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The procedure of audit planning: Russian experience

Svetlana M. Bychkova, Dr, Professor (St-Petersburg State Agrarian University)

Irina A. Smirnova, PhD, Associate Professor ( St-Petersburg State University)

Russia.

Email: gleb@infos.ru

Audit planning procedure is of primary importance bearing on audit risk, audit materiality, and audit
effects. At the planning stage the auditor should determine the amount of work and tolerable error.
Planning deficiencies increase probabilities of missing fraud and errors. The result can be a wrong
audit opinion, penalties and loss of clients’ trust.

In countries with developing market economy the importance of audit planning is additionally
emphasised by high business investments’ risks that call for investor interests’ protection as the major
purpose of audit.

The paper gives a detailed description of main stages of audit planning process: preparatory audit
planning, preliminary planning, decision making and statement of the additional purposes, co-
ordination with the enterprise, contract signing, development of the general plan, reviewing and
assertion of the general audit plan, development of audit plan variants, development of the audit
program, preparation of the planning memorandum. The presented approach has been adopted by
specialists of a reputed Russian audit firm, who apply it in their practice for the past 3 years.

The positive results of experience obtained with the discussed approach to planning by a single audit
firm prompts the authors to assess possibilities of the method applicability on a wider scale. Such
possibilities are currently investigated and include evaluation of potentials and limitations of the
method in relation with such specifics as legislative requirements and owners wishes.

Note: Please do not quote without the consent of the authors

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The essence of audit planning process

To start with definitions we quote from Glossary enclosed in Audit Standards of Russian Federation:
Planning of audit is mandatory stages that aims to determine the audit strategy, tactics and amount, to
draw the general audit plan, to develop the audit program, to schedule concrete audit procedures (8, p.
143).

The major purposes of planning are:

 to develop the general audit plan that presents schedules, duration and expected amount of audit
work involved;

 to work out the audit program that details the sequence and amount of audit procedures, sufficient
for obtaining the necessary audit evidences and forming reasonable judgement about reliability of
accounting statements.

Advanced planning is necessary for auditing because among other benefits it facilitates and ensures:

 management of audit work in accordance with predetermined plan and program;

 accumulation of relevant business information about the enterprise;

 realistic assessment and planning accompanying work, etc.

The Russian Federation "Planning of audit" standard stipulated that planning should be conducted by
an audit firm in keeping with certain general and specific principles.

The general principles are stated in the Temporary Rules of Audit Activity in the Russian Federation,
authorised by the Decree № 2263 issued by President of Russian Federation on December 22, 1993.
This principles define the rights and obligations of auditors.

During auditing and formation of audit report the auditors are independent from firm-client and also
from any third party, including governmental bodies which have entrusted them audit, and also from
owners and chiefs of audit firm, in which they work (item 12 of the Temporary rules).

The auditors and audit firms are obliged

 to strictly observe the legislation of Russian Federation in their audit activity;

 to fulfil audit and to conduct other audit services with high professional quality;

 to ensure the documents safety, and not to disclose their contents without permission of the
proprietor (chief) of the economic subject, excepting in special cases stipulated by Act of Russian
Federation.

The general principles of audit planning include the followings: integrated approach, a continuity,
planning optimality.
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The principle of integrated approach assumes maintenance of correspondence and coherence of all
planning stages - from preliminary planning to the development of general audit plan and program.

The principle of a continuity expresses the establishment of tasks correspondent to audit group and co-
ordination of planning stages for allied economic structures and subjects.

The principle of optimisation states that audit firm should supply variance of planning to allow for a
choice of a general plan and a program in accordance with criterions determined by the most of audit
firms. (8, p. 17)

The specific planning principles concern the followings: technological sequence and information
correlation on all stages and procedures of planning; adherence to requests of audit standards; the
uniform information basis; changes in separate positions of a plan in connection with the decision-
making changes; modification of separate positions made with the purpose of plan optimisation.

The audit planning procedure may be divided into the following stages: preliminary audit planning;
general audit planning; audit routine. (8, p. 17)

At the planning procedure the audit firm should fulfil the following tasks: inspection of firm business;
evaluation of internal control system effectiveness and evaluation of control risk; estimation of an
acceptable materiality level; determination of internal risk; estimation of common audit risk; revealing
of areas significant for audit; planning of amount and character of auditor procedures; determination of
audit methods; co-ordination of organisational and management problems and control of audit
fulfillment; determination of audit amount and duration.

The following informational sources may be used in solving the above mentioned tasks: statutory
documents; minutes of board of directors’ meetings, conventions of shareholders, and other similar
management bodies; accounting and statistical reporting; documents of enterprise activity planning;
contracts, agreements; internal audit reports; internal instructions; documents of fiscal inspection; data
on judicial and arbitration processes; documents regulating industrial and organisational structure of
the firm activity, list of departments and affiliated companies; insider information; visual control
information.

The whole planning procedure can be divided at the following interconnected stages (see scheme on
Fig.1.).
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Formal request to fulfil auditing

Pre-contracts agreements on audit conditions and restrictions
(identification of customer needs; determination of its
Preparatory audit planning stage solvency; a tentative estimation of audit firm resources.)

Understanding specifics of the customer’ business

Going concern assumption of the firm-client
Inspection of accounting; preliminary estimation of information
Preliminary planning sufficiency for audit purposes
Inspection of internal audit, evaluation of internal audit system’
reliability
Determination of accompanying services rendering
Determination of experts involvement
Assessment of audit realisation possibility

Decision making, statement of the additional purposes

Organisational problems
Co-ordination with the enterprise Accompanying services
Contract duration and conditions

Contract signing

Analysis of represented information

Determination of audit problems and objectives
Determination of materiality level
Evaluation of internal control
Development of the general plan Evaluation of risks
Development of the audit approach
Determination of audit amount and schedule of its realisation
Audit project budgeting

Reviewing and assertion of the general audit plan

Development of audit plan variants

Development of the audit program

Preparation of the planning memorandum

Fig. 1.Audit planning stages schematics
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Stage 1. Preparatory audit planning stage

The starting point of this stage is receipt of a formal request to fulfil auditing. Events develop as
follows:

1) It is the customer who approaches the auditor and requests to make an audit;

2) The auditor offers the services to the customer, who agrees with suggested conditions;

3) Different auditors offer their services to the customer, who sets «offers’ competition». In this case
the above mentioned firms should inspect the enterprise to present their conditions to the
administration, which has the right to select. In this case customer may ask audit firm to present the
following data:

- the quantitative structure of the auditors and experts, their professional skills and
experience in the activity area (proved by the appropriate certificates, licenses,
recommendations, documents about their work in the given firm and in the given position);

- general audit strategy (in accordance with prospective customer reputation, strength of its
financial position, mutual relations with the previous audit firm);

- time budget for each stage of audit;

- expected audit fee;

- existence of audit firm’ foreign departments for auditing of the firm-customer

subsidiaries.

The tender procedure may lead to the following sequential stages: creation of a competitive
commission; preparation of competition statement and assertion of all necessary documents; sending
the competition invitation; transfer of the technical project to the potential auditors; the evaluation of
offers (the evaluation of an offer breaks up in two stages: evaluation of the technical offer and
evaluation of the financial offer); negotiations and signing the contract.

Step 1. Pre-contracts agreements on audit conditions and restrictions

This stage starts from meeting with the client. On behalf of the audit firm the following persons usually
participate in this meeting: the chief of audit firm and (or) chief of audit department. On behalf of
customer - executive director and (or) chief accountant are present.

There are several possible approaches to meeting process: soft; rigid; in essence.

The soft approach assumes readiness of the parties involved to make serious concessions for the sake
of consensus. The advantage of this approach is the high probability of reaching of agreement. The
disadvantage is that conflict of interests may remain. Even by coming to the agreement, one from the
parties feels restrained.

The rigid approach assumes, that a party insists on receiving more. Advantage of this approach is
certain probability to achieve the most favourable conditions. Disadvantages are connected with
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growing threat not to reach the agreement, to loose time and resources and to spoil relations. Moreover,
by achieving unilateral advantages, the partners always remember that the relation was not on a stable
base.

The approach in essence assumes that both parties tend to find mutual benefit, where it is possible. And
if their interests do not coincide, try to achieve such outcome that would be reasonable by fair norms.
This approach ensures the highest efficiency of intercommunication processes.

During negotiations the audit firm has the following goals:

 to understand customer interests and current (long-term) plans;

 to form opinion on economic advantages of firm;

 to identify customer needs;

 to determine its solvency;

 to tentatively estimate the audit risk and audit firm resources;

 to explain the customer about auditor activity speciality (for example, risk, materiality, etc.) and
existing restriction;

 to determine the professional services level required from audit firm;

 to prepare the co-operation’ documents.

The reach of the above mentioned goals will allow to save time and to increase the audit firm rating;
to reach matching between the audit costs and audit fee; to ensure audit independence; to escape
possibility of arising problems with the customer.

At this stage the representative of audit firm should become acquainted with: the client accounting
statements before the contract signing; existence of problems which require special skills or experts’
involvement; any potential threats to customer business solvency; existence of the third parties
guaranties and court cases with unpredictable outcome, etc.

The audit decision for co-operation is accepted only in case if the above conditions are considered
favourable and acceptable.

After signing the engagement letter audit planning continues.

Stage 2. Preliminary planning

The preliminary planning is carried out concerning evaluation of audit’ possibility, signing the contract,
and preparation of the general audit plan.

The tasks of this stage are the following: to understand business of the enterprise-customer; to
determine circumstances capable to affect the viability of the enterprise-customer; to inspect of
enterprise accounting system, to tentative estimate informational sufficiency for audit purposes; to
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inspect internal audit (internal control); to determine accompanying services necessity; to determine
experts qualification level; to evaluate audit possibility of realisation and decision-making.

The main audit techniques at the given planning stage are: review of documents; observation;
analytical procedures; oral inquiry of management and staff of the enterprise.

The main informational sources for the purposes of inspections of customer business and the express-
analysis of financial position are: the accounting documentation; the enterprises contracts on
fulfilment of work (services) or goods delivery; statutory documentation; results of conversations
with the past auditors (if possible), with management and staff of the enterprise; results of personal
observations; audit reports on similar enterprises; legislative and normative regulations; data on
competitors activity; etc.

Step 1. Understanding specifics of the customer’ business

To obtain understanding of the customer business the auditor should receive information about history
of enterprise, legislative restrictions, types of outcomes, organisational framework, specific features of
technological process, main buyers and suppliers, business location, employees skills; efficiency of
business activity; business policy of the company; documentation lifecycle; management bodies; large
and extraordinary operations with the related parties; main financial indicators for the last 3 years;
capital framework; tax privileges; types of risk.

If the audit of a given client is carried out not for first time, the review is made only with the material
deviations, which have occurred from the time of the last audit.

Step 2. Going concern assumption of the firm-client

At the preliminary planning stage the auditor should consider the appropriateness of the going concern
assumption. The principle of going concern means that firm-client will continue its activity at least for
the period which will exceed one year after the reporting date.

There are factors that can increase the risk of non-appropriateness of the going concern assumption.
The following conditions can be the evidences of critical financial position of firm-client: net liability
or net current liability position, fixed-term borrowings approaching maturity without realistic prospects
of renewal or repayment, adverse key financial ratios, substantial operating losses, arrears or
discontinuance of dividends, inability to pay creditors on due dates, difficulty in complying with the
terms of loan agreements, change from credit to cash-on-delivery transactions with suppliers, etc. (5,
p.570) These factors should be considered when formation of audit opinion about the financial
statement of the firm-client is in process.

Step 3. Inspection of accounting; preliminary estimation of information sufficiency for audit

purposes

This stage includes the review of the following information: existence of accounting policy;
accounting department responsibility; dealing with regulative documents; accounting
computerisation; involvement of accounting department staff in business activities; critical accounting
areas; book-keeping organisation; analytical data on material sums of turnover and balances;
accounting problems according to the chief accountant opinion.
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On the base of obtained information auditor should form an opinion about:

 whether the accounting system is capable to prepare fair accounting statements;

 whether there are critical accounting areas.

On the base of obtained data the auditor afterwards takes choice of audit technique.

Step 4. Inspection of internal audit, evaluation of internal audit system reliability

The inspection of internal audit comprises the determination of its framework; the review of internal
audit goals; an observance of audit procedures.

This inspection includes review of

 number, skills and experience of the internal audit department experts;

 the degree of internal audit department independence;

 amount, tasks and methodical basis of internal audit;

 quality of the internal auditor reports.

The inspection of internal audit system requires reviewing with the documentary confirmation of its
creation and functioning, and actual confirmation of activity (plans, minutes of meetings, analytical
reports of the internal auditor, working documentation, etc.) The absence of these documents is an
evidence of non-effective functioning of internal audit system.

On the base of this review auditor should form an opinion about possibility to rely on internal data
audit system.

However it is necessary to remember, that at this stage the preliminary opinion about the internal audit
system is only formed in general. Later it may be corrected.

Step 5. Determination of accompanying services rendering

Frequently in the process of audit planning auditors face the following situations: the neglected
accounting system, absence of accounting documents, violation of financial reporting duration. The
accompanying services rendering becomes a necessity in these and similar situations.

The following concerns the number of services, accompanying audits, rendered by the auditors and
audit firms:

 restoring or preparation of financial statements, and consulting services;

 fulfilment of accounting procedures for the firm-enterprise, and presenting of its interests in tax
bodies;

 accounting computerisation;
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 analysis and development of the investment projects, and economic substantiation of marketing
researches;

 evaluation of property and business;

 development of recommendations on production economic re-structuring.

Accompanying services may be rendered both on initiative of firm-client, and the auditor.

Step 6. Determination of experts involvement

The necessity of experts involvement should be determined by the auditor at the planning stage.
There should be defined types of required experts, duration and amount of their work, rate and order
of payment.

The following specialists are involved in audit: the internal auditors; experts in computers and
taxation; persons to evaluate stocks and work-in-progress; technical experts; auditors of others firms.
The main requirements for them are independence, good reputation and the appropriate qualification
level (in the two latter cases the existence of documentary acknowledgement – recommendations,
publications, certificates, licenses – is desirable). Concerning the first case – the audit firm should not
use the work of expert in the events when:

- the expert (individual) is the owner, the stockholder, chief or staff member of firm-customer
or is in relationship with the indicated faces;

- the expert (legal body) is the owner, the stockholder, creditor, insurer of firm-customer.

If the above mentioned data are known after expert assignment, it is necessary to fulfil additional
check on objectivity of confirmation or to nominate another expert.

Moreover, it is necessary to be acquainted with recommendations of both the colleagues and customers
of the expert. It is necessary to evaluate influence of such factors, as: experience in the given area;
technical equipment of the expert business; experts’ reputation and his customers; fee and its
correspondence with the importance, complexity and labour input of work.

The inclusion of the expert must be agreed upon with the firm-customer.

Step 7. Assessment of audit realisation possibility

The final document of preliminary planning stage is the "Review" which has the following structure.

1. Subject of the contract.

2. Purposes of the preliminary audit planning.

3. Amount of work.

4. Informational sources for preliminary audit planning.

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5. Results of preliminary audit planning: general information about firm-client; customer business
(statutory position; branch specifics; types of activities; documentation lifecycle; accounting
policy; main financial-economic ratios for last three years; evaluation of internal audit system
reliability); material results of the last audit; material changes for the post-audit period; offers of
accompanying services; evaluation of audit realisation possibility.

The evaluation of audit realisation possibility should be based on the information about customer
financial position and its stability, low level of business and control risks, competitiveness. Successful
realisation of this project will allow for the audit firm to get a new share in the audit services market.
Moreover, at a preliminary planning stage customer indicates interest for audit and tries to help the
auditor.

The same but negative parameters will lead to the decision "audit – not to fulfil". Furthermore, the
following assertions may be taken into account: the absence of audit firm independence; special
revealed circumstances threatening to the normal business of the firm-customer; the court case with
unpredictable outcome for the firm-customer insufficient; clients’ documentation represented for
planning; existence of the unacceptable for audit firm conditions introduced by a clients; absence of
client permission for additional accompanying services’ fulfilment.

Stage 3. Decision making statement of the additional purposes

Stage 4. Co-ordination with the enterprise: organisational problems,

accompanying services, contract duration and conditions
The process of co-ordination with the enterprise-customer should clarify the following: prospective
duration of work; place of work realisation; audit group structure; auditors’ eligibility; structure,
duration and order of receiving information by auditors; possibility and necessity of experts
engagement; use of computer audit techniques; etc.

Stage 5. Contract signing

After the auditor and customer came to the mutual agreement concerning realisation of auditing and
the main contract conditions were agreed, upon a procedure of contract signing starts.

The contract draft is formed by the audit project chief using the standard contract form and earlier
accepted decisions on firm-customer activity. The contract is signed by lawyer of the audit firm and
by lawyer of firm-customer.

The next stage is development of the general audit plan and program.

Stage 6. Development of the general audit plan

This stage includes establishment of logic correlation between earlier obtained informational blocks,
estimation of obtained information usefulness, and also development of the general audit plan.

The General audit plan is a logic description of prospective amount and character of audit realisation,
specific features of the economic subject and specific of prospective auditing, methods and techniques
used during auditing. (8, p. 143)
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Audit plan is used as a base for compiling audit program and it helps to realise management after the
project.

The audit plan framework includes: analysis of represented information; determination of audit
problems and purposes; estimation of materiality level; evaluation of internal audit; evaluation of
risks; development the auditor approach; determination of audit amount and schedule of its
realisation; audit project budgeting.

Step 1. Analysis of represented information

An analytical procedure is a variety of an audit procedure representing an analysis and evaluation of

obtained by the auditor information, of major financial and economic parameters of the firm-customer
with the purpose of revealing the extraordinary events, incorrectly reflected in accounting and also
clearing up of errors and frauds reasons. (8, p.145)

The essence of analytical procedures is in the following: analysis of accounting reporting forms
relations, historical analysis of reporting data, comparison of the reporting data with the plans,
application of a model with use of logic correlation between the accounts, comparison of information
with similar enterprises data and average branch data, analysis of extraordinary events and their
reasons, estimation of analysis results.

Positive results of audit analytical procedures application are that they

 give an evidence of separate accounts (groups of accounts) accuracy;

 allow to make an evaluation of firm-customer liquidity, profitability as on the date and for the last
period;

 help to concentrate the auditor attention on most important points or “gaps”;

 enable to check up matching of accounting data.

The analytical procedures are usually applied on the three audit phases: planning, auditing and audit
reporting.

At the planning phase the analytical procedures may be applied in unlimited amount, and the most
appropriate methods which are not connected with complicated calculations. At the auditing phase the
limits of application are: an existence of the internal audit system and/or use of analytical procedures
at the first phase. At the audit reporting phase the limit is the application of these procedures at the
two previous phases.

The main reasons increasing importance of analytical procedures are: the tendency to decrease audit
costs with maintenance of audit fee and of quality of services; necessity of error and fraud detection in
the accounting reporting, better understanding of the customer business.

Important point to consider : results of analytical procedures should be reviewed in relation with other
factors, such as specific features of business, results of other audit procedures, internal risk factors .
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Step 2. Determination of audit problems and objectives

The second step of audit plan is determination of audit objectives. The customer can require to receive
from auditor different objectives, for example, to define operation efficiency, profitability of
management decision, existence of property safety, and to develop proposals for its modernisation, to
estimate production profitability, etc.

Sometimes audit objectives can be recognised critical. It happens in cases of very high requirements
for the level of auditor professionalism when problems with audit evidences exist.

This step is important for the reason that it allows to determine audit procedures fast and precisely,
reduce labour costs for audit firm and material costs for firm-customer.

Step 3. Determination of materiality level

The concept of «materiality» is the most important in audit because it determines amount of an
allowable error and, consequently, form of audit report.

In the case of material error undetection auditor will suffer punishment both moral, and material.
Moral penalty is expressed in loss of confidence on the part of the actual and potential shareholders of
firm - customer and, as a rule, in a contract rupture and decrease of auditor professional rating.
Material penalty is that from the auditor (audit firm) can be collected: sums of losses sustained in full
amount, substitution audit costs, penalties.

The probability of material error detection depends on a set of the factors, such as: probability of
material error existence, determined both by management, and auditor; time and costs limits;
customer «expectations»; auditor independence; auditor conscientiousness; confidence of the external
auditor to internal audit system.

The level of materiality depends on firm-customer specifics: sphere of activity; size of business,
taxable profit, working capital, capital, liabilities, owners equity. It may be established both in roubles,
and percentages. In correspondence with the rule (standard) of audit activity "Materiality and audit
risk" the level of materiality may be equal to: reporting profit - 5%, gross revenue (minus VAT) - 2 %,
capital - 2 %, owners equity - 10 %, expenses - 2%.

As a rule, the audit firm selects a criterion depending on customer business and specific features of its
production. Though the reporting profit is most characteristic, it is more in variance, than reporting
profit and gross revenue (minus VAT). It is clear that auditors do not prefer to use variable data.
“Gross revenue (minus VAT)” is actually used as a materiality criterion for the retail business, but
capital will be more characteristic for manufacturing enterprises. The sum of owners equity - for new
established enterprises. “Expenses” - for enterprises where their sum is rather large. ”Capital” - for
small enterprises.

The possibility of material error disclosure by the auditor depends on accounting policy of enterprise
and its correspondence to regulative requirements.
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Step 4. Evaluation of internal control

Internal control system is a combination of an organisational structure, techniques and procedures

accepted by management of customer for estimation of economic activity efficiency.

The internal control system is aimed to maintain of management policy observance, property and
information, actuality and reliability the information for management use, errors prevention and
observance of legislation requirements.

In the keeping with international practice and Russian auditing standards internal control system
includes control environment; accounting system; control procedures.

The concept of control environment mainly depends on an owners directors opinion about creation and
operation of internal control system. The following matters are considered: organisational structure,
revision commission, responsibility and duties, planning methods of management control, internal audit
function, personnel selection, external factors.

For accounting system investigation the following factors should be analysed and evaluated:
accounting policy and accountability; accounting data flows; system of accounting registers; process
of accounting reports preparation; control techniques stipulated by the accounting system; critical
accounting spheres and potential risks.

The control procedures should ensure reaching of the following purposes: sufficient separation of
responsibilities; authorisation of operations; correct documenting of operations and their account;
maintenance of assets and accounting entries, etc.

Four techniques can be applied for testing of the above mentioned control elements: inquiries of firm
staff, review of data processing, observation, and repeating of fulfilment process.

Step 5. Evaluation of risks

The auditor can be never sure that the presented accounting reports are free from errors, irrespective
the type of audit evidence. Accordingly, certain risk elements are inherent in audit evidence process.
The user may only require that the represented evidences are reliable enough and the risk of a material
error did not exceed the established level.

The following factors render influence on a risk level: accounting professional skills, general
conceptual approach, modification of accounting regulations, computerisation, existence of internal
control system, management rotation, extraordinary events, reliability of internal control system.

All elements of general audit risk are evaluated at the stage of the general plan development: internal
risk, control risk, detection risk.

The evaluation of audit risk is one of the most important steps because the form of audit report and
consequently, future prosperity of both the audit firm and firm-customer depends on it.

Step 6. Development of the auditor approach

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The development of the auditor approach implies consideration of several points. It is necessary to
make a choice between compliance tests and substantive procedures. In the second case it is necessary
to define both whether it should be fulfilled via a comprehensive audit or as application of sample
methods, or it should be fulfilled manually or with use of computers.

At first features of compliance tests and substantive procedures should be considered. Common
demands to these tests are their independence.

The following concerns compliance tests: additional check of accounting operations arithmetical
correctness and comparison of obtained results with financial reporting data; comparisons of actual
staff with data in the salary payment documents; accountants staff responsibilities distribution.

It is possible to include the following tests in compliance tests: evaluation of accounting policy,
acknowledgement of the legal rights on activity, review of contractual terms correspondence with the
current legislation.

Substantive procedures are divided on tests of details and analytical procedure. After determination
of the substantive procedures amount a sample methods application should be planned.

“Audit sampling involves the application of audit procedures to less than 100% of the items within an
account balance or class of transactions to enable the auditor to obtain and evaluate evidence about
some characteristic of the items selected in order to form or assist in forming a conclusion concerning
the population.” (5, p.38)

The auditors resort to sample methods in the events when: 1) characters and data of accounting
balances or class of operations do not require 100% of check; 2) the conclusions about accounting
balances or class of operations should be made; 3) time and cost of full general population check will
be too large.

The possibility of sample methods application in audit process depends on a number of conditions:

 amount of a general population should be rather large (otherwise application of sample methods
will not be justified);

 the allowable level of errors should be significantly low;

 each unit of general population should be precisely determined;

 the sample should completely correspond to the established audit objective;

 the sample should be representative;

 the general population should be homogeneous, both on a class of operations, and on magnitude of
their significance;

 the general population should contain operations of the whole accounting period;

 each unit of a general population should have equal odds of hit in sample.
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The sample method is mainly effective in cases when the auditor selects the elements from a large
population and does not have detailed information about its specific features: frequency of errors
emerging, their size and direction.

The sample method should not be applied in relation to procedures executed with the purpose of
control framework clarification. Moreover if the auditor divides general population into two groups in
accordance with the certain criterion and investigates all articles of the first group by comprehensive
method, and data of the second group checks up with the help of other techniques (for example, the
analysis) or does not check up absolutely, the auditor can not use sample methods.

Furthermore, the sample methods are not recommended in the following cases: auditor has doubts in
results of previous auditing; the extent of prospective error does not correspond to actually obtained
results; the separate operations are material significant (purchasing of the real estate, etc.); there are
items on balance sheet which are subject to mandatory check.

If the general population is inhomogeneous application the method of stratification should be applied
before sample methods. The following approaches to operations stratification are possible based on:
а)amount , b) type of accounting balances (debit, credit, zero), c) geographical indication, d) temporary
sequence, e) alphabet of firms, f) intensity of requests for the given type of information.

For sample formation the auditor should define purposes and procedure for test, amount s of general
population, and sizes of sample.

After determination of the sample methods the electronic data processing (EDP) application should be
planned.

The existence of the EDP at a firm-client influences the audit procedures. Auditor should solve a
problem of hardware and software support for audit procedures and necessities of technical experts
involvement. Auditor should reveal the reasons of accounting errors caused by EDP application,
possibility of their removal, and evaluation of correspondent audit risk.

The main requirements to the accounting programs are their performance, flexibility, advanced
control of operations, various forms of the reports. Also it is necessary to define compatibility of
the software used in firm-customer and audit firm.

If the audit will be conducted manually, it is necessary to take into consideration , that the duration
of audit will be considerably long, cost – higher, while risk of fraud or error is much lower.

Step 7. Determination of audit amount and schedule of its realisation

The amount of audit work is determined, at first, with the purposes of audit firm financial plan
performance; secondly, for rational distribution of auditors. Total amount of work and its cost are
authorised by the audit firm chief and by the firm-customer director in the contract.

The schedule of work is established on the basis of amount of work. It depends on the following
factors:

 duration of accounting statements submission and schedule of its separate sections preparation;
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 contents, amount of work and timing costs of the planned audit procedures;

 actual possibility of audit firm staff involvement.

Step 8. Audit project budgeting

The budget of audit project is formed on the basis of the following factors analysis: objectives
introduced by the customer, required number of experts, duration of audit, audit fee.

The budget is formed by chief of the project who uses the data about the last experience of work with
this firm-customer, audit experience of similar enterprise, specific features of given project and
necessity to involve experts. Each auditor involved in the project bears responsibility for the project
performance. On the basis of their reports the consolidated report is formed by chief of the project.
This document is also used as means of permanent control after auditors work.

It is necessary to take into consideration the following: the budget time should coincide with the audit
program; the audit fee should not considerably deviate from accepted average size; operating time of
involved external experts and experts of other departments of audit firm should be shown separately.

Stage 7. Reviewing and assertion of general audit plan

Stage 8. Development of audit plan variants

Stage 9. Development of the audit program

The audit program is a result of audit plan development. The audit program is an aggregation of audit
methods and techniques in a document of established format and contents. The audit program includes
the list of audit procedures used in given audit work, and also their character, duration, amount and the
executors. (8, p. 145).

The main objectives of audit program are the following: to give a detailed description of required
audit procedures, to distribute the responsibility between executors, to co-ordinate all audit stages, to
document the fact of audit procedures fulfilment.

Audit program should include for example the observance of the following items: chart of accounts,
payroll settlements, settlements with accountable persons, settlements with debtors and creditors,
financial investments, fixed assets, capital investments, stocks, stock-taking operations, foreign
currency operations, social insurance and social security settlements, financial results and profit
utilisation, relations with subsidiaries and associates, etc.

Stage 10. Preparation of the planning memorandum

The final document of audit planning is the "Planning memorandum" which includes main results and
decisions on all planning stages. It is the guide for auditors in their activity and may be instrumental
for audit team work co-ordination.

The following items may be included in the Memorandum:

 project framework;
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 general information including brief history of the firm-customer, economical environment,

information about main clients and competitors, current financial characteristics;

 last changes in business;

 related parties and potential influence of operations with them on the financial reporting and
audit approach;

 general review of internal control (internal audit);

 contents and duration of audit procedures for auditing of critical objectives;

 tolerable error;

 general description of audit (experts) work;

 necessity of additional services rendering;

 staff of audit team, “key figures” in the firm-customer, required form of audit report,
schedule of work.

Conclusion
Audit planning procedure is of primary importance bearing on audit risk, audit materiality, and audit
effects. At the planning stage the auditor should determine the amount and the tolerable error of audit
procedures. Planning deficiencies increase probabilities of missing fraud and errors. The result can be
a wrong audit opinion, penalties and loss of clients’ trust.

The positive results of experience obtained with the discussed approach to planning by a single audit
firm prompts the authors to assess possibilities of the above method applicability on a wider scale.
Such possibilities are currently investigated and include evaluation of potentials and limitations of the
method in relation with such specifics as legislative requirements and owners wishes.
References
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Russian Federation. Foundation for the Applied Research, The Institute of the Management Accountants, Montvale, New Jersey and
The Center for International Accounting Development, The University of Texas.
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By D. Alexander and S. Archer. Harcourt Brace Professional Publishing. –London
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num.1. - pp.77-91
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4 : 4, 833-844.
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(1996). Moskow: UNITI)
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