CH - 2 - Audit Strategy, Audit Planning, & Audit Programme

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Chapter 2
Audit Strategy, Audit Planning & Audit programme
SA 300 “Planning an Audit of Financial Statements”
Scope
This Standard on Auditing (SA) deals with the auditor’s responsibility to plan an audit of financial statements.
Objective
The objective of the auditor is to plan the audit so that it will be performed in an effective manner.
Involvement of Key Engagement Team Members
The engagement partner and other key members of the engagement team shall be involved in planning the
audit, including planning and participating in the discussion among engagement team members.
Audit Plan to Conduct an Effective Audit
Plans should be made to cover, among other things:
(a) acquiring knowledge of the client’s accounting systems, policies and internal control procedures;
(b) establishing the expected degree of reliance to be placed on internal control;
(c) determining and programming the nature, timing, and extent of the audit procedures to be
performed; and
(d) coordinating the work to be performed.
Plans should be further developed and revised as necessary during the course of the audit.
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The auditor may decide to discuss elements of planning with the entity’s management to facilitate the
conduct and management of the audit engagement.
Although these discussions often occur, the overall audit strategy and the audit plan remain the auditor’s
responsibility. When discussing matters included in the overall audit strategy or audit plan, care is required in
order not to compromise the effectiveness of the audit.
The involvement of the engagement partner and other key members of the engagement team in planning
the audit draws on their experience and insight, thereby enhancing the effectiveness and efficiency of the
planning process.
Question
“The auditor should plan his work to enable him to conduct an effective audit in an effcient and
timely manner.” Explain stating the matters to be covered in plans. (4 Marks)
MTP March 2020.
Benefits of Planning in the Audit of Financial Statements
Planning an audit involves
● establishing the overall audit strategy for the engagement and
● developing an audit plan.
Adequate planning benefits the audit of financial statements in several ways, including the following:
1. Helping the auditor to devote appropriate attention to important areas of the audit
2. Helping the auditor identify and resolve potential problems on a timely basis.
3. Helping the auditor properly organize and manage the audit engagement so that it is performed in
an effective and efficient manner.
4. Assisting in the selection of engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks, and the proper assignment of work to them.
5. Facilitating the direction and supervision of engagement team members and the review of their
work.
6. Assisting, where applicable, in coordination of work done by auditors of components and experts.

Elements of Planning
● Preliminary Activities
● Planning activities
○ Audit Strategy
○ Audit plan
● The audit strategy and the audit plan must be documented in the audit working papers.
● Any updates to them must also be documented.
Preliminary Activities
The auditor shall undertake the following activities at the beginning of the current audit engagement
a. Performing procedures required by SA 220 , “Quality Control for an Audit of Financial Statements”
regarding the continuance of the client relationship and the specific audit engagement;
b. Evaluating compliance with ethical requirements, including independence, as required by SA 220 ;

and
c. Establishing an understanding of the terms of the engagement, as required by SA 210.
Performing the preliminary engagement activities at the beginning of the current audit engagement assists
the auditor in identifying and evaluating events or circumstances that may adversely affect the auditor’s
ability to plan and perform the audit engagement.
Performing these preliminary engagement activities enables the auditor to plan an audit engagement for
which, for example:
● The auditor maintains the necessary independence and ability to perform the engagement.
● There are no issues with management integrity that may affect the auditor’s willingness to continue
the engagement.
● There is no misunderstanding with the client as to the terms of the engagement.
Planning Activities
Audit Strategy

What is Audit Strategy
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more
detailed audit plan.
How would the audit strategy be helpful to the auditor?
The process of establishing the overall audit strategy assists the auditor to determine, subject to the
completion of the auditor’s risk assessment procedures, such matters as:
● The resources to deploy for specific audit areas, such as the use of appropriately experienced team
members for high risk areas or the involvement of experts on complex matters
● The amount of resources to allocate to specific audit areas, such as the number of team members
assigned to observe the inventory count at material locations, the extent of review of other auditors’
work in the case of group audits, or the audit budget in hours to allocate to high risk areas
● When these resources are to be deployed, such as whether at an interim audit stage or at key cut-off
dates; and
● How such resources are managed, directed and supervised, such as when team briefing and
debriefing meetings are expected to be held, how engagement partner and manager reviews are
expected to take place (for example, on-site or off-site), and whether to complete engagement quality
control reviews.
Establishment of Overall Audit Strategy
In establishing the overall audit strategy, the auditor shall ( POINTS TO BE KEPT IN MIND WHILE
DEVELOPING OVERALL AUDIT STRATEGY)
a. Identify the characteristics of the engagement that define its scope;
b. Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature
of the communications required.
c. Consider the factors that, in the auditor’s professional judgment, are significant in directing the
engagement team’s efforts;
d. Consider the results of preliminary engagement activities and, where applicable, whether knowledge
gained on other engagements performed by the engagement partner for the entity is relevant; and
e. Ascertain the nature, timing and extent of resources necessary to perform the engagement.

Audit Plan
Description of Audit Plan
As per SA 300 “Planning an Audit of Financial Statement” the audit plan shall be include a description of
❖ The nature, timing and extent of planned risk assessment procedures, as determined under SA 315.
❖ The nature , timing and extent of planned further audit procedures at the assertion level, as
determined under SA 330.
❖ Other planned audit procedures that are required to be carried out so that the engagement complies
with SAs. (Obtaining written representations from management)
● Planning of the auditor’s risk assessment procedures occurs early in the audit process.
● However, planning the nature, timing and extent of specific further audit procedures depends on the
outcome of those risk assessment procedures.
Knowledge of the Client’s Business
It is one of the important principles in developing an overall audit plan. In fact without adequate knowledge
of the client's business, a proper audit is not possible.
As per SA-315, “Identifying and Assessing the Risk of Material Misstatement through Understanding the
Entity and Its Environment”, the auditor shall obtain an understanding of the following:
1. Relevant industry, regulatory and other external factors including applicable financial reporting
framework.
2. The nature of the entity, including:
a. Its operations;
b. Its ownership and governance structures;
c. The types of investments that the entity is making and plan to make: &
d. The way that the entity is structured and how it is financed.
3. The entity’s selection and application of accounting policies, including the reasons for changes
thereto.
4. The entity’s objectives and strategies, and those related Business risks that may result in risks of
material Misstatement.

5. The measurement and review of the entity’s financial performance.
In addition to the importance of knowledge of the client’s business in establishing the overall audit plan,
such knowledge helps the auditor to identify areas of special audit consideration, to evaluate the
reasonableness of both accounting estimates and management representations and to make judgements
regarding the appropriateness of accounting policies and disclosures.
Without adequate knowledge of the client's business, a proper audit is not possible. It is one of the
important principles in developing an overall audit plan. Explain in context with relevant SA, knowledge
to be obtained by the auditor in establishing the overall plan.
Also explain how such an understanding would be helpful to the auditor.
RTP May 2021
Relationship between the overall audit strategy and the audit plan
● Change in audit strategy will lead to change in audit plan and vice versa
● Audit plan is prepared after the audit strategy and is more detailed. Audit strategy gives less detail
but it forms the basis of the planning
● The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the
audit, and that guides the development of the audit plan
● Detailed audit plans would include the nature, timing and extent of the audit procedures so as to
obtain sufficient appropriate audit evidence.

● SCOPE - Coverage (Consolidate financial statement or otherwise, branches are included or not, etc)
(regulatory or statutory reporting requirements)
● TIMING - Setting milestones for completion of audit work. (Deadlines) (Time Budgets)
● DIRECTION - How we are going to use the information / knowledge gained from other
engagements, Effect of preliminary evaluations of materiality, audit risk and internal control.
The audit strategy relates to the overall approach you will take to the audit, it decides the scope of the audit.
The audit plan is the detailed procedures you will use in your audit depending on what the strategy is.
For example- if you decide the organisation is new and doesn't have proper controls in place, you will decide
not to rely on any controls and perform only substantive testing- This is Audit Strategy
Audit plan is then deciding the substantive audit tests you will perform (AEIOU. Reperformance.
External Confirmation). This includes the nature, timing and extent of audit tests you will undertake to gain
comfort over the financial statement balances.
An audit plan is more detailed.

The audit plan is more detailed than the overall audit strategy. (Correct / Incorrect - November 2020 - 2
Marks)

Planning is a Continuous Process
Planning is not a discrete phase of an audit, but rather a continual and iterative process
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit,
and that guides the development of the audit plan.
The auditor should update and change the overall audit strategy and Audit plan, as necessary, during the
course of the audit.
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins
shortly after (or in connection with) the completion of the previous audit and continues until the completion
of the current audit engagement.
The nature and extent of planning activities will vary according to the
● size and complexity of the entity,
● the key engagement team members’ previous experience with the entity, and
● changes in circumstances that occur during the audit engagement.
Planning includes consideration of the timing of certain activities and audit procedures that need to be
completed prior to the performance of further audit procedures. For example, planning includes the need to
consider, prior to the auditor’s identification and assessment of the risks of material misstatement, such
matters as
1. The analytical procedures to be applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory framework applicable to the entity
and how the entity is complying with that framework.
3. The determination of materiality.
4. The Involvement of experts.
5. The performance of other risk assessment procedures.

Direction, Supervision and Review
The auditor shall
● plan the nature, timing and extent of
● direction and supervision of engagement team members and
● the review of their work.
The nature, timing and extent of the direction and supervision of engagement team members and review of
their work vary depending on many factors, including:
● The size and complexity of the entity.
● The area of the audit.
● The assessed risks of material misstatement
● The capabilities and competence of the individual team members performing the audit work.
Changes to planning decisions During the Audit
● The auditor shall update and change the overall audit strategy and the audit plan as necessary during
the course of the audit.
○ As a result of unexpected events,
○ changes in conditions, or
○ the audit evidence obtained from the results of audit procedures,
● the auditor may need to modify the audit plan & planned nature, timing and extent of further audit
procedures, based on the revised consideration of assessed risks.
● This may be the case when information comes to the auditor’s attention that differs significantly from
the information available when the auditor planned the audit procedures.
● For example, audit evidence obtained through the performance of substantive procedures may
contradict the audit evidence obtained through tests of controls.
Documentation of Audit plan
The auditor shall document:
a. the overall audit strategy;
b. the audit plan; and

c. any significant changes made during the audit engagement to the overall audit strategy or the audit
plan, and the reasons for such changes.
The documentation of the overall audit strategy is a record of the key decisions considered necessary to
properly plan the audit and to communicate significant matters to the engagement team.
It also serves as a record of the proper planning of the audit procedures that can be reviewed and approved
prior to their performance.
A record of the significant changes to the overall audit strategy and the audit plan, and resulting changes to
the planned nature, timing and extent of audit procedures, explains why the significant changes were made,
and the overall strategy and audit plan finally adopted for the audit. It also reflects the appropriate response
to the significant changes occurring during the audit.
Examples of Documentation

Additional Considerations in Initial Audit Engagements
The purpose and objective of planning the audit are the same whether the audit is an initial or recurring
engagement.
However, for an initial audit, the auditor may need to expand the planning activities because the auditor
does not ordinarily have the previous experience with the entity that is considered when planning recurring
engagements.
For initial audits, additional matters the auditor may consider in establishing the overall audit strategy and
audit plan include the following:
● Performing procedures required by SA 220 regarding the acceptance of the client relationship and
specific audit engagement.
● Unless prohibited by law or regulation, arrangements to be made with the predecessor auditor, for
example, to review the predecessor auditor’s working papers.
● Other procedures required by the firm’s system of quality control for initial audit engagements (for
example, the firm’s system of quality control may require the involvement of another partner or
senior individual to review the overall audit strategy prior to commencing significant audit
procedures or to review reports prior to their issuance).

Audit Programme
Meaning
An audit programme consists of
- a series of verification procedures

- to be applied to the financial statements and accounts of a given company
- for the purpose of obtaining sufficient evidence
- to enable the auditor to express an informed opinion on such statements.
One Audit Programme – Not Practicable For All Businesses
● All businesses are not same
● They vary in nature, size, capital raised and on other parameters also
● Some might have a formal and working internal control, while some may not have internal control at
all.
● Applicability of different laws and regulation also differentiate the scope of services to be given by
auditor
● Because of the reasons for variations mentioned above it is not possible to develop one audit program
applicable to all businesses under all circumstances.
● Every audit programme must have details of the nature of work to be done as per the nature, size
and other parameters of the business. .This will help in saving time and special matters and situations
will not be overlooked.
Periodic Review of The Audit Programme
Audit programme must be periodically reviewed, to check its effectiveness in the light of changing
circumstances.
Objective of review - Cover new aspects and remove not required one, keep AP up-to-date.
● The ultimate objective of periodic review is to cover the new aspects of the client’s business and
remove the not required or non-value adding part so as to keep the audit programme up-to-date.

If not reviewed- Obsolete | Negligence on the part of the auditor | May face legal consequences
● If it is not reviewed, it may be become obsolete and as a result entire audit may become ineffective
also this will be considered as negligence on the part of the auditor and they may have to face legal
and regulatory consequences for the same
Constructing an Audit Programme
While developing an audit programme, the auditor may conclude that relying on certain internal controls is an effective
and efficient way to conduct his audit.
However, the auditor may decide not to rely on internal controls when there are other more efficient ways of obtaining
sufficient appropriate audit evidence.
The auditor should also consider
● the timing of the procedures,

● the coordination of any assistance expected from the client,
● the availability of assistants, and the involvement of other auditors or experts.
Further, the auditor normally has flexibility in deciding when to perform audit procedures.
However, in some cases, the auditor may have no discretion as to timing,
- for example, when observing the taking of inventories by client personnel or verifying the securities and cash
balances at the year-end.
For the purpose of programme construction, the following points should be kept in mind:
1. Stay within the scope and limitation of the assignment.
2. Prepare a written audit programme setting forth the procedures that are needed to implement the audit plan.
3. Determine the evidence reasonably available and identify the best evidence for deriving the necessary
satisfaction.
4. Apply only those steps and procedures which are useful in accomplishing the verification purpose in the
specific situation.
5. Include the audit objectives for each area and sufficient details which serve as a set of instructions for the
assistants involved in audit and help in controlling the proper execution of the work.
6. Consider all possibilities of error.
7. Co-ordinate the procedures to be applied to related items.

Audit Programme To provide Audit Evidence
Audit programme is designed to provide for Audit evidence by prescribing procedures and technique.
The best evidence for testing accuracy of an assertion is a matter of professional judgement of the auditor.
Auditor through his training, knowledge and experience Will design the audit program in such a manner
that it will provide the best possible audit evidence for the given assertions.
For example the best evidence for cash in hand can be obtained through counting the cash.
For something which is pledged with the bank the banker’s certificate will be the best audit evidence.
Variety of fields for Audit Evidence
An auditor picks up evidence from a variety of fields and it is generally of the following broad types:
a. Documentary examination,
b. Physical examination,
c. Statements and explanation of management, officials and employees,
d. Statements and explanations of third parties,
e. Arithmetical calculations by the auditor,
f. State of internal controls and internal checks,
g. Inter-relationship of the various accounting data,
h. Subsidiary and memorandum records,
i. Minutes,
j. Subsequent action by the client and by others.
Advantages of Audit Programme

The advantages of an audit programme are:
a. It provides the assistant carrying out the audit with a total and clear set of instructions of the work
generally to be done.
b. It is essential, particularly for major audits, to provide a total perspective of the work to be
performed.

c. Selection of assistants for the jobs on the basis of capability becomes easier when the work is
rationally planned, defined and segregated.
d. Without a written and predetermined programme, work is necessarily to be carried out on the basis
of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain
books and records. Under a properly framed programme, such danger is significantly less and the
audit can proceed systematically.
e. The assistants, by putting their signature on programme, accept the responsibility for the work
carried out by them individually and, if necessary, the work done may be traced back to the assistant.
f. The principal can control the progress of the various audits in hand by examination of audit
programmes initiated by the assistants deputed to the jobs for completed work.
g. It serves as a guide for audits to be carried out in the succeeding year.
h. A properly drawn up audit programme serves as evidence in the event of any charge of negligence
being brought against the auditor. It may be of considerable value in establishing that he exercised
reasonable skill and care that was expected of a professional auditor.
Disadvantage
a. The work may become mechanical and particular parts of the programme may be carried out
without any understanding of the object of such parts in the whole audit scheme.
b. The programme often tends to become rigid and inflexible following set grooves; the business may
change in its operation of conduct, but the old programme may still be carried on. Changes in staff or
internal control may render precaution necessary at points different from those originally decided
upon.
c. Inefficient assistants may take shelter behind the programme i.e. defend deficiencies in their work
on the ground that no instruction in the matter is contained therein.
d. A hard and fast audit programme may kill the initiative of efficient and enterprising assistants.
Minimum Essential Work and Alteration
● Initially the audit programme must specify the minimum essential work to be carried out based on
the auditor’s understanding of nature, size, composition of business, his understanding of IC, and
considering the scope of audit.
● With the progress of audit, alteration should be made in the audit program as and when the situation
requires, there may be circumstances which were initially not thought of and now needs to be taken
care of.
● Even some areas which were earlier included can be dropped or the extent of checking can be
reduced

● The users of the audit program, that is the assistants working on them, must be motivated to keep an
open mind and not to stick only to the points mentioned in the audit program, they must be
encouraged to report any significant matters to the seniors with appropriate authority on a timely
basis.
Quality Control For Audit Work Delegation And Supervision Of Audit

Work
An audit is a complex task involving number of people at different levels.
Auditor will have to depend on
● Assistants
● Technical Experts
● Other auditors
In the case of assistants, the auditor has to direct, supervise and review the work delegated to them.
In the case of other auditors and expert auditor has to obtain reasonable assurance that the work performed
by them is adequate for the purpose of the auditor.
The objective of the auditor is to implement quality control procedures at the engagement level that
provides the auditor with reasonable assurance that
● The audit complies with the professional standards and the regulatory and legal requirements
● The Auditor’s report is issued as appropriate in the circumstance.
The responsibility to express an opinion on financial statements and it’s accountability will always be of the
auditor.
Question
Your firm has been appointed as an auditor to audit the accounts of an auto parts manufacturer, ABC
LTD. Elucidate the matters to be considered by an auditor in developing his overall plan for the
expected scope and conduct of audit. (MTP May 2021 ICAI)

Answer As per MTP of ICAI - Please refer ICAI’s website - www.icai.org
Development of an Overall Plan
The auditor should consider the following matters in developing his overall plan for the expected scope
and conduct of the audit
● The terms of his engagement and any statutory responsibilities.
● The nature and timing of reports or other communication.
● The applicable legal or statutory requirements.
● The accounting policies adopted by the client and changes in those policies.
● The effect of new accounting or auditing pronouncements on the audit.
● The identification of significant audit areas.
● The setting of materiality levels for audit purposes.
● Conditions requiring special attention, such as the possibility of material error or fraud or the
involvement of parties in whom directors or persons who are substantial owners of the entity are
interested and with whom transactions are likely.
● The degree of reliance he expects to be able to place on the accounting system and internal
control.
● Possible rotation of emphasis on specific audit areas.
● The nature and extent of audit evidence to be obtained.
● The work of internal auditors and the extent of their involvement, if any, in the audit.
● The involvement of other auditors in the audit of subsidiaries or branches of the client.
● The involvement of experts.
● The allocation of work to be undertaken between joint auditors and the procedures for its control
and review.
● Establishing and coordinating staffing requirements
It is not necessary for the auditor to periodically review the audit programme. ( Correct / Incorrect -
November 2020 2 Marks)
Correct / Incorrect Marks 2 MTP April 2021
Audit notes can serve as a guide in framing an Audit programme.

Materiality
The general meaning of Material Items
● The items, the knowledge which might influence the decisions of the user of the financial
statements.
● An item may be material because of its size or because of its nature.
● Thus we can say that materiality can be quantitative or qualitative.
● It is not practicable to design audit procedures to detect misstatements that could be material solely
because of their nature.
● Materiality forms the basis for determination of audit scope and the levels of testing the transactions.
● Sometimes materiality in terms of quantity is also defined in law and regulations. For example
○ A company should disclose by way of notes additional information regarding any item of
income or expenditure which exceeds 1% of the revenue from operations or ` 1,00,000
whichever is higher (Refer general Instructions for preparation of Statement of Profit and Loss
in Schedule III to the Companies Act, 2013).
○ A company should disclose in Notes to Accounts, shares in the company held by each
shareholder holding more than 5 per cent shares specifying the number of shares held.
Materiality from auditing point of view
● Auditor is concerned with material misstatements in the financial statements.

● Auditor will apply the concept of materiality while planning and performing the audit, he will also use
it in evaluating the effect of identified misstatements on the audit and of the uncorrected
misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.
● If materiality is defined or discussed in the financial reporting framework, the auditor will take it as a
point of reference to determine materiality level for the audit.
● Different Financial reporting frameworks may discuss materiality in different terms, the common
points which are generally emphasized are as follows.
1. Misstatements are material if expected to influence the economic decisions of users taken on
the basis of the financial statements
Misstatements, including omissions, are considered to be material if they, individually or in the
aggregate, could reasonably be expected to influence the economic decisions of users taken on the
basis of the financial statements;
2. Judgments about materiality are affected by the size or nature of a misstatement

Judgments about materiality are made in the light of surrounding circumstances, and are affected by
the size or nature of a misstatement, or a combination of both; and
3. Judgments about matters that are material are based on a consideration of the common
financial information needs of users as a group
Judgments about matters that are material to users of the financial statements are based on a
consideration of the common financial information needs of users as a group. The possible effect of
misstatements on specific individual users, whose needs may vary widely, is not considered.
The auditor’s determination of materiality is a matter of professional

judgment.
The auditor’s determination of materiality is a matter of professional judgment, and is affected by the auditor’s
perception of the financial information needs of users of the financial statements. In this context, it is reasonable for the
auditor to assume that users:
a. Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the
information in the financial statements with reasonable diligence;
b. Understand that financial statements are prepared, presented and audited to levels of materiality;
c. Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment
and the consideration of future events; and
d. Make reasonable economic decisions on the basis of the information in the financial statements.
Not for exams.
In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material.
These judgments provide a basis for: (In short, materiality helps in the following)
● Determining the nature, timing and extent of risk assessment procedures;
● Identifying and assessing the risks of material misstatement; and
● Determining the nature, timing and extent of further audit procedures.

Performance Materiality
● For purposes of the SAs,
● Performance materiality means
● the amount or amounts set by the auditor
● at less than materiality
● for the financial statements as a whole
● to reduce to an appropriately low level
● the probability
● that the aggregate of uncorrected and undetected misstatements exceed materiality for the financial
statements as a whole.
● If, there is one or more particular item
● for which misstatements of lesser amounts than the materiality for the financial statements as a
whole could reasonably be expected
● to influence the economic decisions of users taken on the basis of the financial statements,
● the auditor shall also determine the materiality level or levels to be applied to those particular item.
Performance materiality is also known as Tolerable misstatements
A percentage based on risk at the financial statement level is multiplied by planning materiality to
determine tolerable misstatement, or performance materiality,

Benchmarking
Meaning: Benchmarking is one recognized method through which an Auditor determines the materiality
level. Under this method, a percentage is often applied to a chosen benchmark, as a starting point in
determining materiality for the Financial Statements as a whole.
The auditor has to apply his professional judgement in determining materiality, choosing appropriate
benchmark and determining level of benchmark.
Factors: Factors that may affect the identification of an appropriate benchmark include –
a. Elements of the Financial Statement (e.g., Assets, Liabilities, Equity, Revenue, Expenses)
b. Whether there are items on which the attention of the users of the particulars Entity’s Financial
Statement tends to be focused (e.g., profit, revenue or net assets)
c. Nature of the Entity, where the Entity is at in its life cycle, and the industry and economic
environment in which the Entity operates
d. Ownership Structure and Financial Pattern (e.g., if an entity is financed more by Debt rather than
Equity, users may put more emphasis on Assets, and claims on them, than on the Entity’s Earning)
and
e. The relative volatility of the benchmark.
Some examples of suitable benchmark depending upon various circumstances
Examples of benchmarks that may be appropriate, include categories of reported income such as PBT, Total
Revenue, Gross Profit and Total Expenses, Total Equity or Net Asset Value.
a. Profit Before Tax from continuing operations is often used for profit-oriented entities. In this regard if
Profit Before Tax from continuing operations is volatile, other benchmark may be more appropriate.
b. In an audit of the entities doing public utility programs/projects, Total Cost or Net Cost (Expenses less
Revenues) may be appropriate benchmarks for that particular program/project activity.
c. Where an entity has custody of the assets, assets may be an appropriate benchmark.
Percentage applied to profit before tax from continuing operations will normally be higher than a
percentage applied to total revenue.
With Ref. to SA 320 "Materiality in planning and performing an audit" Indicate the factors which may effect
the identification of an appropriate benchmark while determining materiality for the financial statements
as a whole. (November 2020 - 4 Marks

Financial Data w.r.t Chosen Benchmark

In relation to the chosen benchmark, relevant financial data ordinarily includes –
● prior periods’ financial results and other financial information

● the period to-date financial results.
● budgets or forecasts for the current period,
adjusted for significant changes in the circumstances of the entity (for example, a significant business
acquisition) and relevant changes of conditions in the industry or economic environment in which the entity
operates.
Factors that may indicate lesser amounts than materiality for the
financial statements as a whole could reasonably be expected to
influence the economic decisions of users
● Whether law, regulations or the applicable financial reporting framework affect users’ expectations
regarding the measurement or disclosure of certain items.
● The key disclosures in relation to the industry in which the entity operates.
● Whether attention is focused on a particular aspect of the entity’s business that is separately
disclosed in the financial statements.
Revision as the Audit Progresses

Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for
particular classes of transactions, account balances or disclosures) may need to be revised as a result of a
● change in circumstances that occurred during the audit (for example, a decision to dispose of a major
part of the entity’s business),
● new information, or
● a change in the auditor’s understanding of the entity and its operations as a result of performing
further audit procedures.
For example, if during the audit it appears that actual financial results are likely to be substantially different
from the anticipated period end financial results that were used initially to determine materiality for the
financial statements as a whole, the auditor revises that materiality.

Documenting the materiality

The audit documentation shall include the following amounts and the factors considered in their
determination:
● Materiality for the financial statements as a whole;
● If applicable, the materiality level or levels for particular classes of transactions, account balances or
disclosures ;
● Performance materiality ; and
● Any revision in above as the audit progressed.
Materiality and Audit Risk

In conducting an audit of financial statements, the overall objectives of the auditor are
● to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error,
● thereby enabling the auditor to express an opinion on whether the financial statements are prepared,
in all material respects, in accordance with an applicable financial reporting framework;
● and to report on the financial statements, and communicate as required by the SAs, in accordance
with the auditor’s findings.
The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit
risk to an acceptably low level .
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements
are materially misstated.
Audit risk is a function of the risks of material misstatement and detection risk .
Materiality and audit risk are considered throughout the audit, in particular, when
● Identifying and assessing the risks of material misstatement.

● Determining the nature, timing and extent of further audit procedures; and
● Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming
the opinion in the auditor’s report.
Relationship between materiality and audit risk

● There is an inverse relationship between Materiality and the degree of audit risk.
● Accordingly, if we have high risk in an organisation we should keep our materiality level low.
● Audit Risk has three components – Inherent risk (IR), Control Risk (CR) & Detection Risk.
● If a company is having low IR & CR then the chances are material misstatement are also low.
● Auditor will keep his materiality level high.
● If Risk is high the auditor will keep his materiality level low so that he can detect a greater number
of misstatements.
Correct / Incorrect Marks 2 January 2021 Exam Question
Determining materiality involves the exercise of professional judgement.

Case Studies
You are an audit manager with PKCA & Associates, and you have just been approached by Mishti, the
Managing Director of Mishti YT Ltd., who has asked PKCA & Associates to become Statutory auditors to
Mishti YT Ltd.
Mishti YT Ltd. is in the service sector (was being operated as a proprietorship) which has existed for a
number of years. Mishti explains that the company has recently become legally required to have an
audit. It has not had an audit in the past. PKCA & Associates was recommended by Mishti’s friend.
Mishti is not very familiar with the audit process. She has asked for further information about audit
planning and audit documents.
Which of the following considerations/actions should the auditor take before the audit of Mishti YT Ltd. is accepted?
1. Consider if the audit firm is independent from Mishti YT Ltd..
2. Communicate with the previous auditors.
3. Obtain the agreement of Mishti YT Ltd. management that it acknowledges its responsibility to prepare financial statements.
4. Sign an agreement to give a Clean Opinion.
● 1 and 2
● 1 and 3
● 2 and 4
● 3 and 4
Which TWO of the following must be included in the engagement letter between PKCA & Associates and Mishti YT Ltd.?
● Management’s acknowledgement of its responsibilities with regard to accounts preparation, internal control and provision of
information to the auditors.
● Mishti YT Ltd’s Business Plan.
● Details about Internal Control.
● Auditor’s responsibilities with regard to the audit
● Audit risk evaluation
● The Audit Fees to be charged.

SA 320 on “Materiality in Planning and Performing an Audit” requires that an auditor
a. should not consider materiality and its relationship with audit risk while conducting an audit.
b. should consider materiality and its relationship with audit risk while conducting an audit.
c. should not consider materiality but should consider its relationship with audit risk while conducting an audit.
d. should consider materiality but need not consider its relationship with audit risk while conducting an audit
When planning the audit,
a. the auditor considers what would make the financial information materially misstated.
b. the auditor need not consider what would make the financial information materially misstated
c. the auditor need not consider what would make the financial information materially misstated at planning stage
d. the auditor needs to consider what would make the financial information materially misstated while conducting audit only
SA 315 Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity and Its Environment requires
auditors to obtain an understanding of the audited entity.
Which of the following methods should PKCA & Associates use to obtain information about Mishti YT Ltd.?
1. Ask management to tell them about the business.
2. Understand Relevant industry, regulatory and other external factors including applicable financial reporting framework
3. Perform analytical review on current and historical financial information
4. Visit Mishti YT Ltd. and watch its activities
5. Ask the previous auditors to tell them about the client.
● 1, 2, 3 and 5
● 2 and 3 only
● 1 and 4 only
● 1, 3 and 4
● 1, 2, 3, 4
Which of the following statements concerning audit documents is TRUE?
● Mishti is entitled to access and review of the firm’s working papers relating to Mishti YT Ltd..
● Audit working papers are the property of the auditor and Mishti is unlikely to be granted access to them.

● The auditors may not show Mishti any working papers for ethical reasons.
● The auditors may not use documents generated by Mishti YT Ltd. staff as working papers.


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These notes are incomplete without our videos. Study from these notes at your own risk.

We keep on updating our books, notes and videos. You should

SA 300 “Planning an Audit of Financial Statements”

Involvement of Key Engagement Team Members

Audit Plan to Conduct an Effective Audit

Plans should be made to cover, among other things:

(b) establishing the expected degree of reliance to be placed on internal control;

(d) coordinating the work to be performed.

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MTP March 2020.

Benefits of Planning in the Audit of Financial Statements

Planning an audit involves

● establishing the overall audit strategy for the engagement and

● developing an audit plan.

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● Any updates to them must also be documented.

b. Evaluating compliance with ethical requirements, including independence, as required by SA 220 ;

c. Establishing an understanding of the terms of the engagement, as required by SA 210.

● There is no misunderstanding with the client as to the terms of the engagement.

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What is Audit Strategy

How would the audit strategy be helpful to the auditor?

Establishment of Overall Audit Strategy

a. Identify the characteristics of the engagement that define its scope;

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Description of Audit Plan

Knowledge of the Client’s Business

2. The nature of the entity, including:

b. Its ownership and governance structures;

d. The way that the entity is structured and how it is financed.

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5. The measurement and review of the entity’s financial performance.

Also explain how such an understanding would be helpful to the auditor.

RTP May 2021

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An audit plan is more detailed.

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Planning is a Continuous Process

● size and complexity of the entity,

● changes in circumstances that occur during the audit engagement.

1. The analytical procedures to be applied as risk assessment procedures.

3. The determination of materiality.

4. The Involvement of experts.

5. The performance of other risk assessment procedures.

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Direction, Supervision and Review

The auditor shall

● plan the nature, timing and extent of

● direction and supervision of engagement team members and

● the review of their work.

● The size and complexity of the entity.

● The area of the audit.

● The assessed risks of material misstatement

Changes to planning decisions During the Audit

○ As a result of unexpected events,

○ the audit evidence obtained from the results of audit procedures,