Audit strategy and plan - Need for audit planning

Learning Outcomes

After studying this article, you will be able to explain why planning is essential in an external audit. You will identify the purposes of audit planning, distinguish between audit strategy and audit plan, and describe the core requirements of ISA 300. You will be able to outline what an effective audit plan covers and apply typical planning procedures for the ACCA Foundations in Audit (FAU) exam.

ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand why and how auditors plan engagements and what constitutes sound audit planning. Focus your revision on:

• The purpose and benefits of audit planning
• The distinction between audit strategy and audit plan
• The main contents of an overall audit strategy and a detailed audit plan
• Planning procedures, including the use of analytical procedures and engagement team arrangements
• Relevant requirements of ISA 300 Planning an Audit of Financial Statements

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the main objective of audit planning under ISA 300?
   1. To maximise audit fees
   2. To ensure the audit is performed effectively
   3. To investigate all transactions
   4. To prepare financial statements
2. Which document sets the scope, timing, and direction of the audit?
   1. Audit plan
   2. Audit strategy
   3. Audit report
   4. Audit manual

3. List two benefits of effective audit planning.

4. Name one key requirement of the audit plan according to ISA 300.

Introduction

Audit planning is the first step in any effective external audit. Planning answers core questions: What work will be done? When? By whom? Planning enables the audit team to focus on risk areas and use resources efficiently, ensuring the assignment meets required standards and deadlines.

Failure to plan can result in overlooked risks, wasted effort, missed deadlines, and inadequate evidence. ACCA examiners expect you to know why and how auditors plan, and to identify features of a robust audit plan as required by ISAs.

The Importance of Audit Planning

Audit planning is not optional—it is a mandatory requirement of International Standards on Auditing (ISAs). ISA 300 states that auditors shall plan the audit so the engagement is performed effectively.

Key reasons for planning include:

• Focusing attention on areas with a risk of material misstatement
• Organising work to manage time and resources
• Ensuring issues are identified and resolved promptly
• Coordinating the work of the audit team and any experts
• Meeting reporting deadlines

Effective planning is a proactive process, supporting the exercise of professional judgement throughout the engagement.

Key Term: audit planning
The process by which auditors develop a strategy and detailed plan to ensure the audit is conducted efficiently, focusing on significant risk areas to obtain sufficient and appropriate evidence.

Audit Strategy and Audit Plan: The Difference

ISA 300 requires the auditor to establish an overall audit strategy and then develop a detailed audit plan. These are related but not the same.

• Audit strategy: Sets the scope, timing, and direction of the audit, laying out the main decisions and overall approach (e.g., reliance on controls, timing of procedures, team members' skills needed).
• Audit plan: Specifies the detailed nature, timing, and extent of audit procedures. It addresses what will be done, how much testing is needed, who will perform each task, and when.

Key Term: audit strategy
The high-level plan setting the scope, timing, and direction of the audit, guiding development of the detailed audit plan.

Key Term: audit plan
Document describing the detailed nature, timing, and extent of audit procedures to be performed in accordance with the audit strategy.

Purposes and Benefits of Audit Planning

Good audit planning:

• Allocates suitable resources to high-risk areas
• Promotes timely identification of potential problems
• Enables proper supervision and review of work
• Supports coordination between engagement team members, including specialists
• Facilitates effective communication with management and those charged with governance

Without deliberate planning, key risks may be missed and audit teams may waste resources or fail to deliver on time.

Worked Example 1.1

Q: The audit partner is planning the first audit of Wren Limited, which operates internationally in several complex sectors. The team is unfamiliar with some client locations and processes. What planning actions should the partner take to ensure the audit is performed effectively?

Answer:

• Develop an audit strategy outlining scope (including locations), key risk areas, and timing.
• Consider the need for team members with relevant skills and possible use of specialists.
• Schedule preliminary meetings with client management to understand operations.
• Ensure contingency plans are in place for working across time zones and unfamiliar industries.
• Agree communication procedures and deadlines with the team and client.

Contents of the Audit Strategy and Audit Plan

Overall Audit Strategy should identify:

• Key characteristics of the engagement (e.g., business sector, group structure)
• Reporting objectives (e.g., deadlines for audited accounts)
• Significant risk factors (e.g., previous audit findings)
• Resource requirements (staff, specialists, budgets)
• Preliminary materiality levels

Audit Plan must include:

• A description of risk assessment procedures (e.g., analytical review, system walks)
• Detailed responses to identified risks (e.g., specific substantive tests, reliance on controls)
• Allocation of work to team members
• Timings for audit fieldwork and completion stages
• Plans for supervision, review, and involvement of experts

Key Term: analytical procedures
Evaluations of financial information using comparisons and ratio analysis to identify unexpected items or trends for further investigation.

Worked Example 1.2

Q: During planning, the audit team compares this year's sales and receivables data to prior years and industry averages. They spot a significant rise in trade receivables, though sales only increased moderately. What is this risk assessment method called, and what should the audit team do next?

Answer:

• This is an example of using analytical procedures at the planning stage.
• The team should investigate the reason for the rise in receivables and plan additional audit procedures on late payments and credit risk.

Planning Procedures and Typical Steps

Audit planning procedures frequently include:

• Reviewing previous audit files (for recurring audits)
• Understanding the client’s operations and environment
• Discussing significant events with management
• Considering legal, regulatory, or industry changes
• Using analytical procedures to highlight unusual trends
• Agreeing the timing, team allocations, and budget
• Liaising with internal auditors or specialists, if needed

These procedures are adapted to each engagement, and findings are documented as part of the audit working papers.

Exam Warning

Do not confuse the overall audit strategy (high level direction) with the audit plan (detailed procedures and tasks). The exam may ask for the difference. List elements of each separately.

Summary

Audit planning ensures that audit objectives are met efficiently and effectively, concentrating resources on risk areas and establishing a clear approach for the engagement. ISA 300 mandates the establishment of an audit strategy and a detailed audit plan, both of which guide and structure the team's work from start to finish.

Key Point Checklist

This article has covered the following key knowledge points:

• The importance and purposes of audit planning in external audit
• Differences between audit strategy and audit plan
• Main contents of an audit strategy and a detailed audit plan
• Procedures and steps commonly followed in audit planning
• The requirements of ISA 300 regarding audit planning
• The use and purpose of analytical procedures in planning

Key Terms and Concepts

• audit planning
• audit strategy
• audit plan
• analytical procedures