The nature and extent of planning activities will vary according to the size and complexity of the entity, the key engagement team members’ previous experience with the entity, and changes in circumstances that occur during the audit engagement. 

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.  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.

·                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.

The auditor may decide to discuss elements of planning with the entity’s management, or those charged with governance, to facilitate the conduct and management of the audit engagement (for example, to co‑ordinate some of the planned audit procedures with the work of the entity's personnel).  Although these discussions often occur, the overall audit strategy and the audit plan remain the auditor's responsibility.  When discussing matters included in the overall audit strategy or audit plan, care is required in order not to compromise the effectiveness of the audit.  For example, discussing the nature and timing of detailed audit procedures with management, or those charged with governance, may compromise the effectiveness of the audit by making the audit procedures too predictable.

The involvement of the engagement partner and other key members of the engagement team in planning the audit draws on their experience and insight, thereby enhancing the effectiveness and efficiency of the planning process.^[1]

 Performing the preliminary engagement activities specified in paragraph 6 at the beginning of the current audit engagement assists the auditor in identifying and evaluating events or circumstances that may adversely affect the auditor’s ability to plan and perform the audit engagement.

 Performing these preliminary engagement activities enables the auditor to plan an audit engagement for which, for example:

·                The auditor maintains the necessary independence and ability to perform the engagement.

·                There are no issues with management integrity that may affect the auditor’s willingness to continue the engagement.

·                There is no misunderstanding with the client as to the terms of the engagement.

 The auditor’s consideration of client continuance and relevant ethical requirements, including independence,^* occurs throughout the audit engagement as conditions and changes in circumstances occur.  Performing initial procedures on both client continuance and evaluation of relevant ethical requirements (including independence) at the beginning of the current audit engagement means that they are completed prior to the performance of other significant activities for the current audit engagement.  For continuing audit engagements, such initial procedures often occur shortly after (or in connection with) the completion of the previous audit.

 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:

·                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;

·                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;

·                When these resources are to be deployed, such as whether at an interim audit stage or at key cut‑off dates; and

·                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.

Appendix 1 lists examples of considerations in establishing the overall audit strategy.

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. 

Considerations Specific to Smaller Entities

 In audits of small entities, the entire audit may be conducted by a very small audit team.  Many audits of small entities involve the engagement partner (who may be a sole practitioner) working with one engagement team member (or without any engagement team members).  With a smaller team, co‑ordination of, and communication between, team members are easier.  Establishing the overall audit strategy for the audit of a small entity need not be a complex or time‑consuming exercise; it varies according to the size of the entity, the complexity of the audit, and the size of the engagement team.  For example, a brief memorandum prepared at the completion of the previous audit, based on a review of the working papers and highlighting issues identified in the audit just completed, updated in the current period based on discussions with the owner‑manager, can serve as the documented audit strategy for the current audit engagement if it covers the matters noted in paragraph 8. 

The Audit Plan (Ref: Para. 9)

The audit plan is more detailed than the overall audit strategy in that it includes the nature, timing and extent of audit procedures to be performed by engagement team members.  Planning for these audit procedures takes place over the course of the audit as the audit plan for the engagement develops.  For example, planning of the auditor's risk assessment procedures occurs early in the audit process.  However, planning the nature, timing and extent of specific further audit procedures depends on the outcome of those risk assessment procedures.  In addition, the auditor may begin the execution of further audit procedures for some classes of transactions, account balances and disclosures before planning all remaining further audit procedures.

 Determining the nature, timing and extent of planned risk assessment procedures, and the further audit procedures, as they relate to disclosures is important in light of both the wide range of information and the level of detail that may be encompassed in those disclosures.  Further, certain disclosures may contain information that is obtained from outside of the general and subsidiary ledgers, which may also affect the assessed risks and the nature, timing and extent of audit procedures to address them.

 Consideration of disclosures early in the audit assists the auditor in giving appropriate attention to, and planning adequate time for, addressing disclosures in the same way as classes of transactions, events and account balances.  Early consideration may also help the auditor to determine the effects on the audit of:

·                Significant new or revised disclosures required as a result of changes in the entity’s environment, financial condition or activities (for example, a change in the required identification of segments and reporting of segment information arising from a significant business combination);

·                Significant new or revised disclosures arising from changes in the applicable financial reporting framework;

·                The need for the involvement of an auditor’s expert to assist with audit procedures related to particular disclosures (for example, disclosures related to superannuation or other retirement benefit obligations); and

·                Matters relating to disclosures that the auditor may wish to discuss with those charged with governance.[1]

Changes to Planning Decisions during the Course of the Audit (Ref: Para. 10)

 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 and thereby the resulting planned nature, timing and extent of further audit procedures, based on the revised consideration of assessed risks.  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.

Direction, Supervision and Review (Ref: Para. 11)

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:

·                The size and complexity of the entity.

·                The area of the audit.

·                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).

·                The capabilities and competence of the individual team members performing the audit work. 

ASA 220 contains further guidance on the direction, supervision and review of audit work.^[1]

Considerations Specific to Smaller Entities