Chapter 5

Audit Planning
and Types of
Audit Tests

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
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 LO# 1
The Phases of an Audit That Relate to
Audit Planning

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 LO# 2

Establish Terms of the

Engagement
In establishing the terms of the engagement,
three topics must be discussed:
1.The engagement letter;
2.The internal auditors; and
3.The audit committee.

The terms of the engagement, which are documented in

the engagement letter, should include the objectives of
the engagement, management’s responsibilities, the
auditor’s responsibilities, and the limitations of the
engagement.

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 LO# 3

The Engagement Letter

The engagement letter formalizes the arrangement reached
between the auditor and the client.
In addition to the items mentioned in the
sample engagement letter in Exhibit 5-1 in
the textbook, the engagement letter may
include:
• Arrangements for use of specialists or
internal auditors.
• Any limitations of liability of the auditor
or client.
• Additional services to be provided.
•Arrangements regarding other services. 5-4
 LO# 4

Internal Auditors

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 LO# 5

The Audit Committee

Section 301 of Sarbanes-Oxley Act requires the
following for audit committee members of
publicly held companies:
Subcommittee
of the board of •Member of board of directors and independent.
directors
•Directly responsible for overseeing work of any
registered public accounting firm employed by the
company.
No specific
requirements •Must pre-approve all audit and non-audit services
provided by its auditors.
for privately
held companies •Must establish procedures to follow for complaints.

•Must have authority to engage independent counsel.

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 LO# 6

Preliminary Engagement Activities

Determine the Audit

Engagement Team
Requirements

Assess Compliance with

Ethical Requirements,
Including Independence

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 LO# 7

Planning the Audit

When preparing the audit plan, the auditor should be guided
by the results of the risk assessment procedures performed
to gain an understanding of the entity.
Additional steps:
•Assess business risks and establish
materiality.
•Assess the need for specialist. Let’s look at each
•Assess the possibility of illegal acts. of these steps.

•Identify related parties.

•Conduct preliminary analytical
procedures.
•Consider additional value-added services.
•Document Audit Strategy and Plan and
Prepare Audit Programs.
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 LO# 7

Document Audit Strategy

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 LO# 8

Types of Audit Tests

Used to obtain an understanding of

Risk Assessment
the entity and its environment,
Procedures including its internal control.

Directed toward the evaluation of the

Tests of Controls effectiveness of the design and
operation of internal controls.

Detect material misstatements in a

Substantive transaction class, account balance,
Procedures and disclosure component of the
financial statements.

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 LO# 9

Purposes of Analytical Procedures

Preliminary Used to assist the auditor to better
understand the business and to plan the
Analytical nature, timing, and extent of audit
Procedures procedures.

Substantive Used to obtain evidential matter about

Analytical particular assertions related to account
balances or classes of transactions.
Procedures

Final Used as an overall review of the financial

Analytical information in the final review stage of the
audit.
Procedures
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 Substantive Analytical Procedures LO# 9

Decision Process
Figure 5-2 Overview of the Auditor’s Decisions Process for Substantive Analytical Procedures

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 Audit Testing Hierarchy
LO# 10

Figure 5-4 Audit Testing Hierarchy: An Evidence Decision Process for Testing Significant
Balances or Classes of Transactions

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 LO# 11

Financial Ratios
 Short-term Liquidity Ratios
 Activity Ratios

 Profitability Ratios

 Coverage Ratios

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 End of Chapter 5

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
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