.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Question 2 - Which assertion?

Hushpanel Industries Pty Ltd (imagined) makes acoustic wall and ceiling panels. For each possible

misstatement, name the assertion or assertions it affects, and explain why.

Possible misstatement Assertion(s)

affected

Why

(a) Freight on June deliveries, invoiced by the carrier in

July, was never accrued.

(b) A forklift hired for a month from an equipment hire

company, and returned in July, is recorded in plant and

equipment as if the company owned it.

(c) A $180,000 government grant towards a new

production line was recorded as sales revenue.

(d) The note on the bank loan doesn't mention the bank's

charge over the factory or the loan's conditions.

(e) Depreciation on a new cutting machine expected to

last eight years is being charged over forty years.

(f) An order the customer cancelled before production is

still recorded as a sale and a receivable.

Question 3 - Two tests, two directions

Design one test of occurrence and one test of completeness for Hushpanel's sales. For each test, say where you

start, where you finish, and why that direction tests that assertion.

ADVANCED AUDIT AND ASSURANCE | M2 | 2.3.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 2 | 2.3.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Southfin Seafoods

Answer Why

(a) Strategy Scope: the entities and locations the audit covers

(b) Strategy Materiality is a significant factor that directs the team's effort

(c) Plan A further audit procedure, with its nature (inspection), timing (year end) and extent (40 items)

(d) Strategy Reporting objectives and deadlines set the timing of the audit

(e) Strategy Resources, including whether experts are needed

(f) Plan A further audit procedure (confirmation) aimed at the existence of receivables

(g) Plan A planned risk assessment procedure (an analytical procedure)

(h) Strategy Direction and resources: matching experience to the riskiest area

Question 2 - Hushpanel Industries

Assertion(s) Why

(a) Completeness; cut-off A June expense and the amount owed are missing from this year's accounts,

and the cost lands in the wrong period

(b) Rights and obligations The company doesn't own or control the hired forklift, so it isn't the company's

asset

(c) Classification (and presentation) A grant isn't a sale; it belongs in other income or as deferred income, not in

revenue

(d) Presentation The charge and the loan conditions are disclosures users need to understand

the debt

(e) Accuracy, valuation and allocation Plant is carried at too high an amount, and depreciation expense is

understated

(f) Occurrence (sales); existence

(receivables)

The sale never happened, so the receivable doesn't exist

Question 3 - Two tests (sample answer)

Occurrence (vouching): start in the sales ledger, select a sample of recorded sales (including some large ones

near 30 June), and finish at the evidence: the customer's order, the signed delivery docket and the later payment.

Starting from the records proves that recorded sales really happened.

Completeness (tracing): start with the dispatch log of pre-numbered delivery dockets, check the sequence for

gaps, select a sample, and finish in the sales ledger, checking that each delivery was invoiced and recorded in the

right period. Starting from what happened can reveal sales that were never recorded.

Why direction matters: vouching can't find an omission, because it only looks at what's recorded; tracing can't

find a fictitious sale, because a fake invoice has no delivery behind it to start from.

ADVANCED AUDIT AND ASSURANCE | M2 | 2.3.1 | WORKED ANSWERS

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