AU Section 311
Planning and Supervision
Source: SAS No. 22; SAS No. 47; SAS No. 48; SAS No. 77.
See section 9311 for interpretations of this section.
Effective for periods ending after September 30, 1978, unless otherwise indicated.
The first standard of field work requires that "the work is to be adequately planned and assistants, if any, are to be properly supervised." This section provides guidance to the independent auditor conducting an audit in accordance with 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 audit, and the related procedures frequently overlap.
Note: When performing an integrated audit of financial statements and internal control over financial reporting, refer to paragraph 9 of PCAOB Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, regarding planning considerations in addition to the planning considerations set forth in this section.
The auditor with final responsibility for the audit may delegate portions of the planning and supervision of the audit to other firm personnel. For purposes of this section, (a) firm personnel other than the auditor with final responsibility for the audit are referred to as assistants and (b) the term auditor refers to either the auditor with final responsibility for the audit or assistants.
Audit planning involves developing an overall strategy for the expected conduct and scope of the audit. 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. In planning the audit, the auditor should consider, among other matters:
- Matters relating to the entity's business and the industry in which it operates (see paragraph .07).
- The entity's accounting policies and procedures.
- The methods used by the entity to process significant accounting information (see paragraph .09), including the use of service organizations, such as outside service centers.
- Planned assessed level of control risk. (See section 319.)
- Preliminary judgment about materiality levels for audit purposes.
- Financial statement items likely to require adjustment.
- Conditions that may require extension or modification of audit tests, such as the risk of material error or fraud or the existence of related party transactions.
- 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).
[As amended, December, 1983, by Statement on Auditing Standards No. 47. (See section 312.14.) As amended, effective for periods beginning after August 31, 1984, by Statement on Auditing Standards No. 48.]
Procedures that an auditor may consider in planning the audit 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:
- Reviewing correspondence files, prior year's working papers, permanent files, financial statements, and auditor's reports.
- Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.
- Inquiring about current business developments affecting the entity.
- Reading the current year's interim financial statements.
- Discussing the type, scope, and timing of the audit with management of the entity, the board of directors, or its audit committee.
- Considering the effects of applicable accounting and auditing pronouncements, particularly new ones.
- Coordinating the assistance of entity personnel in data preparation.
- Determining the extent of involvement, if any, of consultants, specialists, and internal auditors.
- Establishing the timing of the audit work.
- 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.
In planning the audit, the auditor should consider the nature, extent, and timing of work to be performed and should prepare a written audit program (or set of written audit programs) for every audit. The audit program should set forth in reasonable detail the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. The form of the audit program and the extent of its detail will vary with the circumstances. In developing the program, the auditor should be guided by the results of the planning considerations and procedures. As the audit progresses, changed conditions may make it necessary to modify planned audit procedures. [As amended, effective for engagements beginning after December 15, 1995, by Statement on Auditing Standards No. 77.]
The auditor should obtain a level of knowledge of the entity's business that will enable him to plan and perform his audit 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 his judgment, may have a significant effect on the financial statements. The level of knowledge customarily possessed by management relating to managing the entity's business is substantially greater than that which is obtained by the auditor in performing his audit. Knowledge of the entity's business helps the auditor in:
- Identifying areas that may need special consideration.
- Assessing conditions under which accounting data are produced, processed, reviewed, and accumulated within the organization.
- Evaluating the reasonableness of estimates, such as valuation of inventories, depreciation, allowances for doubtful accounts, and percentage of completion of long-term contracts.
- Evaluating the reasonableness of management representations.
- Making judgments about the appropriateness of the accounting principles applied and the adequacy of disclosures. [fn 1]
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 production, 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 audit. 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.
Knowledge of an entity's business is ordinarily obtained through experience with the entity or its industry and inquiry of personnel of the entity. Working papers from prior years may contain useful information about the nature of the business, organizational structure, operating characteristics, and transactions that may require special consideration. Other sources an auditor may consult include AICPA accounting and audit guides, industry publications, financial statements of other entities in the industry, textbooks, periodicals, and individuals knowledgeable about the industry.
The auditor should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of the internal control. The extent to which computer processing is used in significant accounting applications, fn 2 as well as the complexity of that processing, may also influence the nature, timing, and extent of audit procedures. Accordingly, in evaluating the effect of an entity's computer processing on an audit of financial statements, the auditor should consider matters such as—
- The extent to which the computer is used in each significant accounting application.
- The complexity of the entity's computer operations, including the use of an outside service center. fn 3
- The organizational structure of the computer processing activities.
- The availability of data. Documents that are used to enter information into the computer for processing, certain computer files, and other evidential matter that may be required by the auditor may exist only for a short period or only in computer-readable form. In some computer systems, input documents may not exist at all because information is directly entered into the system. An entity's data retention policies may require the auditor to request retention of some information for his review or to perform audit procedures at a time when the information is available. In addition, certain information generated by the computer for management's internal purposes may be useful in performing substantive tests (particularly analytical procedures). fn 4
- The use of computer-assisted audit techniques to increase the efficiency of performing audit procedures. [fn 5] Using computer-assisted audit techniques may also provide the auditor with an opportunity to apply certain procedures to an entire population of accounts or transactions. In addition, in some accounting systems, it may be difficult or impossible for the auditor to analyze certain data or test specific control procedures without computer assistance.
[Paragraph added, effective for periods beginning after August 31, 1984, by Statement on Auditing Standards No. 48.]
The auditor should consider whether specialized skills are needed to consider the effect of computer processing on the audit, to understand the controls, or to design and perform audit procedures. If specialized skills are needed, the auditor should seek the assistance of a professional possessing such skills, who may be either on the auditor's staff or an outside professional. If the use of such a professional is planned, the auditor should have sufficient computer-related knowledge to communicate the objectives of the other professional's work; to evaluate whether the specified procedures will meet the auditor's objectives; and to evaluate the results of the procedures applied as they relate to the nature, timing, and extent of other planned audit procedures. The auditor's responsibilities with respect to using such a professional are equivalent to those for other assistants. fn 6 [Paragraph added, effective for periods beginning after August 31, 1984, by Statement on Auditing Standards No. 48.]
Supervision involves directing the efforts of assistants who are involved in accomplishing the objectives of the audit and determining whether those objectives were accomplished. Elements of supervision include instructing assistants, keeping informed of significant problems encountered, reviewing the work performed, and dealing with differences of opinion among firm personnel. 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. [Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984.]
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 with final responsibility for the audit should direct assistants to bring to his attention significant accounting and auditing questions raised during the audit so that he may assess their significance. [Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984.]
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. [Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984.]
The auditor with final responsibility for the audit 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 audit. 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. [Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984.]
Statements on Auditing Standards generally are effective at the time of their issuance. However, since this section provides for practices that may differ in certain respects from practices heretofore considered acceptable, this section will be effective for audits made in accordance with generally accepted auditing standards for periods ending after September 30, 1978. [Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984.]
Footnotes (AU Section 311 — Planning and Supervision):
[fn 1] [Footnote deleted to reflect the conforming changes necessary due to the issuance of Statement on Auditing Standards Nos. 53 through 62.]
fn 2 Significant accounting applications are those that relate to accounting information that can materially affect the financial statements the auditor is auditing. [Footnote added by issuance of Statement on Auditing Standards No. 48.]
fn 3 See section 324, Service Organizations, for guidance concerning the use of a service center for computer processing of significant accounting applications. [Footnote revised, June 1992, by issuance of Statement on Auditing Standards No. 70. Title amended, effective December 1999, by Statement on Auditing Standards No. 88.]
fn 4 Section 329, Analytical Procedures, provides guidance pertaining to such procedures. [Footnote added, effective for periods beginning after August 31, 1984, by Statement on Auditing Standards No. 48.]
[fn 5] [Footnote deleted.]
fn 6 Since the use of a specialist who is effectively functioning as a member of the audit team is not covered by section 336, Using the Work of a Specialist, a computer audit specialist requires the same supervision and review as any assistant. [Footnote added, effective for periods beginning after August 31, 1984, by Statement on Auditing Standards No. 48.]