Chapter 2 “Audit Strategy, Audit Planning and Audit Programme” ©www.altclasses.

in

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Chapter 2
Audit Strategy, Audit Planning & Audit
Programme
"Marks Distribution of Past Exams (New Syllabus)"
14

12

10
8
Marks

6
4
2

0
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21 -
Series1 5 12 7 10

2.1 – Audit Planning

Q.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

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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; and

(d) coordinating the work to be performed.

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Q.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. Auditor 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, Adequate
planning would benefit the audit of financial statements in several ways.
Analyse explaining the benefits of adequate planning. [RTP-Nov. 19]

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Answer: Usefulness of Careful and Adequate Audit Planning:

(i) 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.

(ii) 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.

(iii) To ensure that potential problems are identified: The

auditor must ensure that resources are directed towards
material / high risk areas.

(iv) 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.

(v) Coordination of work done by auditors of components and

experts.

Q.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)]

Or

State the matters to be considered for acquiring knowledge of the

business of the client by the auditor.

[May 05 (6 Marks)]

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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;

(c) The entity’s selection and application of accounting policies,

including the reasons for changes thereto.

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(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.

Q.3A 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:

1. The competitive environment, including demand, capacity,

product and price competition as well as cyclical or seasonal
activity.
2. 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.
3. Technological developments, such as those related to the
entity’s products, energy supply and cost.
4. The effect of regulation on entity operations.

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Q.4 “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.

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.

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Q.5 “Planning is not a discrete phase of an audit, but rather a continual and

iterative process”. Discuss. [Nov. 18 (5 Marks)]

Or

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.

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• 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.

Q.6 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 of the audit. 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:

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1. unexpected events,

2. changes in conditions, or

3. 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.

Q.7 The auditor shall document the overall audit strategy, the audit plan,
and any significant changes 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]

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.

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• Documentation of the overall audit strategy is a record of the

key decisions considered necessary to properly plan the audit
and to communicate significant matters to the engagement
team.

• Documentation of the audit plan is a record of the planned NTE

of RAPs and FAPs at the assertion level in response to the
assessed risks. It also serves as a record of the proper planning
of the 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.

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Q.8 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 considered in the development of overall audit
plan? [May 18 (5 Marks), MTP-April 19]

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.

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• 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.

2.2 – Audit Strategy

Q.9 The process of establishing the overall audit strategy assists the auditor

to determine certain matters 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

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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 20]

Answer: Benefits of Audit Strategy:

1. 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.

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2. 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.

3. 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.

4. 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.

Q.10 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]

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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:

1. 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;

2. 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;

3. When these resources are to be deployed, such as whether at

an interim audit stage or at key cut-off dates; and

4. 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.

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Q.11 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:

1. Identify the characteristics of the engagement that define

its scope;

2. Ascertain the reporting objectives of the engagement to

plan the timing of the audit and the nature of the
communications required;

3. Consider the factors that are significant in directing the

engagement team’s efforts;

4. 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

5. Ascertain the NTE of procedures necessary to perform.

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Q.12 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 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 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.

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Q.13 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:

1. The entity’s timetable for reporting, such as at interim and final

stages.

2. The organization of meetings with management and those

charged with

3. governance to discuss the nature, timing and extent of the audit

work.

4. The discussion with management and those charged with

governance regarding the expected type and timing of reports

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to be issued and other communications, both written and oral,

including the auditor’s report, management letters and
communications to those charged with governance.

5. The discussion with management regarding the expected

communications on the status of audit work throughout the
engagement.

2.3 – Audit Programme

Q.14 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.

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• 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:

1. It provides guidance and instructions on the work to be

carried out e.g. manner of picking up transactions for sample

test.

2. It provides a clear record of the work to be carried out by the

individual staff assigned on the audit.

3. The progress of audit work can be reviewed by the audit

managers or the partners.

4. Chances of duplication of work are eliminated.

5. Chances of overlooking the important areas of audit are also

eliminated.

6. Evidence of work done is available when the auditor is to

defend his performance against charge of negligence.

7. It serves as a guide for audits to be carried out in the

succeeding year.

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Q.15 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:

(1) Be within the scope and limitation of the assignment.

(2) Determine the evidence reasonably available and identify the

best evidence for deriving the necessary assurance.

(3) Only those techniques and procedures which are useful in

accomplishing the verification purpose should be applied.

(4) Consideration of all possibilities of errors and fraud.

(5) Co-ordinate the procedures to be applied to related items.

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Q.15A 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.
• What is best evidence for testing the accuracy of any assertion
is a matter of expert knowledge and 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:
1. invoices raised by the client;
2. price list;
3. forwarding notes to client;
4. inventory-issue records;
5. sales managers’ advice to the inventory section;
6. acknowledgements of the receipt of goods by the customers;
and collection of money against sales by the client.

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Q. 16 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:

1. The audit programme lists down areas of audit before

commencement.

2. Audit programme covers the audit timings and hence it

becomes a schedule of audit plan.

3. Audit programme allocates the work among the staff members

and thereby fixes a responsibility over them.

4. It specifies the procedures to be performed during the audit.

5. Audit programme acts as a check list during the performance

of audit.

6. The working papers of the audit staff can be reviewed against

the audit programme to evaluate the performance before

reporting on the financial statements.

7. It also works as a basis for billing the clients for the time and

manpower involved in the audit.

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Q.17 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:

(1) Be within the scope and limitation of the assignment.

(2) Determine the evidence reasonably available and identify the

best evidence for deriving the necessary assurance.

(3) Only those techniques and procedures which are useful in

accomplishing the verification purpose should be applied.

(4) Consideration of all possibilities of errors and fraud.

(5) Co-ordinate the procedures to be applied to related items.

Q. 18 “The utility of the audit programme can be retained and enhanced only

by keeping the programme and 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]

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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 may be
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.

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Q. 19 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.

Q.20 Evolving one audit programme applicable to all audit engagements

under all circumstances is not practicable. Explain [RTP-May 18]

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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.

2.4 – SA 320 “Materiality in Planning and Performing an Audit”

Q.21 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)]

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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 mis-statement (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

1. Legal and regulatory requirements, non-compliance of which

may have a significant bearing on the financial information, and

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2. Considerations which may have a significant bearing on the

financial information, and

3. Considerations relating to individual account balances and

relationships.

These factors may result in different levels of materiality depending on

the matter being audited.

Q.22 State the factors which are to be considered in determining materiality.

[Nov. 15 (4 Marks)]

Answer: Factors influencing materiality:

Refer Answer of Q. No. 21

Q.23 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;

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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 risk is the risk that the 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

Q.24 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 Easygo Ltd. and intends to
apply the concept of materiality 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.

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Or

“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)]

Answer: Factors affecting identification of appropriate benchmark as

per SA 320:

Determining materiality involves the exercise of professional

judgment. A percentage 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:

1. The elements of the financial statements (for example, assets,

liabilities, equity, revenue, expenses);

2. 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);

3. 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;

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4. 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

5. The relative volatility of the benchmark.

Q.25 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-Oct. 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

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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.

Q.26 Write short note on: Audit Planning and Materiality. [May 13 (4 Marks)]

Answer: Audit Planning and 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.

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• This enables the auditor to select audit p5rocedures 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 as against at the time of evaluating the results of audit
procedures.

Objective Types Questions (Correct/Incorrect)

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.

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.

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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.

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 300 “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.

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.

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• 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.

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.

6 There is direct relationship between materiality and the degree of audit

risk. [RTP-May 18]

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Answer: Statement is incorrect.

• As per SA 320 “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.

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

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.

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• 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.

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.

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.

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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.

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.

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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.

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