Auditing theory
271. Audit Plan
The audit plan shall include a description of:
a. The nature, timing and extent of planned
risk assessment procedures;
b. The nature, timing and extent of planned
further audit procedures at the assertion
level; and
c. Other planned audit procedures that are
required to be carried out so the
engagement complies with PSAs.
272. Difference between Overall Audit Strategy and
Audit Plan
The overall audit strategy helps the auditor
decide on how her or she is going to tackle the audit.
That is the big picture. It could be that he or she
decides there are no good internal controls. His or
her strategy would then be to not do any test of
controls and concentrate on substantive
procedures. Having decided that, then he or she has
to plan how he or she will use substantive
procedures to get sufficient appropriate audit
evidence.
273. Direction, Supervision and Review
The auditor should plan the nature, timing
and extent of direction and supervision of
engagement team members and review of their
work depending on the following factors:
a. The size and complexity of the entity;
b. The area of the audit;
c. The assessed risks of material
misstatement (the higher the risk, the
more extensive are the nature, timing
and extent of direction, supervision and
review); and
d. The capabilities and competence of the
individual team members performing the
audit work.
274. Changes to Planning Decisions during the
Course of the Audit
Planning an audit is a continual and iterative
process throughout the audit engagement. The
overall audit strategy and the audit plan should be
updated and changed as necessary during the
course of the audit.
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275. Documentation
The auditor should document the overall
audit strategy and the audit plan, including any
significant changes made during the audit
engagement.
276. Additional Considerations in Initial Audit
Engagements
The auditor should perform the following
activities prior to starting an initial audit:
a. Perform procedures regarding the
acceptance of the client relationship
and the specific audit engagement;
b. Communicate with the previous auditor
in compliance with relevant ethical
requirements; and
c. Expand the planning activities because
the auditor does not ordinarily have
previous experience with the entity that
is considered when planning recurring
engagements.
277. Analytical Procedures
These are auditing procedures that involve
analysis of relationship between financial and non-
financial data. These involve investigation of
identified variances and relationships that seem
inconsistent with each other or with other available
audit evidence.
278. Application of Analytical Procedures in
Planning the Audit
When used for planning purposes, analytical
procedures assist the auditors in planning the
nature, timing and extent of audit procedures that
will be used for the specific accounts.
279. Establishment of an Engagement Team or
Audit Team
Factors to be considered in the
establishment of an engagement team:
a. Levels of expertise and experience
b. Qualification to handle audit positions
(engagement partner, manager, at least
one senior, and one or more staff
auditors)
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Auditing theory
c. Number of people depends on the size
and complexity of the audit
d. Availability of personnel
e. Entities in a regulated industry, such as
banking, requires that the major
members of the audit team have
necessary knowledge and experience in
that industry.
280. Consideration of Work Performed by the
Predecessor Auditor
Communication with the predecessor
auditors can provide the successor CPA with
background information about the client, details
about the client’s system of internal control, and
evidence as to the account balances at the
beginning of the year under audit.
281. Consideration of Work Performed by Other
Auditors in the Audit of Components
a. A principal auditor is the auditor with
responsibility for reporting on the
financial statements of an entity when
those financial statements include
financial information of one or more
components audited by another auditor.
b. Other auditor means an auditor, other
than the principal auditor, with
responsibility for reporting on the
financial statements of a component
which is included in the financial
statement audited by the principal
auditor.
282. Involvement of Experts or Specialists
CPAs may lack the qualifications necessary
to perform certain technical tasks relating to the
audit. A specialist brings unique knowledge and
judgment in a field other than accounting and
auditing (e.g., appraiser for the values of works of
art, mineralogist for the physical characteristics of
mineral resources, etc.).
283. Use of Client’s Staff
The auditors may set up the columnar
headings for certain working papers and give
instructions to the client’s staff as to the
information to be gathered. These working papers
should bear the label “Prepared by Client” or PBC,
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and also the initials of the auditor who verifies the
work performed by the client’s staff. Working
papers prepared by the client should never be
accepted at face value; such papers must be
reviewed and tested by the auditors.
284. Consideration of Work Performed by Internal
Auditors
a. Internal auditors can enhance internal
control (e.g., review of bank
reconciliations), thus reducing the
extent of substantive testing after the
independent auditor has considered the
degree of subjectivity involved in
evaluating the accumulated audit
evidence.
b. Internal auditors may also assist
independent auditors in performing
specific audit procedures (e.g.,
observation of client personnel taking
the inventory).
285. Assessment of Going Concern Assumption
Auditors are required to evaluate whether
substantial doubt exists about an entity’s ability to
continue as a going concern, based on procedures
planned and performed to obtain evidence about
the management assertions embodied in the
financial statements. That is, an auditor is not
required to design specific procedures to evaluate
whether an entity is a going concern.
286. Identification of Related Parties
A related-party transaction is a deal or
arrangement between two parties who are joined by
a preexisting business relationship or common
interest. It is important for auditors to identify them
because they are required to be disclosed in the
financial statements if they are material.
287. Client’s Legal Obligations
The auditor should review the following:
a. Minutes of directors’ and stockholders’
meetings
b. Changes to the articles of incorporation
or by-laws
c. Any significant contracts executed
during the year
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288. Completion of the Initial Audit Program
An audit program is a set of audit
procedures specifically designed for each audit.
The program which includes both substantive tests
and tests of controls will enable the auditor to
express an opinion on the financial statements
taken as a whole.
289. Preparation of a Time Budget
A time budget is an estimate of the total
hours an audit is expected to take.
290. Assignment of Personnel to the Engagement
Staffing is important for the continuity of the
CPA firm’s operation from year to year. Also, the
immersion, familiarity with the technical
requirements and specialization of the audit
personnel are to be considered.
291. Scheduling of Work
Performing audit work during the interim
period has numerous advantages in addition to
facilitating the timely release of the audited
financial statements. However, this results in
additional risk that must be controlled by the
auditor. Significant errors or irregularities could
arise in the accounts during the remaining period
between the time that the interim test was
performed and the statement of financial position
date.
292. Documentation of Audit Plan/Audit Program
The following are the contents of the
documentation of the planning process:
a. Audit plans
b. Audit programs
c. Time budget
293. Planning a Repeat Engagement
The auditor should not merely duplicate last
year’s audit program but should modify his
approach to the audit for any changes in the client’s
operations, internal control structure or business
environment.
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Phase I-C: Performance of Risk Assessment
Procedures to Identify or Assess Risk of Material
Misstatement through Understanding the Entity
295. Risk Assessment Procedures
These are procedures conducted to obtain
an understanding of the entity and its environment,
including its internal control to assess the risk of
material misstatements thereafter.
Types of Risk Assessment Procedures
297. Inquiry
It consists of seeking information of
knowledgeable persons, both financial and non-
financial, inside or outside the entity. For example,
the auditor may consider inquiring from the
following:
a. Entity’s external legal counsel
b. Valuation experts
c. Analysts, banks or rating agencies
d. Those charged with governance
e. Internal audit personnel
f. Employees involved in initiating,
processing or recording complex or
unusual transactions
g. In-house legal counsel
h. Marketing or sales personnel
298. Application of Analytical Procedures
For example, the auditor reviews the current
ratio over several reporting periods. This
comparison of current assets to current liabilities
should be about the same over time, unless the
entity has altered its policies related to accounts
receivable, inventory, or accounts payable. This is a
form of ratio analysis. (See no. for definition.)
299. Observation
Observation is one of the audit procedures
that auditors use to obtain an understanding and
gather audit evidence mainly to the real process or
the ways how clients have done some specific
business processes.
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300. Inspection
Inspection refers to verification or vouching
of documents. The auditor may inspect documents,
records and internal control manuals. Moreover,
reading interim financial statements, quarterly
management report and minutes of the board of
directors’ meetings may also form part of the
inspection procedures done by an auditor.
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