Aud Theo Chapt 5

Audit Planning

- we're developing a general strategy as well a detailed approach for the expected nature of the audit,
timing of the audit and extent of the audit
- developing general audit strategy and detailed approach for a expected conduct of the audit
- auditor's main objective in planning the audit: to determine the scope of audit procedures to be
performed
- so that it will be performed in an effective and efficient manner
- auditor will plan to perform an audit in an efficient and timely manner
- extent of planning will vary accdng to the size of the entity, complexity of the audit and auditor's exp with
the entity and knowledge of the business
- right amount of time, effort and evidences obtain to be able to say that its efficient and timely ng the way
ka nagaudit

Nature of the Audit

Interim? Year End?

Timing of the Audit

When to start? Sept because interim or January kasi year end

Extent of the Audit

How big is the company/client?
How many ppl need in a team for the servicing team?

Importance of the Audit Planning:

1. To specifically assigned or devote ung team members kung saan ung mga big areas or key focus
areas (problematic accounts, revenue recognition(are they ff PFRS 15), mngt override of controls,
acctng for and evaluation of financial instruments, employee benefits, taxation, going concern
2. Ensure appropriate attention is devoted to important areas of the audit
3. Help identify potential problems/issues in a timely basis
4. Allows work to be completed expeditiously
5. Assist in proper assignment and coordination of work
6. Help to ensure that audit is conducted effectively and efficiently
7. Organize and manage the engagement as a whole, which is need to be efficient and effective
8. Choice of Engagement Team Members
 9. Facilitate the directions and mngt of the engagement team members and facilitate to review of
work
10. Identify experts u need for the team (can be internal or external)

Subdivide Audit planning into:

1. Audit Strategy
-general terms of the audit to be conducted
-set of scope and timing and direction of the audit
-overall set of scope, timing and direction
-pag meron ka na neto dito madedevelop ang audit plan mo
-guides of the devt of the audit plan
-Overall approach to Audit
a. Understanding the Client
b. Audit Risk
c. Materiality
d. Scope, Timing and Direction

2. Audit Plan
-detail responses to auditor's risk assessment
-detailed implementation of the audit strategy

Understanding the client

1. Have a knowledge of the business/industry, regulatory and other external factors, including
financial reporting framework
-Need: prior yr fs, discussion with the previous auditor, access to their files if permitted
2. Nature of entity including entity's selection and application of accounting policies
-type of entity, acctnf policies, legal structure, pano ung ownership -parent/subsidiary, main
sources of finance
3. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements
-ano ba ung KPI (key perf  indicators) of the company-budgets and targets
4. Internal Control
-keen understanding how the internal control was designed and how is it being implemented
5. Measure and review of the entity's perf
 -you can read prior yr fs, client's acctng systems, manuals, board minutes, client's website, budgets,
discussion with ppl within and outside the entity, books, periodicsls and other publications, corporate
documents and financial reports, client's facilities (sources of information)
-how and whyba client does and what it does
-should obtain sufficient level of knowledge of the entity
-to identify and understand events and transactions that may have significant effect on fs
-understands operations of the client may able to evaluate the reasonableness if the clients's
estimates
-to choose uniquely applicable procedures
-increases the likelihood of identifying risk of material misstatement
-and design appropriate audit procedures
-continuous and cumulative process
-for continuing engagement, should update and re-evaluate

 Additional Consideration on New Engagements/First-time Audit/New Client

-have special and additional consideration
-background checks
-more work than recurring client
-verification of opening balances of the bs (kaya ka kumakausap sa previous auditor, u can also as for
working paper but have to pay)
-PSA 510 requires the auditor obtain sufficient appropriate audit evidence that
1. opening balances dont contain misstatements materially affect current fs
2. prior closing balances have been correctly brought forward
3. appropriate acctng policies are consistently applied

Understanding the Internal Control

-important step in planning an audit
-sufficient to llan the audit and develop effective audit approach
-internal control systems

Developing Overall Audit Strategy

-need to know gaano kadami ang evidence na dapat maobtain mo from the client (how much evidence to
accumulate)
-best audit strategy is the approach thst results in the most efficient audit that is an effective audit
performed at leaset possible cost
-paano mo siya gagawin? and when? (how and when this should be done)
    *is it personal kamagchecheck  or via email or scanned copy lang (depends)
once may audit strategy, u need develop materiality

 Materiality
-is to determine ano ang audit risk mo
-define by FRSC "Framework for the Preparation and Presentation of the FS in the ff terms: Information is
material if its omission or misstatement could influence the economic decision of users taken on the basis
of the fs
-it determines gaano kamaterial mga omissions and misstatements doon ss fs, which changes the
interpretation of the fs
-di basta bsta kinokompute kinoconsider ang historical data, nature of the company, benchmark to be
used, industry
-preliminary estimate of materiality
-this is a matter of professional judgement
-quantitative factors (amount of item in relation to fs)
-qualitative factors (nature of misstatement)
-concept of materiality recognizes thats some matters are important to fair presentation and others are not

Materiality may viewed:

1. Largest amount of misstatement that the auditor could tolerate in the fs (pwede mong tanggapin o
matolerate) (threshold) or
2. Smallest aggregate amount that could misstate the fs (pinakamaliit misstatement pag pinagsasama
lahat ng mga misstatement, dapat ito na ung pinakamaliit na)

Importance of Materiality:
   -inversely related to audit evidence
   -lower materiality, mas madaming evidence ka dapat makuha
   -mataas materiality, less na need mo makuhang evidence
   -more evidence will be required for a low peso amount of materiality than for a high peso amount
   -should make preliminary estimate of materiality to determine amount if evidence to accumulate
  
Uses of Materiality:
   -accdng to PSA 320 materiality should be considered by the auditor in:
   -planning stage - to determine the scope of the audit procedures
   -completion phase-to evaluate the effect of the misstatements on the fs, reassess the materiality esp
when there's adjustments during the audit (if bumaba u might further testing pa or inquiry) (pag tumaas
naman, confident ka na)
3 steps on how to compute materiality levels
Step 1 Determine the Overall Materiality - Financial Statement Level
  -determine amount of misstatement that could be material to fs taken as a whole
  -consider that fs are interrelated-that misstatement on one fs usually affects the other
  -if set too low, may waste time in auditing not important
  -if set too high, may not detect material. misstatements
  -multiply statement base by a certain percentage
  -u need to know first the statement base (total assets, sales, net income, total liabilities) -depends on the
industry u are auditing, nature of company
  -u need to determine or iassess mo if ung nacompute mo bang materiality is masyado bang mababa or
masyado bang mataas kasi di pwedeng either doon sa dalawa, pano malalaman? professional judgement
  -may icoconsider ka lagi, kike prior yr materiality computation, movements of the balances in the fs

Step 2 Determine the tolerable misstatement-Account Balance Level/Performance Materiality

  -once overall materiality is established, auditor determines materiality at the account balance level
  -done by allocating overall materiality to the fs balances
  -allow auditors to determine audit procedures that will be applied ti specific accounts
  -allocated materiality to an account is called Tolerable Misstatement/Performance Materiality
  -this is highly subjective and requires the exercise of great deal of judgment
  -may certain percentage din ito, 75% of the materialityusually but depends on audit firm, purely base on
prof judgment
  -pinaka threshold sa subaccounts under fs
  -2nd level, mas mababa sa materiality, this is  level by level
  -Audit Misstatement Posting Threshold - pinakamaliit na amount, usually 5% of the materiality
  -Amount Materiality Posting Threshold - threshold for the accnts under the subaccnts
 
Step 3 Compare the Aggregate Amount of Uncorrected Misstatements with the Overall Materiality
   -auditor will have to compare in the (preliminary estimate of materiality or revised materiality level to
determine whether or not the fs are materially misstated
   -its either ampt or sa pm or materiality as a whole kung pasok ba siya, step by step siya kung nga
transactional misstatements, level by level hanggang sa mapunta sa overall materiality kaya may
tinatawag na accumulation of uncorrected misstatements

Bases that can be used to determine the materiality need:

 1. Annualized interim fs
2. Prior yr fs
3. Budgeted fs of the current yr

Planning stage
1. Determine the Overall Materiality -FS Level
2. Determine the tolerable misstatement-Account Balance Level
3. Perform Audit Procedures

Completion Stage
4. Compare the aggregate amount of misstatement with overall materiality

Audit Risk Model

Audit Risk
-design audit to provide reasonable assurance
-use prof judg to assess audit risk and design audit procedures to ensure it is reduced to an acceptably
low level
-designing substantive audit procedures, three main issues
1. What level of assurance wish to attain?
2. How susceptibke is the account to material misstatement?
3. How effective is the client's internal control in preventing/detecting misstatements?
-risk to provide unqualified opinion where in reality hindi naman because may mga di tayo nadetect na
material misstatements
-gives inappropriate audit opinion
-because of the inherent limitations of the audit the auditor cannot totally
-desired level of audit risk decreases, the auditor should design more effective substantive
procedures/higher extent of substantive procedures(inverse r-ship)
-during planning

3 issues are the preliminary basis for the devt of audit risk model:
1. Inherent Risk
-susceptibility of an account balance or class of transactions  to a material misstatement assuming
there were no related internal controls.
-during risk assessment
-by nature some accnts are more susceptible to misstatement than others
-likely to be misstated/prone to maybe based on complex computations like pensions
 -As the assessed level of inherent risk increases, auditor should design more effective substantive
procedures
-functions of mgnt, can only be assess
-PSA 315 requires auditor to assess inherent risk at fs and account balance or transaction class
levels
-Factors affect the risk of misstatement at fs level:
a. Mgnt Integrity
b. Mgnt Characteristics
c. Operating Characteristics
d. Industry Characteristics
-Factors affecting inherent risk at account balance level
a. Susceptibility of account tot theft
b. Complexity of computations
c. Complexity underlying transactions and other events
d. Degree of judgment involved in determining account balances
  
  
2. Control Risk
-risk that material misstatements could occur in account balance or class of transactions will not be
prevented or detected and corrected on timely basis by acctng and internal control systems
-related to effectiveness of client's internal control
-internal control is effective. assessed level decreases
-functions of mgnt, can only be assess
-assessed level of control risk increases. more effective substantive procedures
-during internal control's testing
3. Detection Risk
-risk that the auditors substantive procedure will not detect a material misstatement
-acceptable level of detection risk decreases, the assurance directly provided from substantive tests
increases
-can be controlled by performing more effective substantive procedures
-inversely related to the assessed level of inherent and control risks
-function of the auditor
-during substantive procedures

Steps in Using Audit Risk Model

Step 1 - Set the desired level of audit risk
Step 2 - Assess the level of inherent risk
-every accnt or assertion has a built-in risk of being misstated
-auditor will rely in knowledge of the client's business and industry and results in preliminary analytical
procedures
Step 3 - Assess the level of control risk
-would involve studying and evaluating the effectiveness if the client's accounting and internal control
systems
Step 4 - Determine the acceptable level of detection risk
-by rearranging the audit risk model
-Audit risk = IR*CR*DR
-Detection risk = AR/IR*CR
Step 5 - Design substantive tests

Audit Risk Model

Audit Planning
- Set Desired Level of Audit Risk
- Assess Inherent Risk
Consideration of Internal Control
-Assess Control Risk
Performing Substantive Tests
-Determine Acceptable Level of DR

Relationship bw Materiality and Risk

-Auditor's assessment of materiality related to specific account helps to selct audit procedures that can be
expected to reduce audit risk
-inverse relationship
-higher materiality level, lower the audit risk

MATERIALITY AUDIT RISK PLANNED AUDIT PROCEDURES

1.high 1. Low 1.more extensive

2.low 2. High 2.less extensive

Risk Assessment Procedures

-obtain an understanding of the entity and its environment including internal control and to assess risk of
material misstatements in fs called rap includes:
a. Inquiries of mgnt and others within the entity
b. Analytical procedures
c. Observation and inspection

Analytical Procedures
-involve analysis of significant ratios and trends
-including resulting investigation of fluctuations and r-ships that are inconsistent with other relevant info
-basic premise underlying the use of analytical procedures is that plausible r-ships among data may
reasonably be expected to exist and continue in the absence of known conditions to the contrsry
-PSA 520 requires to used analytical procedures in the planning and overall review stages of the audit

Steps in Applying Analytical Procedures

-help the auditor in identifying unusual transactions and events that nay affect fair presentation of the fs

Step 1 - Develop Expectations regarding FS

-using:
-prior yr's fs
-anticipated results such as budgets or forecasts
-Industry averages (FS of other entities opersting within the same ind)
-non financial info
-typical r-ships among fs account balances

Step 2 - Compare the Expectation with the FS under Audit

-to identify significant fluctuations thatbare inconsistent with auditor's knowledge kr that deviate from
predicted amounts

Step 3 - Investigate Significant Differences

-unusual fluctuations to determine whether the fs contain material misstatements
-begins with inquiries if mgnt
-followed by corroboration of mgnt response and
-applying other appropriate audit procedures

Uses of Analytical Procedures

-may be used for the ff purposes:
1. as a Planning tool
- to determine the nature, timing and extent of other audit procedures
- to understand the client's business
- to identify areas that may represent specific risks
2. as a Substantive Test
- to obtain corroboration evidence about particular assertions related to the account balance or
transaction class
- to obtain evidence to confirm or refute individual account balances
3. as an Overall Review of the fs in the completion phase of the audit
-to identify unusual fluctuations that were not identified in the planning and testing
-to confirm conclusions reached with respect to the fairness of the fs

Using Analytical Procedures as a Planning Tool

1. Compare FS with expectations

2. Determine the diff bw expected and recorded balances
3. In the difference significant
4. Design less/more extensive substantive tests.

Documenting the Audit Plan

-final step in the planning process is the documentation of the audit planning process by preparing an
overall audit plan, audit program and time budget

Audit Plan
-an overview of the expected scope and conduct of the audit. The overall audit plan sets out in broad
terms in the nature timing and extent of the audit procedures to be performed.
-varies for each client
-it should be sufficiently detailed to guide in the devt of an audit program

Audit Program
-should develop and document an audit program setting out the nature, timing and extent of the planned
audit procedures required to implement the overall audit plan
-audit program executes the audit strategy
-it sets out detail the audit procedures to be performed un each segment of the audit
-serves as a set of instructions to assistants involved in the audit and as a means to control and record
the proper execution of the work
-form and content may vary for each particular engagement
-should always include a detailed list of audit procedures that the auditor believes are necessary to
accomplish the audit objectives

Time Budget
-estimate of the time that will be spent in executing the audit procedures listed in the audit program.
-provide basis for estimating audit fees
-assist the auditor in assessing the efficiency of the assistants

Changes to audit plan and program

-planning is continuous throughout the engagement
-because conditions or unexpected results of audit procedures
-should be revised as necessary during the course of the audit and reasons for significant changes would
be recorded.