Benefits of audit planning
Audit planning is addressed by ISA 300 Planning an Audit of Financial Statements. It states that adequate planning benefits the audit of financial statements in several ways:
– Helping the auditor to devote appropriate attention to important areas of the audit.
– Helping the auditor to identify and resolve potential problems on a timely basis.
– Helping the auditor to properly organise and manage the audit engagement so that it is performed in an effective and efficient manner.
– Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks and the proper assignment of work to them.
– Facilitating the direction and supervision of engagement team members and the review of their work.
– Assisting, where applicable, in coordination of work done by experts.

Audit risk and auditors responses
Audit risk
Sitia Sparkle Co purchases their goods from suppliers in Africa and the goods are in transit for up to three weeks. At the year end, there is a risk that the cut-off of inventory, purchases and payables may not be accurate and may be under/overstated.
Sitia Sparkle Co has incurred expenditure of $1·3 million in developing a new range of cleaning products. This expenditure is classed as research and development under IAS 38 Intangible Assets. The standard requires research costs to be expensed to profit or loss and development costs to be capitalised as an intangible asset.
If the company has incorrectly classified research costs as development expenditure, there is a risk the intangible asset could be overstated and expenses understated.
In addition, as the senior management bonus is based on year-end asset values, this increases this risk further as management may have a reason to overstate assets at the year end.
In September 20X5, the company invested $0·9 million in a complex piece of plant and machinery. The costs include purchase price, installation and training costs. As per IAS 16 Property, Plant and Equipment, the cost of an asset incudes its purchase price and directly attributable costs only.
Training costs are not permitted under IAS 16 to be capitalised as part of the cost and therefore plant and machinery and profits are overstated.
The bonus scheme for senior management and directors of Sitia Sparkle Co has been changed; it is now based on the value of year-end total assets.
There is a risk that management might be motivated to overstate the value of assets through the judgements taken or through the use of releasing provisions or capitalisation policy
The finance director of Sitia Sparkle Co believes that an allowance for receivables is excessive and unnecessary and therefore has not provided for it at the year end and has credited the opening balance to profit or loss.
There is a risk that receivables will be overvalued; some balances may be irrecoverable and so will be overstated if not provided for.
In addition, releasing the allowance for receivables will increase asset values and hence the senior management bonus which increases the risk further.
A new general ledger system was introduced in May 20X6 and the old and new systems were run in parallel until August 20X6.
There is a risk of the balances in May being misstated and loss of data if they have not been transferred from the old system completely and accurately. If this is not done, this could result in the auditor not identifying a significant control risk.
In addition, the new general ledger system will require documenting and the controls over this will need to be tested.
A number of reconciliations, including the bank reconciliation, were not performed at the year end, however, they were undertaken in June and August.
Control account reconciliations provide comfort that accounting records are being maintained completely and accurately. At the year end, it is important to confirm that balances including bank balances are not under or overstated. This is an example of a control procedure being overridden by management and raises concerns over the overall emphasis placed on internal control.
The purchase ledger of Sitia Sparkle Co was closed down on 8 August, rather than at the year end 31 July.
There is a risk that the cut-off may be incorrect with purchases and payables over or understated.

Auditor’s response
The audit team should undertake detailed cut-off testing of purchases of goods at the year end and the sample of GRNs from before and after the year end relating to goods from suppliers in Africa should be increased to ensure that cut-off is complete and accurate.
Obtain a breakdown of the expenditure and verify that it relates to the development of the new products. Undertake testing to determine whether the costs relate to the research or development stage. Discuss the accounting treatment with the finance director and ensure it is in accordance with IAS 38.
Obtain a breakdown of the $0·9 million expenditure and undertake testing to confirm the level of training costs which have been included within non-current assets. Discuss the accounting treatment with the finance director and the level of any necessary adjustment to ensure treatment is in accordance with IAS 16.
Throughout the audit, the team will need to be alert to this risk and maintain professional scepticism.
Detailed review and testing on judgemental decisions, including treatment of provisions, and compare treatment against prior years. Any manual journal adjustments affecting assets should be tested in detail.
In addition, a written representation should be obtained from management confirming the basis of any significant judgements.
Co identifies receivables balances which may require a provision to ensure that they are operating effectively in the current year.
Discuss with the finance director the rationale for not maintaining an allowance for receivables and releasing the opening provision.
Extended post year-end cash receipts testing and a review of the aged receivables ledger to be performed to assess valuation and the need for an allowance for receivables.
The auditor should undertake detailed testing to confirm that all of the balances at the transfer date have been correctly recorded in the new general ledger system.
The auditor should document and test the new system. They should review any management reports run comparing the old and new system during the parallel run to identify any issues with the processing of accounting information.
Discuss this issue with the finance director and request that the July control account reconciliations are undertaken. All reconciling items should be tested in detail and agreed to supporting documentation.
The audit team should undertake testing of transactions posted to the purchase ledger between 1 and 8 August to identify whether any transactions relating to the 20X7 year end have been included or any 20X6 balances removed.

Supervision and reviewing of the assistants’ work
Supervision
During the audit of Sitia Sparkle Co, the supervisor should keep track of the progress of the audit engagement to ensure that the audit timetable is met and should ensure that the audit manager and partner are kept updated of progress.
The competence and capabilities of individual members of the engagement team should be considered, including whether they have sufficient time to carry out their work, whether they understand their instructions and whether the work is being carried out in accordance with the planned approach to the audit.
In addition, part of the supervision process should involve addressing any significant matters arising during the audit of Sitia Sparkle Co, considering their significance and modifying the planned approach appropriately.
The supervisor would also be responsible for identifying matters for consultation or consideration by the audit manager or engagement partner of Sitia Sparkle Co.
Review
The supervisor would be required to review the work completed by the assistants and consider whether this work has been performed in accordance with professional standards and other regulatory requirements and if the work performed supports the conclusions reached and has been properly documented.
​​​​​​​The supervisor should also consider whether all significant matters have been raised for partner attention or for further consideration and where appropriate consultations have taken place, whether appropriate conclusions have been documented.