The Risk-Based Audit Process It states that the auditor should plan the

audit so that the engagement will be performed

Phase 1 - RISK ASSESSMENT in an effective manner

A. Preliminary engagement activities to

decide whether to accept or continue an Audit
Engagement AUDIT PLANNING

B. Planning the Audit for overall Strategy Definitions:

and Audit Plan Development
Audit Planning involves the
C. Risk Assessment Procedures to establishment of the overall audit strategy for
identify and assess risk of material misstatement the engagement and developing an audit plan, in
through understanding the entity order to reduce audit risk to an acceptably low
level (Cabrera)

Audit Planning means establishment of

PHASE 1 - B the overall audit strategy for the engagement
and developing an audit plan to reduce audit risk
PLANNING THE AUDIT TO DEVELOP AN
to an acceptably low level (Mark Francis Ng)
OVERALL AUDIT STRATEGY AND AUDIT
PLAN Audit Planning means developing a
general audit strategy and a detailed approach
Start of Planning? for the expected conduct of the audit
(Salosagcol, Tiu, Hermosilla)
"As the client has been obtained and the
engagement letter signed by both parties
(auditor and client), the planning process
intensifies...." (Cabrera)

Start of Planning Activities SYSTEMATIC PROCESS

Even before the client is obtained and Auditing consists of:

the engagement letter is signed by both parties
(auditor and client), planning activities should by  Structured, logical, and organized series
initiated by the auditor..... of steps and procedures A series of
sequential steps that independent
Auditors follow
 To ensure that the audit is conducted in
PSA 300 "Planning an Audit of Financial an:
Statements" o Organized
o Effective
Establishes standards and provides
o Efficient
guidance on the considerations and activities
 SYSTEMATIC PROCESS INVOLVES
applicable to planning and audit of financial
COMPLETE PLANNING
statements.
FEATURES OF AUDIT PLANNING
 Establish overall audit strategy for the
engagement and audit plan to reduce
risk
 Team members benefit from experience
and insight
 Nature and extent of activities will vary
according to size and complexity of the
entity
 Continuous and iterative, not discrete
 Enhance effectiveness and efficiency of
the planning process
 Timing of planning activities and
procedures needing completion prior to
considering other procedures.
Benefits of Audit Planning
 Helps ensure that appropriate attention
is devoted to important areas of the
audit
 Aids identify potential problems and
resolving them on a timely basis
 Ensures proper organization,
management and performance in an
effective and efficient manner
 Assists in proper manner, coordination
and review of the work of the team
 Allows the work to be completed
expeditiously
 Helps coordinate the work by other
auditors and other parties
Other Activities in Audit Planning
 Modifying (Updating) the overall audit
strategy
 and the audit plan as necessary during
the audit
o Unexpected events
o Changes in conditions
o Audit evidence obtained from
audit procedures
TWO LEVELS OF PLANNING
Overall Audit Strategy
 Scope
 Objectives and Timing
 Materiality
 Key aspects of focus
 Staffing needs, selection, & supervision
 Approach to Audit
Detailed Audit Plan
 Understanding the entity and its
environment (PSA 315)
 Auditor's response to assessed risk (PSA
330) (risk-based audit)
 Other planned audit procedures for
compliance to PSA (various PSA)
AUDIT STRATEGY
PSA 300 par 6
 Requires that the auditor establishes the
overall strategy for the audit.
 The overall audit strategy sets the scope,
timing, and direction of the audit and
guides the development of the more
detailed audit plan.
THE AUDIT STRATEGY
An abstract idea that occurs in the
brainstorming stage of the audit planning
process
Main ideas of the auditor on how to plan
and conduct the audit and set the scope,
timinng, and direction of the audit
This guides the development of the
more detailed audit plan
OVERALL AUDIT STRATEGY
PSA 300 par 7 - The process of establishing the
audit strategy should involve:
 Identifying the characteristic of the
engagement that defines the scope
 Ascertaining the reporting objectives of
the engagement to plan the timing of
the audit and the nature of the
communication required
 Considering the important factors that
will determine the focus and direction of
the engagement team efforts
 Considering the results of preliminary
engagement activities, and relevance of
knowledge gained by the team on other
engagements performed
 Ascertaining the nature, timing and
extent of resources necessary to
perform the engagement
 Financial Reporting Framework
 Industry specific reporting requirements
 Locations of the components of the
entity
2. Ascertaining the reporting objectives of the
engagement to plan the timing of the audit and
the nature of the communication required
 Deadline for interim and final reporting
 Key dates and organizations of meeting
with management and those charged
with governance to discuss the nature
and extent of audit work
 Discussion with management regarding
the communication on the status of
audit work
3. Considering the important factors that will
determine the focus and direction of the
engagement team efforts
 Determination of appropriate
materiality levels
 Preliminary identification of areas where
there may be higher risks of material
misstatement.
 Preliminary identification of material
components and account balances.
 Evaluation of whether the auditor may
plan to obtain evidence regarding the
effectiveness of internal control, and
 Identification of recent significant
entity-specific, industry, financial
reporting or other relevant
developments

4. Considering the results of preliminary

OVERALL AUDIT STRATEGY
1. Identifying the characteristic
Engagement that defines the scope
engagement activities, and relevance of
knowledge gained by the team on other
engagements performed
of the
5. Ascertaining the nature, timing and extent of
resources necessary to perform the engagement
Other Benefits of Audit Strategy:
 Resources to deploy for specific areas
 Amount of resources to be allocated in
specific areas
 When the resources are to be deployed
 How such resources are managed,
directed and supervised
The Best Audit Strategy:
The approach that results in the most
efficient audit, that is, an effective audit
performed at the least possible cost.
NOTE:
Audit strategy normally identifies and
sets after the audit objective but before or at the
same time as the audit plan is performed.
Managing the time frame of the audit
assignment is also part of the audit strategy.
The right audit strategy could lead to
minimizing auditor risks, meeting audit
deadlines, and using audit resources efficiently.
The auditor will have to make sure that
the audit assignment is not only complete within
the time required by its client, but they have to
make sure that there is sufficient time to ensure
that the maximum audit quality is maintained.
EXAMPLES OF AUDIT STRATEGY
Auditors will:
✔use risks-based audit approach
✔apply a top-down approach to conduct
audit assignments
✓ audit of new clients and they decided
not to rely on the internal control financial
statements by deciding not to test of control. Go
to a substantive test.
✓Income Tax season, audit the classes of
transactions then account balances.
THE AUDIT PLAN
Formalizes the audit strategy and is
more detailed than the Audit Strategy
It includes the nature, timing, and extent
of audit procedures to be performed
The purpose is to obtain sufficient
appropriate audit evidence to reduce risk to an
acceptably low level
An Audit Plan is a detailed plan that
professionals create before performing an audit
on a company or organization.
This plan includes information about the
standards the auditors aim to uphold while
performing the audit.
➤Includes the specific procedures and policies
that the auditors are to use to complete the
audit.
➤Contains information about:
 the scope of the audit
 the name and other defining
information about the company in
question
 the time frame over which the audit
occurs
 the professionals in charge of the audit.
TYPICAL AUDIT PLAN
 Description of the client company
o Structure
o Nature of business
o Organization
 Audit objectives (tax filing, for end users)
 Description of the nature and extent of
services such as tax returns
 Required governmental reports
 Timetable of the audit work
 Work to be done by the client's
employer
 Assignment of audit staff
 Target completion dates
 Preliminary evaluation and judgement
about materiality level
 Any special problems to be resolved
during the engagement
 Conditions that may require revision in
materiality
MATTERS OF IMPORTANCE
Difference between audit strategy and
audit plan
 An AUDIT STRATEGY is about
implementing a program for tackling the
audit, and the
 AUDIT PLAN is about how you will use
this strategy to tackle the audit.
 AN AUDIT PLAN is more detailed than
the
 AUDIT STRATEGY and includes the
nature, timing, and extent of audit
procedures to be performed to obtain
sufficient evidence to reduce the audit
risk at an acceptable low level.
Take note:
Development of audit strategy and audit
plans is not sequential
Audit strategy and audit plans should be
updated and changed as necessary during the
course of the audit
RELATIONSHIPS IN AUDIT PLANNING
1. THE AUDIT STRATEGY
2. THE AUDIT PLAN
3. THE AUDIT PROGRAM
4. THE AUDIT PROCEDURES
AREAS FOR CONSIDERATION IN AUDIT
STRATEGY
 Characteristics of the engagement that
defines the scope
 Reporting objectives to plan the timing
and nature of communications required
  Results of preliminary activities and
previous engagement experience
 Nature, Timing, and extent of available
resources
AUDIT STRATEGY
When developing an audit strategy, the
auditor must consider the appropriate levels of
materiality and audit risk
MATERIALITY
Definition by PSA 320 par:
 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
 Judgement about materiality are made
in light of surrounding circumstances,
and are affected by the size and nature
of misstatement, or a combination of
both; and
 Judgement 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.
Definition by Financial Reporting Standard
Council (FRSC)
 Information is material if its omission or
misstatement could influence the
economic decision of users taken on the
basis of the financial statements.
 Materiality depends on the size of the
item or error judged in the particular
circumstances of its omission or
misstatement
 Thus, materiality provides a threshold or
cut-off point rather than being a primary
qualitative characteristic which
information must have if it is to be
useful.
CONCEPT OF MATERIALITY:
The largest amount of misstatement
that the auditor could tolerate
The smallest aggregate amount that
could misstate the financial statement
Materiality therefore relates to:
 the significance of transactions
 balances and errors contained in the
financial statements.
 threshold or cut-off point after which
financial information becomes relevant
to the decision making needs of the
users.
CONSIDERATION OF MATERIALITY
Materiality should be considered by the
auditor
 Determining the nature, timing and
scope of the audit engagement
(STRATEGY)
 Identifying and assessing the risks of
material misstatement
 Adjustments, revisions of audit plans
FEATURES OF MATERIALITY
 Involves both quantitative
qualitative considerations
 Relative to size and particular
circumstance of the entity
 To determine what is material is a
matter of professional judgment of the
auditor
 In designing audit plan, the auditor
should establish materiality level to
detect material misstatements
 Even immaterial matters can have
material effect in the Financial
Statements
 An error may not be material
quantitatively but material qualitatively
 Small amounts but collectively could
have a material effect
 Materiality refers to an amount or
transaction that would influence the
decision of users
 Materiality depends on the size of the
item
 It is a threshold point not a characteristic
to be useful
The auditor's determination of materiality
is
 a matter of professional judgment
 Affected by the auditor's perception of
the financial information needs of the
users of financial information.
The auditor can assume that users:
 Have knowledge of the business,
economic and accounting activities of
the firm and will diligently study the
information in the financial statement
and  Understand that FS are prepared and
audited to levels of materiality
 Recognize uncertainties that
measurement used are based on
estimates, judgment, forecasts
 Make economic decision based on the
information in the financial statement -
(PSA 320 par 4)
RELATIONSHIP BETWEEN MATERIALITY
AND RISK
“The higher the materiality level, the
lower the risk; the lower the materiality level,
the higher the risk”
MATERIALITY IN TERMS OF AMOUNT AND
LEVEL
ASSUMPTION: P100,001 as the base amount
High level of materiality
 Lower the amount to P50,001
 More strict in the conduct of the audit
 More evidence to gather
 More extensive procedures
 Only below P50,000 is tolerated
Low level of materiality
 Increase the amount to P200,001
 The auditor is more lax in the conduct of
the audit
 Lesser evidence to gather
 Toleration of more errors
USE OF MATERIALITY
 Planning and performing the audit
 Evaluating effect of identified
misstatements and uncorrected
misstatements
 Forming the opinion in the auditor's
report
DIFFERENNT LEVELS OF MATERIALITY
(PSA 320 par 10)
 Financial Statement level or overall
materiality materiality for the financial
statement as a whole
 Specific materiality - materiality applied
to classes of transactions, account
balances, disclosures
 Performance materiality - scoping of
financial statements line items to be
tested by the auditor to ensure that
significant accounts are covered in the
audit testing (PSA 320 par 9)
OVERALL MATERIALITY (how to compute
materiality as a whole)
 Based on financial statement as a whole
 The highest amount of misstatement
without affecting the economic decision
of the users
 Financial Statements are interrelated
(same, and will be used to another)
 Based on the common financial
information needs of the users.
 Percentage is often applied to a chosen
benchmark as starting point (how to
compute)
MATERIALITY BENCHMARKS (what to use
inorder to start)
 The elements of financial statements
(FP/FS/CF)
 Items which users tends to be
focused(capital structure)
 Life cycle of the entity (use cycle)
 Economic environment which the entity
operates (based on the materiality
position )
 Ownership structure and the way it is
financed (qualitative - see how it is used/
is common higher than preference/ the
way it is financed)
TECHNICAL BENCHMARKS(total assets)
 Reported income such as profit before
tax, total revenue (where to base the
percentage)
 Gross profit and total expense
 Total equity or net asset value
 Total Assets
 Total Revenues
 Profit before tax from continuing
operations (for profit-oriented entities)
 Average of three years' net income
before taxes
STARTING POINTS
PSA does not require any range of
percentages, based in actual practice
 Income from continuing operations - 3%
to 7%
 Assets - 1% to 3%
  Equity -3% to 5%
 Revenues-1% to 3%
 Less than 5% immaterial & greater than
10% materiality
 1% to 1.5% larger of total assets or
revenue
 Suggestion: ranges from 5%-20% of the
factor
SPECIFIC MATERIALITY (sample: )
 Lesser amount than the overall
materiality that may be relevant to users
 Refers to sensitive accounts in the
financial statements or disclosures
 Done by allocating the overall
materiality to the respective account
balances
 Allows the auditor to determine audit
procedures to each specific accounts
 Allocation is not provided in the
standards and highly subjective
Factors affecting application of specific
materiality:
 Law, regulation or applicable reporting
framework affect user's expectations on
measurement or disclosures on
accounts
 Key disclosures in relation to industry it
operates
 Certain aspect in the business that is
separately disclosed in the financial
statements
Tolerable misstatement: The allocated
materiality to an account
PERFORMANCE MATERIALITY( lesser)
Definition (PSA 320 par 9)
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 exceeds materiality for the
financial statements as a whole.
If applicable, performance materiality
also refers to the amount set by the auditor at
less than the materiality level or levels for
particular classes of transactions, account
balances or disclosures
 Margin of safety or buffer against
undetected misstatement and
uncorrected errors
 Consideration of immaterial items on
the aggregate to cause misstatement
exceeding materiality level
 Set at lower amount than the overall
materiality and specific materiality
 To lower audit risk to an appropriately
low level
Other pertinent matters on performance
materiality:
 Not a simple mechanical calculation but
an exercise of professional judgment
 affected by the auditor's understanding
of the entity
 updated during the execution of the
auditor's risk assessment procedures
 nature and extent of accumulated
misstatements from past engagements
  required for an auditor to establish
under PSA 320 par 11
STEPS IN USING MATERIALITY
 Establish a preliminary judgement about
materiality
 Determine tolerable misstatement
 Establish performance materiality
 Estimate likely misstatements and
compare totals to the preliminary
judgement about materiality
WARNING!!!
NEVER MENTION THE LEVEL OF
MATERIALITY TO THE CLIENT OR AUDITEE
OTHERWISE EVIDENCE COULD BE MANIPULATED
BY THE MANAGEMENT
AUDIT PLAN
Detailed Audit Plan
 Understanding the entity and its
environment (PSA 315)
 Auditor's response to assessed risk (PSA
330)
 Other planned audit procedures for
compliance to PSA (various PSA)
DOCUMENTATION
 The overall audit strategy
 The audit plan
 Significant changes discovered during
the audit engagement and the reasons
for such changes
 Pre-engagement activities
 Letter of engagement
 Materiality level
INITIAL AUDIT ENGAGEMENTS
Considerations in initial audit
engagements:
 Acceptability of the client relationship
and specific engagement
 Communication with the previous
auditor, if there is a change, in
compliance with ethical requirements
 Review the previous auditor's working
paper but consider the ethical
requirements
DIRECT, SUPERVISION AND REVIEW
Auditor plans the nature, timing, and
extent of direction and supervision of
engagement and review their work
Direction and supervision:
 extent of instructions to team members
on procedures to undertake
 supervising how procedures are
undertaken
Review: to determine if members have
conducted the procedures properly and
effectively
Nature & timing varies and dependent on:
 size and complexity of the entity
 area of the audit
 assessed risk of material misstatement
 capabilities and competence of
individual team members
ADDITIONAL MATTERS
 Unless prohibited by law, review the
previous auditor's working paper
 Major issued discussed with
management (accounting issues and
reporting standards)
 Planned audit procedures regarding
opening balances (PSA 520 par 3)
 Assignment of firm personnel regarding
competence and capabilities
 Other procedures required of the firm's
system of quality control
PSA 510 - Opening Balances
PSA 510 par 3
Objective of the auditor regarding opening
balances whether:
 Opening balances contain misstatement
and affect current period's financial
statement
 Consistency in the application of
appropriate accounting policies
reflected in the opening balances
 Opening balances: those account
balances that exist at the beginning of
the period (PSA 510 par 4)
OTHER CRITICAL MATTERS IN
ENGAGEMENT PLANNING
 Application of Analytical Procedures
Establishment of an engagement or
audit team
 Consideration of work performed by
others:
o predecessor auditor
o other CPA
o specialists
o use of client's staff
o internal auditors
 Assessment of going concern
 Identification of related parties
 client's legal obligation
 completion of the initial audit program
 preparation of time budget
 assignment of personnel to the
engagement
 scheduling of work
1. ANALYTICAL PROCEDURES
Involves analysis of significant ratios and
trends,
including the resulting investigation of
fluctuations and relationships that are
inconsistent with other relevant information or
deviations from predicted amounts.
Importance:
It helps the auditor in identifying
unusual transactions and events that may affect
fair presentations of the FS and material
misstatements.
PSA 520 "Analytical procedures" requires the
auditor to use analytical procedures in the
planning and overall review stages of the audit,
Substantive Analytical procedures:
 Existence of unusual transactions or
events
 Amounts, ratios, and trends that might
indicate matters that have financial
statement and audit implications
 Development of expectations about
plausible relationships that are
reasonably expected to exist
 Ratios and trends should be compared
with a certain benchmark
 Ratios and balance indications may
contradict each other
FEATURES OF ANALYTICAL PROCEDURES:
 Analytical procedures consist of the
analysis of significant ratios and trends
including the resulting investigation of
fluctuations and relationships that are
inconsistent with other relevant
information or deviate from predictable
amount.
 Some material errors, unusual
transactions, material deviations, vital
activities can be viewed thru the
financial statements even prior to the
actual audit engagements.
 Auditors are strictly instructed to do this
procedure.
 Mastery of analytical process, just a
glimpse of the Assertions, errors and
management fraud is suspected
Compare and investigate:
 Prior years' Financial Statements
 Anticipated results such as budget
forecast (income & expense
performance)
 Industry averages
 Non-financial factors
 Typical relationships among Financial
Statement balances
 Analysis of significant ratios and trends
 Changes in the industry in which the
entity operates
 Changes in key personnel
 Observation and inspection
Analytical procedures used in planning an
audit
 Simple comparisons
 Ratio analysis
 Common-size statements
 Trend statements
 Time series
 Comparison of client ratio vs. industry
2. ESTABLISHMENT OF AN ENGAGEMENT
TEAM
Matters to consider:
 Qualification
 Ability
 Experienced and knowledgeable
 Varied in expertise
 Audit size and complexity
 Continuity and rotation of personnel
3. CONSIDERATION OF WORK PERFORMED
BY OTHER AUDITORS/PARTIES
To be considered:
 Involvement of other auditors in the
audit components
 Involvement of experts
 Number of locations
o Predecessor Auditor
o Other CPA
o Specialists
o Use of Client Staff
o Internal Auditors
4. ASSESSMENT OF GOING CONCERN
ASSUMPTION
 Financial
 Operations
 Loss of customers
 Availability of capital and credit
 Others Matters
 DANGER OF COMMITING
MANAGEMENT FRAUD
 Non-compliance capital or statutory
requirements
 Legislations or government policy
expected to adversely affect the entity
5. IDENTIFICATION OF RELATED PARTIES
Related party: if one party has the ability to
control the other part or exercise significant
influence over the other party in making
financial and operations decisions
Examples of related party transactions:
 sales or purchase transactions between
parent company and subsidiary
 cash advances between branches
 inventory warehousing among offices
within the holding company
 foreign currency transactions between
offices
 intercompany loans :significant
transactions with related parties
6. CLIENT`S LEGAL OBLIGATION
 Changes to articles of incorporation
 Minutes of meeting
 Significant contracts executed during
the year
 Major agreements or contracts
 current situation and future plans
 authorization of dividends
 Inquiries into the entity's operations or
financial results by regulatory or
government bodies.
 Pending litigation and contingent
liabilities
7. COMPLETION OF INITIAL AUDIT
PROGRAM
AUDIT PROGRAM
Definitions
 Set of instructions or manuals to
assistants or the audit team as a mean to
control the proper execution of the
work.
o A program sets out the nature,
timing and extent of the planned
audit procedures required to
implement the overall audit
plan.
 A detailed list of procedures to be
performed in an audit.
  A list of audit procedures to be
performed so that the auditor will have
evidence as a basis for expressing an
opinion on the financial statements
 A more detailed plan of the procedures
to be used in the audit of specific
accounts and transactions
 Includes detailed instructions and
procedures to be performed by audit
team members
TYPES OF AUDIT PROGRAM
1. Standard All-Purpose Audit Program
2. Tailor-Made Audit Program
3. Modified Standard Form
Uses of an audit program:
 Aids in the effective and efficient
conduct of the evidence gathering phase
of the audit
 Help in directing and supervising of audit
staff
 Facilitates review procedures
 Coordinate the different audit
procedures with client's staff and
personnel
 Document the performance of audit
procedures
8. PREPARATION OF THE TIME BUDGET
Definition
 An estimated total hours to finish the
audit engagement
 Based on information obtained in
understanding the client
 Allocated to work schedules indicating
who, what to do, and length of time
 Basis for determining fees
 Used to measure efficiency of staff
 Indicates progress of the engagement
9. PERSONNEL ASSIGNMENT
PSA 220 par 8 to 25
The auditor, and assistants with
supervisory responsibilities, will consider the
professional competence of assistants
performing work delegated to them when
deciding the extent of direction, supervision and
review appropriate for each assistant
Any assignment to team member shall
provide reasonable assurance that the work will
performed with due care by someone with
professional competence required in the
situation
10. SCHEDULING OF WORK
 Deadline
 Ability of the audit staff
 Cost
 Other audit clients
 Manpower Availability
The firm should consider (Scheduling of
Work):

 Type of engagement
 Deadline for submission of final audit
report
 Ability of the audit staff
 Costs
 Other audit clients
 Manpower availability

threshhold - cut off point/ decision point

DOCUMENTATION OF AUDIT PLAN/ AUDIT

PROGRAM

 Audit Strategy
 Audit Plans
 Audit Programs
 Time Budget
 Significant Changes
 Letter of Engagement