Audit Planning

Planning is a process of determining in advance what to do, when to do, how to do and who is to do. Audit planning involves the development of an overall strategy based on the understanding of the organization being audited, the environment in which it operates; the possible lines of enquiry and the kinds of information that should be gathered for the identified areas of audit.  It integrates the various aspects of auditing task, which is aimed at achieving the primary objective of the Royal Audit Authority i.e. Enhancing the government accountability.  The Planning also optimises the transfer of knowledge from one audit to another, with minimal cost and disruption to the audit entity.

Foreword

Planning is the most essential element of a process of any initiative. A properly drawn-up audit plan helps in the efficient and effective conduct of audit. Audit planning helps in ensuring that adequate attention is devoted to important areas of audit. It helps in ensuring that audit is completed expeditiously and intended objectives are achieved. Audit planning helps in the utilisation of staff properly and effectively and also acts as a direction for auditors.

The Royal Audit Authority, with the development of this Audit Planning and Programming Guide shall be able to meet the challenges and demands of conducting a more systematic and planned audits for providing a more responsive audit reports to decision makers in the Government.  It is also hoped that the Audit Planning and Programming Guide will enable auditors to adopt a more systematic and planned audit approaches for all audits in future.

While developing the Audit Planning and Programming Guide, attempts have been made to make it exhaustive, simple and applicable to our environment. The development of audit manuals is not the end and is not important, unless it can be understood and applied by all auditors in their auditing assignments.

We wish to thank the DANIDA, under whose assistance this guide has been developed.

We shall always appreciate and encourage suggestions for further improvement of this manual.  

Kunzang Wangdi  
Auditor General of Bhutan

Table of Contents

SUBJECT                                                                                            

1. Introduction
2. Elements of Audit Planning
2.1 Understanding of the agency
2.2 Audit Objectives
2.3 Audit scope
2.4 Timing
2.5 Audit Criteria
2.6 Audit Methodology
2.7 Resources
3.Advantages of Audit Planning
4.Planning process
5.Planning process at the Audit Team Level
5.1 Preparation of Annual Work Plan of the Audit Team
5.2 Getting an over view of the agency to be audited
5.2.1 Gaining sufficient understanding of the agency
5.2.2 Identification of matters of potential significance
5.3 Developing detailed audit procedures
      Detailed Audit Procedures
5.3.2 Obtaining approval of the audit program
5.4 Advantages of a detailed audit program
      SOME DISTINCT OUTPUTS IN THE VARIOUS PHASES OF AUDIT TEAM LEVEL PLANNING ARE
6.Planning at Audit Division level
      OUTPUTS OF DIVISION LEVEL PLANNING MIGHT INCLUDE
7.The Royal Audit Authority Level Planning

AUDIT PLANNING AND PROGRAMMING

1. Introduction 

Planning is a process of determining in advance what to do, when to do, how to do and who is to do. Audit planning involves the development of an overall strategy based on the understanding of the organisation being audited, the environment in which it operates; the possible lines of enquiry and the kinds of information that should be gathered for the identified areas of audit.  It integrates the various aspects of auditing task, which is aimed at achieving the primary objective of the Royal Audit Authority i.e. Enhancing the government accountability.  The Planning also optimises the transfer of knowledge from one audit to another, with minimal cost and disruption to the audit entity. 

1.    Elements of Audit Planning

Each and every audit must be adequately planned. Planning the audit includes understanding the audit entity, determining the audit objectives, the audit scope, timing, audit criteria, methodology to be used and resources required. All audit plans must be written and documented for approval by the appropriate authorities.

2.1 Understanding of the agency

The auditor should acquire the knowledge and understanding of the organisation and its operational activities and the circumstances under which it is operating. The knowledge and the understanding help in the identification of line of audit enquiry, determination of audit areas and audit objectives.

2.2 Audit Objectives

The audit objective is the central theme, which the particular audit is to accomplish. For example, objective in the audit of Financial Statements is to verify the accuracy and reliability of financial data and express an opinion whether financial statements present fairly the financial position, results of operation and cash flows in conformity with the Generally Accepted Accounting Practices.

Audit objectives can be determined through either and or any one or more of the following:

•     as per the audit mandate of the Royal Audit Authority;

•     as specific instructions from the Government;

•     as specific instructions of the Auditor General;

•     as based on thrust areas identified by the Auditor General/Division Chiefs; and

•     as based on specific requests, complaints, media reports etc. 

2.3 Audit scope

Audit scope is the area or the extent to be covered in audit. It is also the basis on which the audit is conducted. A clear determination and statement of the scope of audit acts as a defence for the auditor in case of any misunderstanding or allegation that the auditor had or had not covered certain aspects of audit.

Either, and or any one or more of the following may determine the audit scope:

•     instructions from the Government;

•     instructions of the Auditor General;

•     instructions of the Division Chiefs;

•     judgement of the Team Leader/member;

•     specific request made by agencies including bilateral, multilateral and international agencies;

•     sensitivity as reported in the media reports;

•     geographical location of agencies;

•     accessibility of records;

•     sensitivity of subjects/areas etc.; and

•     representations made by the members of public.

Audit scope is aimed at achieving the audit objectives. The scope of audit is mentioned in the audit communication as an indication of the extent of coverage and to act as a defence for the auditor in case of any misunderstanding or allegation that the auditor has not covered certain aspects of audit.

2.4 Timing

Timing means the period to be covered in audit, commencement date of audit, how long it will take, and when is the final report expected etc. Milestones and deadlines shall be specified with reference to audit engagement letter. Audit timing should be based on the Annual Audit Plan.

2.5 Audit Criteria

Audit criteria are standards against which performance is compared to assess the deviations. For instance, the Government approved rates of mileage for various types of vehicles are the criteria for any mileage claims. The auditors are required to identify audit criteria suitable to the circumstances, by which to evaluate the matters subject to audit. Audit criteria can be set either and/or from:

•     the laws;

•     the Financial Manual;

•     the Royal Civil Service Rules;

•     Government circulars/notifications;

•     Bhutan Schedule of Rates (BSR);

•     Provisions of contract agreements;

•     Donor requirements;

•     Standard Acceptable norms and practices;

•     Administrative manual and operational manual of the agencies; 

•     Minutes of the meetings etc.; and

•     INTOSAI/ASOSAI Standards. 

2.6 Audit Methodology

Audit methodology means the methods and techniques used for performing audit procedures and in gathering data and documentation of audit evidence as a basis for opinions and conclusions. For example the methodology used in confirming the existence of inventories is observing physical count and inspection. A few of the methodologies used by auditors are:

•   inspection,

•     observation,

•     counting,

•     inquiry,

•     interviewing,

•     confirmation,

•     computation,

•     reconciliation,

•     analysis,

•     testing,

•     sampling,

•     verification

•     vouching.

The auditor however should decide what methodologies should be used to gather sufficient and competent audit evidence.

2.7 Resources

Resources mean the money, equipment, time, number and mix of audit staff that may be required to complete a particular audit. A combination of size and sensitivity as well as location of the organisation determine the resource requirements, the period of audit, the audit scope and such other factors.

3.    Advantages of Audit Planning:

Audit planning is a continuous process and must continue throughout the audit. A properly drawn-up audit plan helps in the efficient and effective conduct of audit. Some of the main advantages of audit planning are:

Audit planning helps in ensuring that adequate attention is devoted to important areas of the audit.

The auditor while planning an audit must consider all aspects of audit, such that all the important aspects are adequately covered. If an audit is not planned adequately, it is likely that some important aspects are overlooked or are paid inadequate attention.

Audit planning helps in identifying potential problems.

While preparing an audit plan, the auditor can perceive some problems, which may arise during the audit. This helps in planning suitable action to overcome such problems.

Audit planning helps in ensuring that the audit work is completed expeditiously.

Taking various aspects of audit into consideration, the auditor can plan his audit procedures in such a manner that the audit can be completed on a timely basis, eliminating unproductive efforts.

Planning helps in utilising the staff properly and optimally.

Planning helps the auditor in determining what audit procedures are to be performed in achieving the audit objectives. He can, thus, allocate various aspects of audit to his assistants in a judicious manner. It can facilitate the auditor in ensuring that work performed by his assistants is adequate for his purpose by reviewing their work and also enable him in carrying out proper supervision of his staff.

Audit planning helps achieve intended audit objectives.

Audit planning helps to determine what areas should covered in audit, what audit procedures are required to be performed to achieve the audit objectives.

Audit planning acts as a direction.

Audit planning acts as a direction for auditors in the planning, conducting and reporting of an audit assignment.

Audit planning helps reduce unnecessary cost/wastage.

Proper audit planning will reduce unnecessary costs/wastage of resources. 

4.    Planning process

Usually the planning processes involves gaining knowledge and understanding of the entity, determining the lines of audit enquiry, setting of audit objectives and preparing detailed audit procedures and considering how audit results will be reported. The planning at the Royal Audit Authority may be carried out at different levels involving a variety of processes. The main planning can be segregated at three different levels as under:

•     Planning at the Audit Team level;

•     Planning at Audit Division level; and

•     Planning at the organisation wide (RAA) level.

5.    Planning process at the Audit Team Level

The planning process at the Audit Team level is the most important as the team is solely responsible for the execution of audit. Inappropriate planning at the team level will result in inefficient and ineffective audit of the agencies affecting the primary objective of the Royal Audit Authority. Accordingly all audit members including the Division Chief should be actively involved along with the Audit Team Leader in the audit planning process of the designated audit of the entity. The audit planning at the team level involves:

•     Preparation of Annual Work Plan of the Audit Team;

•     Getting an over view  of the agency to be audited;

•     Developing detailed audit procedures

5.1 Preparation of Annual Work Plan of the Audit Team

Each Audit Team Leader will prepare an annual work plan of the Audit Team in the beginning of the Financial Year in accordance with the area of responsibility, jurisdiction and evaluation of the previous years performance. The work plan should be supportive of the work programs and commitments of the Audit Division and in line with the audit thrust and priorities set by the Auditor General to accomplish the Development plan of the Royal Audit authority. Sample of the Audit Teams Work Plan is annexed as Form No. 1.

5.2 Getting an over view of the agency to be audited

It is very important that auditors have sufficient knowledge of the agency to be audited and the circumstances under which it is operating, because such information might have significant impact on the financial information, on the audit procedures, or on the audit report. During the Overview Phase gaining sufficient understanding of the agency, identification of matters of potential significance and development of possible lines of audit enquiry are carried out by the Audit Team.

5.2.1 Gaining sufficient understanding of the agency

Audit Divisions will maintain permanent files on each auditee agency with records such as mandates, organisational charts, plan documents, important agreements, budget outlays, year end financial statements and such other important documents relevant to the operations of the agency. The Audit Team should review this file along with other documents to gain sufficient knowledge and understanding of the agency to be audited in the Royal Audit Authority itself.  If need be the audit team shall visit the auditee agency for interviewing key persons and review of other related documents.  The Audit Team Leader shall ensure that all the audit team members have common understanding on the objectives and the purposes of the audit of the agency by carrying out the following reviews:

•     Review of past audit reports;

•     Review of mandates of the agency;

•     Ascertaining objectives of the agency;

•     Review of common performance measurement criteria/yardsticks;

•     Review of present operations;

•     Review of Government policies and programmes, plan documents on the agency;

•     Review of Financial allocations and operation;

•     Review of minutes of the meetings and publications;

•     Review of performance monitoring, evaluation reports generated;

•     Consultant Reports;

•     Internal Audit Reports;

•     Other important documents; and

•     Newspaper/media reports.

The Audit Team as an output of the above reviews carried out should prepare and submit the following documents for review:

•     Synopsis of the understanding of the mandate, objectives, planned activities;

•     Key performance indicators;

•     Organizational set up/chart;

•     Important people/contact points;

•     Operational trends;

•     Financial outlays and expenditure summaries etc.;

•     Consolidated summary statement of collection and deposits;

•     List of  matters of potential significance which will be considered during the present audit; and

•     Review statement of past audit reports and audit follow-up actions.

During the review if sufficient information is not available within the Division, the Audit Team may visit the auditee agency and gather above information. The above reports should be submitted and reviewed by the Division Chief. 

5.2.2 Identification of matters of potential significance

The list of matters of potential significance prepared as an output of the reviews should be further analysed by the Audit Team Leader considering the potential audit risk, materiality, thrust areas, constraints, availability of time and such other considerations. In any auditing situation some audit areas involve greater audit risk than others. It is, therefore, important that audit areas involving greater audit risk be identified so that special attention can be paid during the audit execution phase. For instance, in the audit of constructions one potential audit risk/thrust area would be the preparation and payment of muster roll. There are possibilities that false names could be included in the muster roll and payments could be made to non-existing persons. Key areas where potential audit risks exist include:

• Procurements;

• Inventory controls;

• Revenue;

• Construction and maintenance works etc.;

In order to come to proper assessment of potential audit risks, the Audit Team leader may carryout the following tasks:

•     Interview of some of the senior agency personnel (management);

•     Review of internal controls and accounting practices etc.;

•     Review of policies and procedures manual; and

•     Such other reviews as felt essential.

The refined list of matters of potential significance along with the possible impacts should be submitted to the Division Chief for approval of possible areas of line of audit enquiry. Besides, the Audit Team must also come out with a report giving an assessment of internal controls and the extent to which reliance could be placed on the work of internal and other auditors. The auditor shall also determine broad areas to be covered during the execution phase and how much emphasis should be placed on each area or the thrust/significant areas as identified.

5.3 Developing detailed audit procedures

Detailed Audit Procedures

The cornerstone of audit planning is the development of an appropriate audit programme. An audit programme is a detailed list of audit procedures to be performed in the course of the audit, and is designed to accomplish audit objectives. Based on the matters of potential significance and possible areas of line of audit enquiry the auditor shall develop detailed audit procedures, which will be followed during the execution phase. Specific procedures for the preparation of the audit programme are:

•     Statement of audit objectives in line with the selected maters of potential significance;

•     Specify audit criteria in line with the stated audit objectives; and

•     List out the audit procedures to be accomplished during the execution phase.

•     Assignment of task to the Audit Team Member.

Sample of the Detailed Audit Program illustrated is annexed as Form No. 2.

While preparing an audit programme, the auditor must determine the specific audit procedures to be performed in respect of different aspects to be covered, the extent to which those tests will be performed, and the timing of such tests.  In the case of recurring audits, the auditor shall plan it in such a manner that certain specific areas are reviewed in rotation. For instance, if procurement is scrutinised deeply in one year, next year it could be the construction or contract and so on.

Determine the resources necessary to perform the audit. The auditor must determine the resources necessary to perform the audit in terms of salary, TA/DA expenses of auditors, time to be spent including the supervisor’s for a particular audit. The auditor must estimate the exact requirement of staff, testing tools/equipment and the involvement of technical persons. 

5.3.2 Obtaining approval of the audit program

The detailed audit plan prepared by the auditor shall be reviewed by the Division Chief to assess its adequacy in meeting the audit objectives before approval at appropriate levels.

5.4 Advantages of a detailed audit program

The audit programme should be sufficiently detailed to serve as a set of instructions to the audit staff as a means to control proper execution of audit. A written audit programme shall have the following advantages:

Provides evidence of the actual conduct of audit.

A written audit programme along with audit working papers provides evidence of actual work performed by auditors.

Serves as a guide to other auditors and simplifies the allocation of work.

A written audit programme provides clear instructions to auditors, reducing any misunderstanding that may arise in case of other auditors joining an ongoing audit assignment. It also simplifies allocation of work because what works should be done by who is clearly specified.

Provides a valuable tool for planning staff requirement.

A written audit programme identifies the skills and experience that may be required of auditors conducting the audit. For example assistance of a technical person might be required in the audit of construction projects.

 Facilitates supervision and control over the execution of audit.

It provides a basis against which the actual progress on an audit can be judged; e.g. whether planned time schedule is met or planned procedures are performed etc. facilitating supervision.

Serves as a basis for planning future audits.

Making appropriate modifications in the previous audit programme, plan for future audits can be made. For instance, thrust area might be changed or emphasis could be made in some other areas than in the previous year.

Assists in fixing responsibility for work done.

The auditors have to record their initials against audit procedures performed by them. It assists in fixing responsibility for the work done by the auditors.

A written audit programme, however tends to become mechanical and auditors may lose interest and initiative. As such, the audit programme must be made flexible and constantly reviewed and revised as the audit progresses. There should be a system whereby the audit staff is encouraged to participate in the reviewing and revision of audit programme.

SOME DISTINCT OUTPUTS IN THE VARIOUS PHASES OF AUDIT TEAM LEVEL PLANNING ARE:

-        Audit Teams Work Plan;

-        List of potential matters of significance;

-        Detailed Audit programme;

-        Letter of Audit engagement; and

-        Travel Authorisation.

6.    Planning at Audit Division level

In the beginning of the Financial year the Division Chief will brief the respective Audit Teams and units on their appropriate contribution to the achievement of the audit activities and priorities of the year in accordance with the respective area of responsibility and jurisdiction and evaluation of the prior year’s performance. In setting out the priorities the Division Chief will include the audit thrust and special priorities declared by the Auditor General. The Division Chief will then require each Audit Team to submit annual work plan.

The approved annual work plan of each audit team will be consolidated to form the commitment of the audit teams in what is known as the Annual Plan. The commitment of the audit teams will the be summarised and Divisional Work Plan as per sample annexed as Form No. 3 will be prepared by the Division. The Divisional Work Plan along with the consolidated work plan of the Audit Teams becomes the commitment of the Division for the Financial Year. The Divisional Work Plan should be got approved by the Auditor General.

OUTPUTS OF DIVISION LEVEL PLANNING MIGHT INCLUDE:

-        Consolidated Work Plan of the Audit Teams;

-        Annual Work Plan of the Division;

-        List of audit by priority taking care of request audits; and

-        Approval of teams’ Audit Programme.

7.    The Royal Audit Authority Level Planning

The RAA level planning shall be the compilation and consolidation of all the Division level plans in to the Annual Audit Plan. Thrust area for the various divisions may be determined by the Auditor General or could be in the form of specific instructions/requests received from the government or other stakeholders. The RAA level planning would encompass the overall auditing and other activities that are directed at fulfilling the missions of the RAA.

Schedule for RAA level planning:

1.Annual Work Plan of each Division including cost of audit.

2. Review and approval of annual work plans of Divisions by the Auditor General.  

3.Consolidation of annual work plans of Divisions.