City College of Calamba

After studying this chapter, you should be able to:

1. Explain audit planning.
2. Identify and explain the major audit planning activities.
3. Identify considerations in establishing audit strategy.
4. Describe the difference of audit strategy, audit plan and
audit program.
5. Identify the activities in risk assessment.
6. Describe audit risk and its components and how will it affect
the audit procedures.
Primary objective - to plan the audit so that the audit
will be performed in an effective manner. However,
adequate planning also leads to an efficient and
timely audit engagement.

Planning as a phase of the audit process

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.
Audit Planning - involves establishing the overall
audit strategy for the engagement and developing
an audit plan. Benefits:
Appropriate attention is devoted to important
areas
Potential problems are identified and resolved on
a timely basis
Proper organization and management of the audit
engagement lead to an effective and efficient
performance
Work is properly assigned to appropriate
engagement team members
Assistance in coordinating work done by other
auditors and experts
Assistance in facilitating direction, supervision
and review
The nature and extent of planning activities will vary
according to the:
Size and complexity of the entity
Previous experience with the entity of key
engagement team members (partner,
manager, and staff-in-charge)
Changes in circumstances that occur during the
audit engagement
Timing of the appointment of the independent
auditor
Planning is required regardless whether it is a new
engagement or recurring engagement. Planning
activities may differ from one client to another client
but normally includes the following:
1. Obtaining an understanding of the client and its
environment
2. Determining the need for experts
3. Determining the appropriateness of management use
of going concern assumption
4. Establishing materiality and assessing risks
5. Assessing the possibility of non-compliance
6. Identifying related parties
7. Performing preliminary analytical procedures
8. Development of the overall audit strategy and
detailed audit plan
9. Preparation of preliminary audit programs.
 THE OVERALL AUDIT STRATEGY
AND AUDIT PLAN
Overall Audit Strategy
-sets the scope, timing and direction of the audit, and that guides the
development of the audit plan. In establishing the overall audit
strategy, the auditor shall:
Identify the characteristics of the engagement that define its
scope;
Ascertain the reporting objectives of the engagement to plan the
timing of the audit and the nature of the communications
required;
Consider the factors that, in the auditor's professional judgment,
are significant in directing the engagement team's efforts
Consider the results of preliminary engagement activities and,
where practicable, whether knowledge gained on other
engagements performed by the engagement partner for the
entity is relevant
Ascertain the nature, timing and extent of resources necessary to
perform the engagement
 THE OVERALL AUDIT STRATEGY
AND AUDIT PLAN
Audit Plan
After the overall audit strategy has been established, an audit plan
can be developed to address the various matters identified in the
overall audit strategy.

Audit plan - more detailed than the overall audit strategy in that it
includes the nature, timing and extent of audit procedures to be
performed by engagement team members. These procedures may
be documented in an audit program. The audit program shall serve
as a:
Set of instructions to assistants involved in the audit; and
Means to control and record the proper execution of the work.

The audit program also contains:

The audit objectives for each area; and
A time budget in which hours are budgeted for the various audit
areas or procedures.
Changes to Planning Decisions During the Course of the Audit
The overall audit plan and the audit program should be revised as
necessary during the course of the audit. Planning is continuous
throughout the engagement because of changes in conditions or
unexpected results of audit procedures.

Completion of Overall Strategy and Audit Plan

The establishment of the overall audit strategy and the detailed
audit plan are not necessarily discrete or sequential processes but
are closely interrelated since changes in one may result in
consequential changes to the other. Also, preferably, a plan shall be
initially completed prior to consideration of internal controls or
performance of specific procedures.

Planning documentation
The auditor shall document:
a. the overall audit strategy
b. the audit plan
c. any significant changes made during the audit engagement to the
overall strategy or audit plan, and the reasons for such changes
Additional Considerations in Initial Audit Engagements
The auditor may need to expand the planning activities because
he/she does not ordinarily have previous experience with the entity
that is considered when planning recurring engagements.

For initial audits, additional matters the auditor may consider in

developing the overall audit strategy and audit plan include the
following:
Arrangements to be made with the predecessor auditor to
review prior years' working papers;
Any major issues discussed with management in connection
with the initial selection as auditors, the communication of these
matters to those charged with governance and how these
matters affect the overall audit strategy and audit plan;
The planned audit procedures to obtain sufficient appropriate
audit evidence regarding opening balances; and
Other procedures required by the firm's system of quality control
for initial audit engagements.
 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.

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 assessed risks of material misstatement;
size and complexity of the entity;
the area of audit; and
capabilities and competence of personnel performing the audit
work.
Considerations Specific to Smaller Entities
When an audit is carried out entirely by an audit engagement
partner, who may be a sole practitioner, it may be desirable to
consult with other suitably-experienced auditors or the auditor's
professional body.

Identifying And Assessing The Risks Of Material Misstatement

Through Understanding The Entity And Its Environment
It is the objective of the auditor to identify and assess risks of
material misstatements, whether due to fraud or error, at the
financial statement and assertion levels, through understanding
the entity and its environment, including the entity's internal
control, thereby providing a basis for designing and implementing
responses to the assessed risks of material misstatements.
The Required Understanding of the Entity and its Environment

The auditor shall obtain an understanding of the following:

a. Relevant industry, regulatory, and other external factors including
the applicable financial reporting framework;
b. The nature of the entity, including its operations; ownership and
governance structure; types of investments that the entity is
making and plans to make; and the way the entity is structured
and how it is financed;
c. Entity's selection and application of accounting policies,
including reasons for changes thereto;
d. Entity's objectives and strategies, and those related business
risks that may result in risk of material misstatement;
e. The measurement and review of the entity's financial
performance; and
f. Internal control
 RISK ASSESSMENT PROCEDURES
RAP are audit procedures performed to obtain an understanding of
the entity and its environment, including the entity's internal control,
to identify and assess the risks of material misstatement, whether
due to fraud or error, at the financial statement and assertion levels.

Risk Assessment Procedures and Related Activities

The auditor shall:
a. Identify risks throughout the process of obtaining an
understanding of the entity and its environment, including relevant
controls that relate to the risks, and consider the classes of
transactions, account balances, and disclosures in the financial
statements;
b. Relate the identified risks to what can go wrong at the assertion
level;
c. Consider whether the risks are of a magnitude that could result in a
material misstatement of the financial statements; and
d. Consider the likelihood that the risks could result in a material
misstatement of the financial statements.
 RISK ASSESSMENT PROCEDURES
The risk assessment procedures shall include the following:
a. Inquiries of management, and of others within the entity who in the
auditor's judgment may have information that is likely to assist in
identifying risks of material misstatement due to fraud or error;
b. Analytical procedures; and
c. Observation and inspection.

Note: Risk assessment procedures by themselves, however, do not

provide sufficient appropriate audit evidence on which to base the
audit opinion.
Analytical Procedures during Planning Stage
Analytical procedures consist of evaluations of financial
information made by a study of plausible relationships among both
financial and non-financial data. Analytical procedures also
encompass the investigation of identified fluctuations and
relationships that are consistent with other relevant information or
that differ from expected values by a significant amount.

Analytical procedure is required to be performed during planning

stage and overall review stage of the audit. Analytical procedures
performed during audit planning is designed to:
1. Enhance the auditor's understanding of the entity's business and
transactions to help plan the nature, timing, and extent of
substantive auditing procedures that will be used to gather audit
evidence.
2. Identify areas that may represent specific risks (such as unusual
transactions and events or abnormal/significant fluctuations in
amounts, ratios, or trends) that the auditor may need to investigate
further
 AUDIT RISK AND MATERIALITY
Materiality
Information is material if its omission or misstatement could
influence the economic decisions 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.

The concept of materiality recognizes that some matters, but not all,
are important for fair presentation of the financial statements in
conformity with PFRS. In planning the audit, the auditor makes
judgments about the size of misstatements that will be considered
material. These judgments provide a basis for:
a. Determining the nature, timing and extent of risk assessment
procedures;
b. Identifying and assessing the risks of material misstatement; and
c. Determining the nature, timing and extent of further audit
procedures
 AUDIT RISK AND MATERIALITY
Materiality
Using professional judgment, the auditor shall determine the
following materiality:
1. Financial statement level materiality - the smallest aggregate
amount of misstatement applicable to all financial statements.
2. Assertion level materiality - materiality level for individual or
particular class of transactions, account balance, or disclosure
where appropriate; this is also known as tolerable misstatement
3. Performance materiality - amount or amounts set by the auditor
at less than materiality for the financial statements as a whole, and
if applicable, at less than materiality level or levels for particular
classes of transactions, account balances or disclosures
 AUDIT RISK AND MATERIALITY
Audit Risk
Audit risk is the risk that the auditor gives an inappropriate audit
opinion when the financial statements are materially misstated.

Components of Audit risk

1. Risk of Material Misstatement (RMM)
Inherent Risk is the susceptibility of an account balance or class
of transactions to misstatement that could be material,
individually or when aggregated with misstatements in other
balances or classes, assuming that there were no related
controls.
Control Risk is the risk that a misstatement, that could occur in
an account balance or class of transactions that could be
material, individually or when aggregated with misstatements in
other balances or classes, will not be prevented or detected and
corrected on a timely basis by the accounting and internal
control systems.
 AUDIT RISK AND MATERIALITY
Components of Audit risk
2. Risk of not Detecting the Misstatement
Detection Risk is the risk that the auditor's substantive
procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material,
individually or when aggregated with misstatements in other
balances or classes.

If the auditor wishes to reduce detection risk, procedures to be

performed shall be
a. As to nature- more effective procedures
b. As to timing- closer or nearer to year-end
c. As to extent- larger sample size
Relationships of Risk and Materiality to substantive
procedures

Risk of material misstatement Direct

(inherent and control risks)

Risk of not detecting the Inverse

misstatement (detection risk)

Inverse
Materiality
 Obtain an Establish Assess inherent risk Identify detection
understanding of materiality and set risk to determine
the entity and its desired level of the nature, timing
environment audit risk and extent of
further audit
procedures
City College of Calamba

123-456-7890