This article entails the auditor’s duties as laid down in standards on auditing SA 300 while planning the Nature, timing and scope of Audit of the Financial Statements especially in case of recurring audit engagements.
Following are the topics we cover here:
SA 300 deals with the auditor’s responsibility towards planning for an audit of financial statements and its context is focused more on a recurring audit. This standard also prescribes the additional considerations required for an initial audit engagement.
Objective of the standard & Requirement laid down
The objective is to plan the audit in accordance with the size and complexity of the entity to perform the audit in an effective manner.
Partner and key members of the engagement team are required to be involved in the audit planning through discussion which will enhance the audit effectiveness and efficiency.
Preliminary Engagement & Planning Activities
Following preliminary activities are to be undertaken at the beginning of the current audit engagement:
i. Client relationship and specific audit engagement procedures are to be performed in accordance with SA 220 (Quality Control for Audit Work)
ii. Evaluate ethical requirement compliance including independence per SA 220
iii. Understand the terms of engagement as required by SA 210 (Terms of Audit Engagements)
Planning Activities :
Overall audit strategy sets the scope, direction and timing of the audit and in turn, develops the Audit plan.
* SA 315 – Identifying and assessing the risk of material misstatement through understanding the entity and its environment
* SA 330 – The auditor’s responses to assessed risks
During the audit, the overall audit strategy and audit plan can be updated or changed when unexpected events occur or any change in conditions etc. Auditor has to plan the direction, timing, supervision and review of the engagement teamwork depending on the following:
i. Size and complexity of the entity
ii. Audit area
iii. Competencies and capabilities of the engagement team members
iv. Level of assessed risk of material misstatements etc
Following are the list of requirements which are to be documented:
i. Overall audit strategy which exhibits the key decision of the audit planning
ii. Audit Plan which includes standard audit program and audit completion checklist
iii. Any significant changes made during the audit engagement to the above and the reasons for the same
Additional Considerations in Initial Audit Engagements
With respect to initial audit, certain additional considerations to be followed prior to the start of the audit:
i. Acceptance of the client relationship and the specific audit engagement per SA 220
ii. If there is any change of auditors, communicate with the predecessor auditor in compliance with relevant ethical requirements
iii. Audit procedures necessary to obtain appropriate audit evidence for opening balance
Sample of an Audit Plan:
The objective of this audit engagement is to conduct an internal audit of XXXX cinemas for the period XXX which will require XXX of professional services.
Our audit approach for this audit engagement will include interviewing key employees, checking the documents, data extraction & verification and other appropriate audit tools as and when required. Following areas will be verified in detail for:
1. Internal Control System – Primarily, the internal check system of the cinema must be examined. A check of the daily receipts of the cinema must be carried out and this should include a check of the daily receipts of tickets for reserved and unreserved seats. All sold tickets must be verified against their counterfoils.
2. Cash and Bank Balances – Cash in hand must be verified physically and reconciled to books. Bank balances must be confirmed with the banks and reconciliations need to be reviewed during the audit.
3. Agreements – All purchase hire and other agreements regarding the films need to be verified to check compliance with the terms and conditions.
4. Brand Promotions and Advertisements – For all brand promotions and advertisements at the theatre, invoices raised on clients and receipts for these invoices must be checked with job contracts for rates and correctness of charging.
5. Payments – Expenses such as wages, salaries, electricity charges and other costs must be adequately vouched to ensure correctness of the expenses booked and paid.
6. Outstanding Liabilities – Examination of outstanding liabilities like posters and advertising expenses must be carried out to check if they are properly recorded in the books.
7. Advances – Advances paid to the film producers and distributors for the screening contract must be examined to ensure recoverability of the dues.
8. Allocation – The allocation of expenditure between capital and revenue should be checked to ensure correctness. Major operating expenses must be vouched.
9. Valuation – Value of unexpired purchased film must be verified and valuation of the same needs verified to ensure correctness of carrying values.
10. Food and Beverages – Closing stock of canteen must be physically verified and matched with the books.
11. Parking tokens and collections –Parking tokens issued daily must be reconciled to the actual collections and recorded correctly
12. Taxes – All tax levies on behalf of the government (both Central and Local) on the tickets must be checked and ensured that they are duly deposited into the government’s account
Audit will be carried on by team of XX and a senior partner will be involved for the review of reports. The audit is planned to be completed on XXX and report will be issued to the management on XXX.
SA 300 is applicable for the audit of financial statements for periods beginning on or after 1st April 2008.