AUDIT

PLANNING By: ATTY. PETER JAY S. GENISTON, CPA

 AUDIT PLANNING
- involves establishing the overall
audit strategy for the engagement
and developing an audit plan, in
order to reduce audit risk to an
acceptably low level

AUDIT PLANNING MEMORANDUM summarizes the

decisions taken during the planning process.
 IMPORTANCE OF AUDIT PLANNING
❑ Appropriate attention is devoted to important areas of the audit;
❑ Potential problems are identified and resolved on a timely basis;
❑ The audit is performed in an effective and efficient manner
❑ The audit engagement is properly organized, staffed and
managed;
❑ The audit is completed expeditiously;
❑ Assists in the selection of engagement team members with
appropriate levels of capabilities and competence to respond to
anticipated risks
❑ Assists in the proper assignment of work or proper utilization of
assistants
❑ Facilitates the direction and supervision and the review of work
❑ Assists in the coordination of work done by auditors of
components and experts
❑ Proper utilization of experience gained from previous years’
engagements and other assignments.
 FACTORS THAT AFFECT THE NATURE AND
EXTENT OF AUDIT PLANNING:

❑ The size and complexity of the entity

❑ Changes in circumstances that occur during the audit

engagement

❑ The auditor’s previous experience with and

understanding of the entity

❑ The composition and size of the audit team

 MAJOR AUDIT PLANNING
ACTIVITIES:
1. Obtaining an understanding of the client and
its environment;
2. Assessing the possibility of non-compliance
3. Establishing materiality and risk assessment
4. Identifying related parties
5. Performing preliminary analytical procedures
6. Determining the need for experts
7. Development of the overall audit strategy and
detailed audit plan
8. Preparation of preliminary audit programs
 MAJOR AUDIT PLANNING ACTIVITIES

UNDERSTANDING OF THE CLIENT AND ITS

ENVIRONMENT
❑ Required understanding of the following:
1. Industry, regulatory and other external factors including
the applicable financial reporting framework
2. Nature of the entity
3. Entity’s selection and application of accounting policies,
including the reasons for changes thereto
4. Objectives and strategies and the related business risks
that may result in risks of material misstatement
5. Measurement and review of the entity’s financial
performance
6. Internal control
 UNDERSTANDING OF THE CLIENT AND ITS
ENVIRONMENT
❑ Need knowledge and understanding of how a client’s
internal control works:
1. What control exists;
2. Who performs them;
3. How various types of transactions are processed and
recorded;
4. What accounting records and supporting documentation
exist
 UNDERSTANDING OF THE CLIENT AND ITS
ENVIRONMENT
❑ Client’s Internal Control System (ICS) – the
preliminary assessment of the ICS is based on the
five components of the internal control:
1. Control Environment;
2. Risk Assessment;
3. Control Activities;
4. Information and Communication; and
5. Monitoring
 UNDERSTANDING OF THE CLIENT AND ITS
ENVIRONMENT
❑ An effective internal control system requires that:

➢ Each of the five components of internal control are

present and functioning

➢ The five components are operating together in an

integrated manner.
 MAJOR AUDIT PLANNING ACTIVITIES

ASSESSING THE POSSIBILITY OF

NON-COMPLIANCE
❑ NONCOMPLIANCE – refers to acts of omission or
commission by the entity being audited, either
intentional or unintentional, which are contrary to
the prevailing laws or regulations.
❑ Requires obtaining a GENERAL UNDERSTANDING of
the Legal and Regulatory Framework applicable to
the entity and the industry and how the entity is
complying with that framework.
 ESTABLISHING MATERIALITY AND
ASSESSING RISK
❑ Quantitative materiality thresholds or the maximum
errors are established at three levels:
1. OVERALL MATERIALITY – is an amount set to establish
whether or not the FS can be regarded as materially
misstated.
2. PERFORMANCE MATERIALITY – is the amount set at less
than the overall materiality to lower the risk of not being
able to detect uncorrected and undetected misstatements
which in the aggregate, may be considered material for the
overall financial statements.
 ESTABLISHING MATERIALITY AND
ASSESSING RISK
❑ Quantitative materiality thresholds or the maximum
errors are established at three levels:
3. SPECIFIC MATERIALITY – refers to the amount or
amounts set at less than overall materiality for particular
classes of transactions, account balance or disclosures
which may reasonably be expected to influence the
economic decisions of users taken on the basis of FS.
 ESTABLISHING MATERIALITY AND
ASSESSING RISK
❑ CALCULATING MATERIALITY is established through
these steps:
a. Selecting an appropriate benchmark.

b. Identifying appropriate financial data for the selected

benchmark.

c. Calculating materiality based on established percentages.

 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK
❑ Uses of materiality in planning the audit:
1. To determine the nature, timing and extent of risk
assessment procedures;
2. To identify and assess risk of material misstatement; and
3. To determine the nature, timing and extent of further
audit procedures.
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK
❑ Considering materiality throughout the audit:
1. Planning stage: (a) To identify and assess risks of
material misstatements; (b) To determine the nature,
timing and extent of further audit procedures
2. Testing stage – materiality levels set during audit planning
are simply updated / revised if necessary
3. Completion stage – To evaluate the effect of uncorrected
misstatements, if any, on the FS and in forming the
opinion in the auditor’s report
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK
❑ TOLERABLE MISSTATEMENT – is the amount of
planning materiality that is allocated to an account
balance or class of transactions. The process of
allocation may be done judgmentally or using formal
quantitative approaches.
❑ The lower the tolerable misstatement, the more
extensive the required audit procedures.
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK

❑ MATERIALITY LEVELS:

1. Materiality at FS as a whole (planning

materiality or overall materiality)
2. Materiality at assertion level (tolerable
misstatement)
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK

❑ RISK – is the probability of an act or event occurring

that would have an adverse effect in the
achievement of an agency’s objectives. Thus, the
threat that an event, action or inaction will adversely
affect the agency’s ability to successfully achieve its
mandate and objectives and execute its strategies is
defined as agency risk.
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK
❑ ASSESSING THE RISKS OF MATERIAL MISSTATEMENT:
➢ The auditor is required to perform the following -
1. Identify risks by considering the understanding of the
entity and its environment and by considering the
classes of transactions, account balances, and
disclosures in the FS;
2. Relate the identified risks to what can go wrong at the
assertion level; and
3. Consider whether the risks are of a magnitude that could
result in a material misstatement of the FS.
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK

Obtain an understanding of the

Assess inherent risk
entity and its environment

Obtain an understanding of the

Assess control risk
internal control structure

❑ The more reliable internal controls are, the lesser the

substantive test procedures to apply in auditing year-end
balances.
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK
❑ SIGNIFICANT RISKS

Non-routine transactions are transactions that are unusual, either due to size
or nature and that therefore occur infrequently.
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK
❑ ASSESSING THE RISKS OF MATERIAL MISSTATEMENT:
 MAJOR AUDIT PLANNING ACTIVITIES

ESTABLISHING MATERIALITY AND

ASSESSING RISK
❑ ASSESSING THE RISKS OF MATERIAL MISSTATEMENT:

The higher the combined assessments of

inherent and control risks, the lower the amount
of detection risk that can be accepted. The
lower the acceptable detection risk, the greater
the amount of audit procedures to be performed
in order to reduce the chances of not detecting
misstatements.
 MAJOR AUDIT PLANNING ACTIVITIES

IDENTIFYING RELATED PARTIES

❑ RELATED PARTY TRANSACTION is a transfer of

resources, services or obligations between related
parties, regardless of whether a price is charged.
❑ The Auditor needs to be aware of them because:
1. May require disclosure in the FS of certain related party
relationships and transactions;
2. May affect the financial statements
3. The source of evidence affects the auditor’s assessment of its
reliability.
4. The related party transaction may be motivated by other than
ordinary business considerations, for example, profit sharing
or even fraud.
 MAJOR AUDIT PLANNING ACTIVITIES

PERFORM ANAYLTICAL PROCEDURES

❑ ANALYTICAL PROCEDURES – refer to evaluations of
financial information made by a study of plausible
relationships among both financial and non-financial
data.
❑ ANALYTICAL PROCEDURES – encompass the
investigation of identified fluctuations and relationships
that are inconsistent with other relevant information or
deviate significantly from predicted amounts.
❑ ANALYTICAL PROCEDURES – required to be performed in
planning and in the final review stages of the audit, BUT
not as substantive test procedures in gathering audit
evidence.
 MAJOR AUDIT PLANNING ACTIVITIES

PERFORM ANAYLTICAL PROCEDURES

❑ ANALYTICAL PROCEDURES DURING PLANNING STAGE

- primary objective is to enhance the
auditor’s understanding of the client, its
business and the industry in which the
client operates and to identify areas of
potential risk.
 MAJOR AUDIT PLANNING ACTIVITIES

DETERMINING THE NEED FOR EXPERTS

❑ SITUATIONS which may warrant the use of an EXPERT:

1. Valuations of certain types of assets (e.g. precious
stones);
2. Determination of quantities or physical condition of
assets (e.g. minerals stored in stockpiles; petroleum
reserves);
3. Determination of amounts using specialized techniques
or methods (e.g. actuarial valuation);
4. The measurement of work completed and to be
completed on contracts in progress;
5. Legal opinions concerning interpretation of agreements,
statutes and regulations.
 MAJOR AUDIT PLANNING ACTIVITIES

DEVELOPMENT OF THE AUDIT STRATEGY

❑ OVERALL AUDIT STRATEGY – sets the

scope, timing and direction of the audit, and
guides the development of the more
detailed audit plan.
 MAJOR AUDIT PLANNING ACTIVITIES

DEVELOPMENT OF THE DETAILED AUDIT PLAN

❑ DETAILED AUDIT PLAN – addresses the

various matters identified in the overall
audit strategy, taking into account the need
to achieve the audit objectives through the
efficient use of the auditor’s resources.
 MAJOR AUDIT PLANNING ACTIVITIES

PREPARATION OF THE PRELIMINARY

AUDIT PROGRAMS

❑ AUDIT PROGRAM – is the most important control

mechanism in an audit

❑ AUDIT PROGRAM – is a list of procedures (tests of

controls or substantive tests) used to gather sufficient
appropriate audit evidence.

Auditors would normally modify these audit

programs to suit the client’s conditions, situations
and peculiarities.
 MAJOR AUDIT PLANNING ACTIVITIES

PREPARATION OF THE PRELIMINARY

AUDIT PROGRAMS

❑ TWO TYPES OF AUDIT PROGRAMS:

1. TESTS OF CONTROLS AUDIT PROGRAM – prepared when

the auditor has identified controls which he/she plans to
rely on (reliance approach).
2. SUBSTANTIVE TEST AUDIT PROGRAM – prepared
regardless of the approach taken by the auditor
(reliance or no reliance).
 TIMING OF AUDIT WORK
❑ SIGNIFICANT DATES – AUDIT ENGAGEMENTS
1. Physical Inventory Count;
2. Confirmation of receivables;
3. Commencement of fieldwork;
4. Submission of required schedules and analyses;
5. Work-papers and data for consolidation to arrive from
other locations;
6. Closing conference;
7. Submission of auditor’s report and management letter;
8. Issuance of special report, if any;
9. Availability of financial statements for BOD’s meeting
10.Filing of financial statements/returns with BIR, SEC and
other agencies
 OTHER PLANNING CONSIDERATIONS
❑ Arrangements for Company Assistance

❑ Consider the Work of the Internal Auditors

❑ Direction, Supervision and Review