PLANNING AND SUPERVISION
Introduction
1. The first standard of field work prescribed under SASP No. 2
requires that “the work is to be adequately planned and assistants, if
any, are to be properly supervised.”
2. This Statement provides guidance to the auditor making an
examination in accordance with the generally accepted auditing standards
on the considerations and procedures applicable to planning and
supervision, including preparing an audit program, obtaining knowledge
of the entity’s business, and dealing with differences of opinion among
firm personnel. Planning and supervision continue throughout the
examination, and the related procedures frequently overlap.
3. Adequate audit planning helps to ensure that appropriate
attention is devoted to important areas of the audit, potential problems
are promptly identified, and the work is completed expeditiously.
Planning also assists in proper utilization of assistants and in
coordination of work done by other auditors and experts.
4. The auditor with final responsibility for the examination may
delegate portions of the planning and supervision of the examination to
other firm personnel. For purposes of this Statement, (a) the term
auditor refers to the auditor with final responsibility for the audit
and (b) the term assistants refers to the personnel involved in an
individual audit other than the auditor.
Planning
Knowledge of the Client’s Business
5. The auditor should obtain a level of knowledge of the entity’s
business that will enable him to plan and perform his examination in
accordance with generally accepted auditing standards. That level of
knowledge should enable him to obtain an understanding of the events,
transactions, and practices that, in this judgment, may have a
significant effect on the financial statements. Knowledge of the
entity’s business helps the auditor in:
a. Identifying areas that may need special consideration.
b. Assessing conditions under which accounting data are
produced, processed, reviewed, and accumulated within the organization.c. Evaluating the reasonableness of estimates, such as valuation
of inventories, depreciation, allowances for doubtful accounts, and
percentage of completion of long-term contracts.d. Evaluating the reasonableness of management representations.
e. Making judgments about the appropriateness of the accounting principles applied and the adequacy of disclosures.
6. The auditor should obtain a knowledge of matters that relate to
the nature of the entity’s business, its organization, and its operating
characteristics. Such matters include, for example, the type of
business, types of products and services, capital structure, related
parties, locations, and productions, distribution, and compensation
methods. The auditor should also consider matters affecting the
industry in which the entity operates, such as economic conditions,
government regulations, and changes in technology, as they relate to his
examination. Other matters, such as accounting practices common to the
industry, competitive conditions, and if available, financial trends
and ratios should also be considered by the auditor.
7. Knowledge of an entity’s business is ordinarily obtained through
experience with the entity of its industry and inquiry from personnel of
the entity.
The auditor can obtain such knowledge from such sources as:
a. The client’s annual reports to shareholders, prospectuses, advertising literatures, interim financial reports.
b. Minutes of meetings of stockholders, board of directors and important committees.
c. Internal financial management reports for current and previous periods.
d. The previous year’s audit working papers and other relevant files.
e. Firm personnel responsible for non-audit services to the
client who may be able to provide information on matters that affect the
audit.f. Discussions with client’s management and staff;
g. The client’s policy and procedures manual.
h. Trade journals or magazines.
i. Consideration of the state of the economy and its effect on the client’s business.
j. Visits to the client’s premises and plant facilities.
8. Discussions with the client’s management and staff might include such subjects as:
a. Changes in management, organizational structure, and activities of the client.
b. Current government regulations affecting the client.
c. Current business developments affecting the client.
d. Current or impending financial difficulties or accounting problems.
e. Explanations as to trends and major changes in results of
operations and financial position, significant budget variances, key
ratios, cash flows, etc.
Development of Overall Plan
9. Audit planning involves developing an overall strategy for the
expected conduct and scope of the examination. The nature, extent, and
timing of planning vary with the size and complexity of the entity,
experience with the entity, and knowledge of the entity’s business.
10. To improve the efficiency of the audit and to
coordinate audit procedures with work of the client’s personnel, the
auditor may wish to discuss elements of his overall plan and certain
audit procedures with the client’s management. The overall audit plan
and the audit program, however, remain the auditor’s responsibility.
11. In planning the examination, the auditor should consider among other things:
a. Matters relating to the entity’s business and the industry in which it operates.
b. The entity’s accounting policies and procedures.
c. The methods used by the entity to process significant accounting information.
d. Anticipated reliance on internal accounting controls.
e. Preliminary judgment about materiality levels for audit purposes.
f. Financial statement items likely to require adjustment.
g. Conditions that may require extension or modification of
audit tests, such as the possibility of material errors or
irregularities or the existence of related party transactions.h. The nature of reports expected to be rendered (for example, a
report on consolidated or consolidating financial statements, reports
on financial statements filed with the SEC or special reports such as
those on compliance with contractual provisions).i. The identification of significant audit areas.
j. Possible rotation of emphasis on specific audit areas.
k. The involvement of other auditors and assistants in the audit of subsidiaries or branches of the client.
12. Procedures that an auditor may consider in planning the
examination usually involve review of his records relating to the
entity and discussion with other firm personnel and personnel of the
entity. Examples of those procedures include:
a. Reviewing correspondence files, prior years working papers, permanent files, financial statements, and auditor’s reports.
b. Discussing matters that may affect the examination with firm personnel responsible for non-audit services to the entity.
c. Inquiring about current business developments affecting the entity.
d. Reading the current year’s interim financial statements, if any.
e. Discussing the type, scope, and timing of the examination
with management of the entity, the board of directors, or its audit
committee.f. Considering the effects of applicable accounting and auditing pronouncements, particularly new ones.
g. Coordinating the assistance of entity personnel in data preparation.
h. Determining the extent of involvement, if any, of consultants, specialists, and internal auditors.
i. Establishing the timing of the audit work.
j. Establishing and coordinating staffing requirements.
The auditor may wish to prepare a memorandum setting forth the
preliminary audit plan, particularly for large and complex entities.
Developing the Audit Program
13. In planning his examination, the auditor should
consider the nature, extent, and timing of work to be performed and
should prepare a written audit program (or a set of written audit
programs). An audit program aids in instructing assistants in the work
to be done. It should set forth in reasonable detail the audit
procedures that the auditor believes are necessary to accomplish the
objectives of the examination. The form of the audit program and the
extent of its detail will vary. In developing the program, the auditor
should be guided by the results of his planning considerations and
procedures. As the examination progresses, changed conditions or
unexpected results of audit procedures applied may make it necessary to
modify planned audit procedures.
14. In preparing the audit program, the auditor, having an
understanding of the accounting system and related internal controls,
may wish to rely on certain controls in determining the nature, timing,
and extent of required auditing procedures. The auditor may conclude
that relying on certain internal controls is an effective and efficient
way to conduct his audit. However, the auditor may decide not to rely on
internal controls when there are other more efficient ways of obtaining
sufficient appropriate audit evidence. The auditor should also
consider the timing of the procedures, the coordination of any
assistance expected from the client, the availability of assistance, and
the involvement of other auditors or experts.
15. The auditor normally has flexibility in deciding when
to perform audit procedures, as very few of them have to be carried out
within specific time limits. For example, procedures carried out on
transactions can be performed at any time after the transactions have
been recorded. On the other hand, the auditor may have no discretion as
to timing, for example, when observing the taking of inventories by
client personnel.
16. Supervision involves directing the efforts of
assistants who are involved in accomplishing the objectives of the
examination and determining whether those objectives were accomplished.
Elements of supervision include the following activities:
a. Coordinating staff assignments and ascertaining that the
work is being performed by staff with appropriate capabilities.b. Assigning work to assistants.
c. Reviewing all fieldwork to conclude that the engagement is satisfactorily completed.
d. Conducting on the job training.
e. Resolving significant accounting, auditing, and similar
matters relative to the engagement, including necessary consultation
thereon.
The extent of supervision appropriate in a given instance depends on
many factors, including the complexity of the subject matter and the
qualifications of persons performing the work.
17. Assistants should be informed of their responsibilities
and the objectives of the procedures that they are to perform. They
should be informed of matters that may affect the nature, extent and
timing of procedures they are to perform, such as the nature of the
entity’s business as it relates to their assignments and possible
accounting and auditing problems. The auditor should direct assistants
to bring to his attention significant accounting and auditing questions
raised during the examination so that he may assess their significance.
18. The work performed by each assistant should be reviewed
to determine whether it was adequately performed and to evaluate
whether the results are consistent with the conclusions to be presented
in the auditor’s report.
19. The auditor and assistants should be aware of the
procedures to be followed when differences of opinion, concerning
accounting and auditing issues exist among firm personnel involved in
the examination. Such procedures should enable an assistant to document
his disagreement with the conclusions reached if, after appropriate
consultation, he believes it necessary to disassociate himself from the
resolution of the matter. In this situation, the basis for the final
resolution should also be documented.
Effectivity
This Statement shall be effective upon approval by the Board of Accountancy and the Professional Regulation Commission.
This statement was approved on December 15, 1989, by the members of the Auditing Standards and Practices Council.
Adopted: 15 Dec. 1989
(SGD.) LUIS C. DIAZ
Chairman