EPFO APFC 2023 General Studies · Question 109 of 120

Correct — B, (b) Overall audit strategy. The stem is very nearly the definition printed in the auditing standard on planning, SA 300, which requires the auditor to establish an overall audit strategy that sets the scope, timing and direction of the audit and that guides the development of the more detailed audit plan. Recognising the sentence is half the work; understanding the sequence is the other half. Planning an audit proceeds through three documents that stand in a fixed order of generality. The overall audit strategy comes first and is the broad design of the engagement. In settling it the auditor identifies the characteristics of the engagement that define its scope — the financial reporting framework, the industry, the locations and components involved, the extent to which the work of internal audit or of other auditors may be used — ascertains the reporting objectives and the timetable and the nature of the communications required, considers the factors that in the auditor's professional judgement are significant in directing the team's efforts, such as materiality and the areas of higher assessed risk, and determines the nature, timing and extent of the resources needed: how many people, of what experience, deployed where and when. Those four considerations are precisely 'scope, timing and direction'. The audit plan comes second and is narrower and more detailed, setting out the nature, timing and extent of the risk assessment procedures and of the further audit procedures to be performed at the assertion level by members of the engagement team. The audit programme comes third, as the practical list of procedures and instructions handed to the assistants who will carry them out. The stem itself rules out the second-place document, since it says the answer guides the development of the more detailed audit plan — a thing cannot guide its own development. Two further points are worth fixing. Planning is not a discrete phase completed before the field work starts; it is a continual and iterative process, and where the audit throws up something unexpected the auditor updates and changes the overall strategy and consequently the plan. And all of it must be documented: SA 300 requires the strategy, the plan and any significant changes made to either during the engagement, together with the reasons for those changes, to be recorded in the audit documentation.

• (a)Audit program — The audit programme — printed here in the American spelling, as the booklet has it — is the most detailed of the three planning documents, not the broadest. It is the written scheme of the audit procedures to be carried out, item by item and area by area, ordinarily with space against each entry for the assistant who performed it and the date on which it was done. Its purposes are practical: it sets out instructions to the engagement team, records that each procedure was in fact performed, fixes responsibility and lets the engagement partner see how far the work has progressed. Because it is derived from the audit plan, which is in turn derived from the overall audit strategy, it sits at the end of the chain the stem describes rather than at its head. A programme cannot set the scope of an audit because its own content is decided by the scope that has already been set — the number and the kind of procedures it lists follow from the risks assessed and the resources allocated at the strategy stage.
• (c)Completion memorandum — A completion memorandum belongs to the end of an audit, not the beginning. It is a summary document placed in the audit file recording the significant matters that arose during the engagement, the conclusions reached on them and how the matters were resolved, so that a reviewer, the engagement quality control reviewer, or an inspector reading the file afterwards can follow the auditor's reasoning to the opinion. It is part of the assembly of the final audit file, and the auditing standards deal with it under documentation rather than under planning. Chronology alone eliminates the option: a document that summarises what happened cannot determine the scope, timing and direction of work that has already been done. It is a useful contrast to hold beside the strategy for exactly that reason — one document opens the audit file and the other closes it, and papers occasionally test the pair by asking which comes first.
• (d)Audit plan — The audit plan is the closest of the three to the correct answer and the stem itself excludes it. The sentence asks which document guides the development of the more detailed audit plan, so whatever the answer is, it is not the audit plan. In the scheme of SA 300 the plan is the second stage: once the overall strategy has fixed the scope, the timing, the direction and the resources, the plan records the nature, timing and extent of the planned risk assessment procedures and of the further audit procedures at the assertion level, together with any other procedures required to comply with the standards. It is therefore more detailed than the strategy and less detailed than the programme. The distinction is one of generality, not of importance, and it is easy to blur because in a small engagement the two documents may be short and prepared at the same time. The strategy answers how much audit there will be and where the effort goes; the plan answers which procedures will be performed to get there.

Audit planning is governed by SA 300, Planning an Audit of Financial Statements, and its purpose is to make the audit effective: to direct attention to the important areas and the potential problems, to get the work organised and managed so that it is done efficiently, to help select an engagement team of the right size and competence, and to make supervision, review and the coordination of work on components possible. Planning begins with preliminary engagement activities — considering continuance of the client relationship, evaluating compliance with ethical requirements including independence, and establishing an understanding of the terms of the engagement — and then moves through three documents of decreasing generality. The overall audit strategy sets the scope, timing and direction of the audit; the audit plan sets out the nature, timing and extent of the procedures to be performed; and the audit programme lists those procedures as instructions to the team. The relationship between planning and risk is the heart of the modern approach. What is planned depends on what risks of material misstatement have been assessed, and those assessments come from understanding the entity, its environment and its internal control, so planning cannot be completed in advance and then left alone — the standard describes it as a continual and iterative process running from the completion of the previous audit to the completion of this one. Where evidence obtained in the field changes the risk assessment, the strategy and the plan are revised, and the revision and its reasons are documented.

The auditing questions in this paper are drawn from the language of the standards rather than from practical procedure, and this item is the clearest example: the stem reproduces the operative words of SA 300 almost exactly. That tells a candidate something about how to prepare. A definition learned in the standard's own phrasing is worth several learned in paraphrase, because the stem is likely to be the phrasing, and the four options will be four documents that all genuinely exist in an audit file. Here nothing is invented — audit programme, overall audit strategy, completion memorandum and audit plan are all real, and the item is decided purely by which of them sits where in the sequence. The practical reason an EPFO paper cares is that an Assistant Provident Fund Commissioner conducts and commissions inspections that are audits in all but name, and the same logic applies to them: decide the scope and the resourcing first, work out the detailed procedures second, and record both. One point of printing should be noted rather than corrected. Option (a) prints 'program' in the American spelling, where Indian auditing literature and the standards use 'programme'. It is the Commission's spelling and it changes nothing about the meaning, but a candidate who scans for the familiar word may hesitate for a moment over an option that is otherwise the most recognisable of the four.

• SA 300 requires the auditor to establish an overall audit strategy that sets the scope, timing and direction of the audit and that guides the development of the more detailed audit plan. The stem of this question is that sentence, which is why recognising the standard's own phrasing is the fastest route to the answer.
• The three planning documents run from broad to narrow: the overall audit strategy first, then the audit plan setting out the nature, timing and extent of risk assessment procedures and further audit procedures at the assertion level, then the audit programme listing those procedures as instructions to the engagement team, with space to record who performed each and when.
• In establishing the strategy the auditor identifies the characteristics of the engagement that define its scope, ascertains the reporting objectives and the timetable and required communications, considers the factors significant in directing the team's efforts such as materiality and higher assessed risks, and determines the nature, timing and extent of the resources needed.
• Planning is a continual and iterative process rather than a discrete phase; it runs from the completion of the previous audit and is revised whenever evidence changes the assessed risks. SA 300 requires the overall audit strategy, the audit plan and any significant changes to either, with the reasons for them, to be documented in the audit file.
• A completion memorandum belongs to audit documentation rather than to planning. It summarises the significant matters that arose during the engagement, the conclusions reached and how those matters were resolved, and is assembled into the final audit file after the work is finished, so it cannot determine the scope of the work it describes.

• Choosing the audit plan. The stem says the answer guides the development of the more detailed audit plan, so the plan is the thing guided and cannot be the guide; reading the whole sentence rather than its first clause eliminates the option without any knowledge of the standard.
• Treating the audit programme as the master document because it is the one most often seen in practice. The programme is the most detailed of the three and is derived from the plan, which is derived from the strategy, so it stands at the end of the chain rather than at its head.
• Assuming planning is finished before field work begins. SA 300 describes it as continual and iterative, and the strategy and plan are revised whenever evidence obtained during the audit changes the assessed risks, with the changes and their reasons documented.
• Confusing scope with procedure. The strategy answers how much audit there will be, where the effort goes and with what resources; the plan answers which procedures will be performed at the assertion level. The distinction is one of generality, and both documents are required.

Auditing items in these papers are heavily weighted towards the standards on planning, documentation and reporting, and they take three recognisable forms. The first quotes a definition from a standard and asks which term it defines, which is what this item does with SA 300 — preparation for it is simply learning the operative sentences of the commonly examined standards verbatim. The second gives four documents or four steps and asks which comes first or last, testing the sequence rather than the definitions. The third describes a situation and asks what the auditor must do, which draws on the same standards but requires them to be applied. Because the option sets are made of real documents that all belong somewhere in an audit file, elimination by plausibility does not work and the ordering has to be known: preliminary engagement activities, overall audit strategy, audit plan, audit programme, field work, review, completion memorandum, report.

No directly related past PYQ was found.

• practice — not a real PYQ

  Which one of the following is more detailed than the overall audit strategy and includes the nature, timing and extent of the audit procedures to be performed by engagement team members?

  • (a)The engagement letter
  • (b)The audit plan
  • (c)The management representation letter
  • (d)The completion memorandum

  Answer(b) The audit plan — under SA 300 the plan is more detailed than the overall audit strategy in that it sets out the nature, timing and extent of the risk assessment procedures and of the further audit procedures at the assertion level. The engagement letter records the terms on which the audit is accepted, the representation letter is written evidence from management, and the completion memorandum summarises significant matters at the end of the engagement.

• practice — not a real PYQ

  Which one of the following best describes an audit programme?

  • (a)A written statement of the terms of the audit engagement agreed with the client
  • (b)A detailed list of the audit procedures to be carried out, serving as instructions to the assistants performing them and as a record that each was performed
  • (c)The auditor's opinion on whether the financial statements give a true and fair view
  • (d)A summary of the significant matters arising during the audit and the conclusions reached on them

  Answer(b) A detailed list of the audit procedures to be carried out, serving as instructions to the assistants performing them and as a record that each was performed — the programme is the most detailed of the planning documents and is derived from the audit plan. The first option describes the engagement letter, the third the auditor's report and the fourth a completion memorandum, all of which are real documents in an audit file at different stages.