Definition
AU-C 300 requires the auditor to establish an overall audit strategy and develop an audit plan. The planning memo is the usual place to document them. It typically covers the engagement terms, the entity and its environment, materiality and performance materiality, identified risks of material misstatement, planned approach by area, use of specialists or internal audit, team assignments, and the timetable.
Why it matters in an audit or review
Planning ties risk to response. A reader of the file can see why a procedure was chosen and what would change the plan. The memo is updated as new information appears. An outdated memo that no longer describes the audit actually performed is a common peer review comment, as is a memo that lists risks but does not connect them to procedures.
Example
The memo for a manufacturer with $38 million revenue (illustrative) identifies revenue cutoff and inventory valuation as significant risks. It sets overall materiality at $380,000, plans inventory observation in the week after year end with a rollback procedure, and lists a new ERP system as a new area requiring more senior time.
Common mistakes
- Carrying forward last year's memo unchanged.
- Listing risks without linking each to a planned procedure.
- Failing to document discussion among team members about fraud risk.
FAQ
Does the memo have to be a single document?
No. The standards call for a strategy and plan, not a form.
Sources
- AICPA, AU-C Section 300, Planning an Audit
- AICPA, AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (as amended by SAS No. 145)
- AICPA, AU-C Section 320, Materiality in Planning and Performing an Audit
- AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit (team discussion)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error