AUDIT PLANNING

Chapter 5
Learning Objectives
■ Understand what is the purpose of audit planning in
the engagement.
■ Comprehend the audit risk model and its
components.
■ Know the procedures used by auditors in risk
assessment and further audit.
■ Identify the relationship of materiality and risks to
the audit procedures.
Audit Process
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

AUDIT PLANNING
■ Involves developing a general audit strategy and a
detailed approach for the expected conduct of the
audit.
■ The main objective in planning the audit is to
determine the scope of the audit procedures to be
performed.
■ “Planning is not a discrete phase but continual and
iterative.”
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

AUDIT PLANNING
Planning helps the auditor because:
■ It helps ensure that appropriate attention is devoted to
important areas of the audit.
■ It helps identify potential problems.
■ It allows the work to be completed expeditiously.
■ It assists in the proper assignment and coordination of
work.
■ It helps ensure that the audit is conducted effectively
and efficiently.
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Risk Assessments Procedures

A. Risk Assessment Procedures are procedures performed by auditors to obtain an
understanding of the entity and its environment including its internal control. (must done in
audit)
■ Inquiry
■ Analytical Procedures –analysis of plausible relationships (include ratios and trends)
like industry data, horizontal, vertical & ratio analysis, and nonfinancial data
– Purpose: to better understand the client’s business and to assess client business
risk
– Business risk- a risk that the client will fail to meet its objectives
■ Observation and inspection
■ Other factors considered
– Prior period information
– Engagement team discussion
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Risk Assessments
It includes the following: (PSA 315)
B. Understanding the entity and its environment
– Industry (Accounting practices and laws and
regulations)
– Nature ( operations, ownership & governance and
structure)
– Accounting policies in estimates
– Objectives and strategies
– Methods of measuring and reviewing performance
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Risk Assessments
C. Understanding the Entity’s Internal Control
– Over Financial Reporting
D. Materiality- if its omission or misstatement could
influence the economic decision of users taken on the basis
of the Financial Statements.
■ Overall Materiality- threshold or cut-off point at the FS
level (based on the quantitative set by the standards)
■ Performance Materiality- less than the level of overall
materiality ; allocated materiality for each account.
(highly based on the professional judgment of auditor)
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Risk Assessments
E. Audit Risk Model
– Refers to the risk that the auditor gives an inappropriate audit
opinion on the financial statements
– There is an inverse relationship between materiality and the
level of audit risk.
– Audit Risk= Inherent Risk x Control Risk x Detection Risk
– Inherent risk- is the susceptibility of an account balance or class
of transactions to a material misstatement that there were no
related controls. (e.g. accounts subject to complex calculations
such as pensions)
Acceptance and Performing Risk Test of Details of Balances Completing the Audit and
Test of Controls
Continuance Decisions Assessments and Transactions Audit Report

Risk Assessments
E. Audit Risk Model
– Factors that affect the risk of misstatement at FS level include
■ Management integrity
■ Management characteristics (e.g. aggressive attitude toward financial
reporting)
■ Operating characteristics (e.g. profitability relative to its industry is
inadequate)
■ Industry characteristics (e.g. industry is experiencing a large number of
business failures
– Factors affecting inherent risk at the account balance level
include:
■ Susceptibility of the account to theft.
■ Complexity of calculations related to account.
■ The complexity underlying transactions and other events.
■ The degree of judgment involved in determining accounts
Acceptance and Test of Details of Completing the
Performing Risk
Continuance Test of Controls Balances and Audit and Audit
Assessments
Decisions Transactions Report

Risk Assessments
E. Audit Risk Model
– Control risk is the that a material misstatement that could
occur in the balance or class of transactions will not be
prevented or detected and corrected timely basis by
accounting and internal control systems.
– Detection risk is the risk that an auditor’s substantive
procedure will not detect a material misstatement.
– Inherent and Control Risk combined is called Risk of
Material Misstatement (exists independently on the audit)
– Audit risk should be as low as possible
– Detection Risk= Audit Risk/ (Inherent Risk x Control Risk)
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Risk Assessments
E. Audit Risk Model
– Audit procedures will be based on the level of detection risk
(NET: Nature, Extent, Timing)
F. Overall Audit Strategy (scope, timing, and direction of the audit)
General plan
– Scope of engagement
– Nature and timing of reports
– Factors significant in directing efforts
– Results of preliminary engagement activities
– Resources necessary (manpower, competence, time,
finances, etc.)
“In the form of MEMORANDUM.”
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Risk Assessments
F. Overall Audit Strategy (scope, timing, and direction of the audit)
General plan
Audit plan- an overview(detailed) of the expected scope and
conduct of the audit (NET)
■ Risk Assessment Procedures In the form of checklist
■ Further Audit Procedures Audit Program
– Test of Controls
– Substantive test of Transactions
– Test of details of Balances
– Substantive Analytical Procedures
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Risk Assessments
Audit Plan
■ Seven types of evidence- RIORICA
– Reperformance
– Inspection
– Observation
– Recalculation
– Inquiry
– Confirmation
– Analytical Procedure
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Risk Assessments
Audit Plan
Procedure Rep Ins Obs Rec Inq Con An
Risk assessment x x x x
Test of Controls x x x x
Test of Transactions x x x x
Test of Details of Balances x x x x x
Analytical Procedures x x
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Test of Controls
a. Test the operating effectiveness only if the design is strong
– Done to lessen the substantive test
b. Attribute sampling (characteristic)
c. Communication to Management and those charged with
Governance
– Material weakness- possibility of material misstatement
– Significant deficiencies- less than material weakness
– Management letter
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Substantive test
a. Substantive Test Procedures
a. Analytical Procedures or
b. Substantive Test of Details of
a. Transactions
b. Balances
b. Variable Sampling (amount)
c. Corroborating evidence
Acceptance Test of Details
Performing Completing
and Test of of Balances
Risk the Audit and
Continuance Controls and
Assessments Audit Report
Decisions Transactions

Completing the Audit

a. Completing the Audit
– Search for Unrecorded Liabilities
– Review of Minutes of Meetings •• Risk Assessment (required)
Substantive Test/ Evidence Gathering
– Final Analytical Procedures •
(optional)
Completing the Audit (required)
– Loss contingencies
– Going concern assumptions
– Review of subsequent events
■ Extending the Date
■ Dual Dating