Audit Planning

Learning Objectives

After studying this module, the students are expected to:

§ define and describe auditing;

§ identify and explain the different phases of performing
an audit;
§ describe the different audit considerations in accepting
an engagement; and
§ identify and explain the nature of pre-engagement
activities and its purpose.
 Agenda

§ Introduction to Audit and Assurance

§ Objectives of an auditor in an FS audit
§ Management assertions
§ Phases of the audit process
Introduction to Audit and Assurance

Assurance services

Audit

Assurance services are three-party contracts in which the assurers

reports on the quality of information.
Introduction to Audit and Assurance

Assurance services

Audit

Assurance services are three-party contracts in which the assurers

reports on the quality of information.

Three-party
relationship:
Appropriate subject Sufficient appropriate Written assurance
practitioner, Suitable criteria
matter evidence report
responsible party,
intended users
Introduction to Audit and Assurance

Assurance services

Audit

Assurance services are three-party contracts in which the assurers

reports on the quality of information.

Auditing is a systematic process of objectively obtaining and evaluating

evidence regarding selected assertions about economic actions and
events to ascertain the degree of correspondence between those
assertions and established criteria and communicating the results to
interested users.
 Objectives of Independent Auditor
in the audit of Financial Statements

• To obtain reasonable assurance about whether the

financial statements as a whole are free from
material misstatement, whether due to fraud or
error, and

• to express an opinion on whether the financial

statements are prepared, in all material respects, in
accordance with an applicable financial reporting
framework
 Responsibilities of Management and
Those Charged With Governance
• Preparation and presentation of the financial
statements in accordance with the applicable financial
reporting framework.

• Design, implementation and maintenance of internal

control relevant to the preparation and presentation
of financial statements
 Conduct and Scope of an Audit in
Accordance with PSAs
• The auditor shall comply with all PSAs relevant to the audit.

• If compliance with PSA cannot be achieved, the auditor shall

modify his opinion or withdraw from the engagement

• Scope of an audit refers to the audit procedures that, in the

auditor’s judgment and based on the PSAs, are deemed
appropriate to achieve the objectives of the audit
 Professional Skepticism. . . Be alert. .

An auditor should be alert about. . .

• audit evidence that contradicts other audit evidence
obtained

• information that brings into question the reliability of

documents and responses to inquiries to be used as
audit evidence

• conditions that may indicate possible fraud

 Audit Evidence

• Audit evidence is all the information obtained and used

by the auditor in arriving at the conclusions on which
the audit opinion is based.

• The auditor should obtain sufficient appropriate audit

evidence
 Management Assertions

• Auditor shall gather audit evidence regarding the

assertions (i.e., representations) of management in their
financial statements.

• Broadly speaking, assertions include: presentation and

disclosure, existence and occurrence, rights and
obligations, completeness and valuation and allocation
 Financial Statement Assertions

EXISTENCE/ COMPLETENESS RIGHTS AND

OCCURRENCE OBLIGATIONS

VALUATION/ PRESENTATION AND

ALLOCATION DISCLOSURE
 Audit Risk

• The likelihood or possibility that the auditor expresses an

inappropriate audit opinion when the financial statements
are materially misstated.

• Audit risk may be assessed either in quantitative (e.g., ten

percent of total assets) or non-quantitative terms (e.g., high,
moderate, or low)

• Audit risk is a function of the possibility of material

misstatement and the possibility that the auditor will not
detect such misstatement
 Components of Audit Risk

• Inherent risk - - the susceptibility of an assertion to a

misstatement that could be material assuming that there
were no related internal controls

• Control risk - - the likelihood that a misstatement that could

occur in an assertion and that could be material and will not
be prevented, detected or corrected on a timely basis by the
entity’s internal control

• Detection risk - - the likelihood that the auditor will not

detect a misstatement that exists in the financial statements
 Professional Judgment

• In auditing, professional judgment. . . is the application of

relevant knowledge and experience, within the context
provided by auditing, accounting and ethical standards, in
reaching decisions about the courses of action that are
appropriate in the circumstances of the audit engagement

• Professional judgment needs to be exercised throughout the

audit.

• Application and exercise of professional judgment shall be

appropriately documented
 Phases of the Audit Process

PRE- PLANNING EXECUTION CONCLUSION

ENGAGEMENT

• Acceptance/ • Risk • Study and • Communicate

continuance assessment evaluation of control and
• Agreeing to the procedures internal control accounting
terms of • Understanding • Test of controls issues and book
engagement the client and its • Substantive audit
(PSA 210) environment tests adjustments
(PSA 315) • Final analytical
• Establish review
materiality • Sign the audit
• Develop overall report
audit strategy
 Principal Contents of an Engagement Letter

• Reports and other communication of results of the audit

• Auditor’s responsibilities
• Access to records and other information needed by
auditor in connection with the audit
• Management’s responsibilities
• Basis of fees and and billing arrangement
• Objective of the engagement
• Scope of the audit
 Audit Planning

• Involves establishing the overall audit strategy for the

engagement and developing an audit plan.

• Involves:
– obtaining an understanding of the client and its environment,
– establishing materiality and audit risk,
– assessing the possibility of non-compliance,
– identifying related parties,
– performing preliminary analytical, and
– developing preliminary audit program
Major Audit Planning Activities
• Understand the client and its environment
• Assess the possibility of non-compliance
• Establish materiality and assess risk
• Identify related parties
• Perform Preliminary Analytical Procedures
• Determine the need for experts
• Develop the overall audit strategy
• Preparation of Preliminary Audit Program
 Risk Assessment Procedures (RAP)
• RAP - - a major category of audit procedures designed to
obtain an understanding of the the entity (ie., the client)
and its environment, including the client’s internal
control.

• RAP Procedures include:

– Inquiries - of management and others within the entity
– Observation - and inspection, and
– Analytical procedures
 Obtain an Understanding
of the Client and Its Environment

Requires an understanding of the following:

• Industry, regulatory and other external factors, including
the applicable financial reporting framework

• Nature of the entity (i.e., operations, governance

structures, investment appetite)

• The entity’s accounting policies, including the reasons for

changes thereto.
 Obtain an Understanding
of the Client and Its Environment..cont’d.

• Objectives and strategies and the related business risk

that may result in risks of material misstatements

• Measurement and review of the entity’s financial

performance

• Internal control
Assessing the Possibility of Non-Compliance

• ‘Non-compliance’ 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.
Establishing Materiality and Assessing Risk

• Establish a preliminary judgment about materiality.

• Determine tolerable misstatement.

• Estimate likely misstatements and compare the totals

to the preliminary judgment about materiality.
 Materiality

• Materiality is a relative concept.

• Information is material if its omission or misstatement

could influence the economic decisions of users taken
on the basis of the financial statements.

• The assessment of what is material is a matter of

professional judgment of the auditor.
 The Effect of Materiality
on Audit Procedures
• The amount of tolerable misstatement assigned to
an account affects the extent of audit procedures.

• The lower the tolerable misstatement, the more

extensive the required audit procedures.

• The concept of materiality recognizes that auditors

work within constraints of time and cost.
 Performing Analytical Procedures

• Analytical procedures refer to evaluations of financial

information made by a study of plausible
relationships among both financial and non-financial
data.

• These procedures are required to be performed in

the planning and in the final review stages of the
audit, but not required as substantive test procedure
 Analytical Procedures During Planning

• The primary objective in performing analytical

procedures in the planning stage of the audit, 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 of
material misstatements.
 Study and Evaluation of Internal Control

• Obtain an understanding of the client’s internal control

structure.

• The study and evaluation of client’s internal control will

serve as the basis of the auditor in assessing control risk
and in ultimately determining the nature, timing and
extent of substantive test procedures
 Substantive Testing

• Procedures used to detect material misstatements in

account balances, classes of transaction and disclosures.

• Substantive test procedures are classified as tests of

details and analytical procedures

• Evidences obtained thru substantive tests procedures

serve as basis in forming audit report
 Completing the Audit

• At this stage, the auditor communicates the updated list

of findings to management and to those charged with
governance

• Involves:
– Performing final analytical analytical procedures
– Obtaining management representation letters
– Summarizing and evaluating audit findings
– Reviewing the audit staff working papers
 Issuance of the Auditor’s Report

• Finally, the auditor issues an opinion regarding the

fairness of the financial stataements.

• Types of audit opinion are:

– Unqualifed opinion
– Qualified opinion
– Adverse Opinion
– Disclaimer of opinion
 Post-Audit Responsibilities

• Debriefing - - - this phase of the audit process involves

assessing and evaluating the quality of delivery of the audit
service team

• Usually involves:
– Considering events during the audit
– Analyzing the activities within the audit
– Producing recommendations
– Archiving audit documentation
Questions?