v.

Discus
REVIEWER IN AUDIT PLANNING sion
with
Objective: Plan the audit so that it will be knowledgeable people outside the entity
performed in an effective manner
OUTPUTS OF AUDIT PLANNING
1. Overall audit strategy vi. Publications related to the industry
vii. Legislation and regulations that
2. Overall audit plan significantly affect the entity
viii. Visits to entity’s premises and plant
3. Draft audit programs detailing the work to be
facilities
performed
ix. Documents produced by entity

OVERALL AUDIT STRATEGY

 Sets out the:
o Scope
o Timing
o Direction
o Guides audit plan
 Documented in a strategy document
 Often combined with overall audit plan and
included in the Audit Planning Memorandum
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 assessing risk
4. Identifying related parties
5. Performing preliminary analytical procedure
6. Determining the need for experts
7. Development of overall audit strategy and
detailed audit plan
8. Preparation of preliminary audit
A. Obtaining an understanding of the client
and its environment
 Develop an audit plan that includes description
of:
i. NTE of planned audit risk assessment
ii. NTE of planned future audit procedures at
assertion level
iii. Other planned audit procedures that are
required to be carried out so that it
complies with PSAs
 Sources of Understanding of the Entity and the
Environment
i. Previous experience with the entity and
its industry
ii. Discussion with people with the entity
iii. Discussion with internal audit personnel
and review of internal audit reports
iv. Discussion with auditor and legal and
other advisors who have provided
services to the entity or within the
industry
Risk Assessment procedures
 Audit procedures performed to obtain an
understanding of the entity to identify and
assess the risk of material misstatement
 Risk assessment procedures to be performed:
o Inquiries of management and other within
the entity
o Analytical procedures
o Observation and inspection
I. Inquiries
 Generally obtained from management and
responsible for FR
 Parties to whom inquiries can be directed to:
o Those charged with governance-
environment to which FS in prepared
o Internal Audit Personnel- design and
effectiveness of internal control
o Employees who are involved in initiating,
processing or recording complex or
unusual transaction- appropriateness of
accounting policies
o In-house legal counsel- legal matters
o Marketing or sales personnel- changes in
the entity’s marketing strategies, sales
trends, or contractual arrangement
II. Observation and inspection
 Support inquiries
 Examples:
o Observation of activities and operations
o Inspection of documents
o Reading reports prepared by management
o Visit entity’s premises and plant facilities
o Tracing transactions (walkthrough)
Required understanding of the entity and its
environment:
 Industry- misstatements in the nature of
business or degree of regulation
 Legislative and regulatory requirement-
determines applicable FRFramework
Nature of the entity
 Operations
 Ownership and Governance Structures
 Types of investments that entity is making and
plans to make
 Entity structure and how it is financed.
Entity’s selection and application of acco
policies, including reasons for change thereto
 The understanding encompasses:
o Methods in accounting significant and
unusual transactions
o Effect pf accounting policies in controversial
areas which lacks authority guidance
o Changes in acco policies
Objectives and strategies and the related
business risks that result in risk of material
misstatement
 Objectives- overall plans
 Strategies- operational approaches to achieve
the objectives
 Business risk- result from significant
conditions that could adversely affect the
entity’s ability to achieve objectives and execute
strategies
Business risk is broader that risk of material
misstatement
 It arises from change or complexity
 RMM is included in Business risk
 Auditor does not have a responsibility to identify
business risk
 Have financial consequences and has an effect
to FS
Measurement and review of entity’s financial
performance
 Helps identify what is important
Internal control
 Processes designed and effected by those
charged with governance, management and
other personnel
B. Assessing the Possibility of Non-
Compliance
 Noncompliance- act of omission or
commission by the entity being audited which
are contrary to laws and regulations
 To have general understanding of legal and
regulatory framework:
o Use existing understanding of entity’s
industry, regulatory and other external
factors
o Inquire entity’s policies and procedures
o Inquire laws or regulations that may have
fundamental effect to operations
o Policies and procedures for litigation claims
and assessments
o Discuss the legal and regulatory framework
with auditors of subsidiaries in other
countries
C. Establishing Materiality and Assessing
Risk
 Identify materiality for FS as a whole
 Determine performance materiality for
assessing risk of material misstatement and
determining NTE
 Performance materiality- set to reduce to an
appropriately low level he probability that the
aggregate of uncorrected or undetected
misstatement in the FS exceeds materiality for
FS as a whole
 STEPS IN APPLYING MATERIALITY:
o During planning
1. Establish a preliminary judgement about
materiality
2. Determine tolerable misstatement
o At audit completion
1. Estimate likely misstatement and
compare the totals to preliminary
judgement about materiality
 Preliminary Judgement about materiality-
maximum amount that would not cause the
auditor to believe that decisions of reasonable
users would be affected.
o Not required to be quantified
o Normal practice to document a range of
activities
 Bases for quantifying materiality
o % effect on Net income before taxes
Most common (less than 5% immaterial;
more than 10% material)
o % effect on total revenue
o % effect of total assets
 Planning materiality- resulting materiality
amount in pesos. May be adjusted for
qualitative factor
 Tolerable misstatement (Performance
materiality)- Amount of planning materiality
that is allocated to an account balance or class
of transaction
o Done judgmentally or formal qualitative
procedure
o The lower the tolerable misstatement, the
higher the audit procedure
o
 Aggregate uncorrected misstatements
(likely misstatements) comprises:
 o Specific misstatements (incl net effect of
uncorrected misstatements during previous
audit)
o Auditor’s best est of other misstatements
which cannot be specifically identified
 Assessing the risk of material misstatement.
Perform the following:
1. Identify the risk
2. Relate identified risk to what can go wrong at
assertion level
3. Consider whether risk are of a magnitude
that could result in material misstatement
ASSESSMENT OF INHERENT RISK
 Factors in assessing inherent risk (FS level):
1. Integrity of management
2. Management experience and knowledge and
changes in management during the period
3. Unusual pressures on the management
4. Nature of the entity’s business
5. Factors affecting the industry in which the
entity operates
 Factors in assessing inherent risk (Account
balances and transaction level):
1. FS accounts susceptible to misstatements
2. Complexity underlying transactions which
requires experts
3. Degree of judgement
4. Susceptibility to loss or misappropriation
5. Completion of unusual and complex
transactions
6. Transactions not subject to ordinary
processing
ASSESSMENT OF CONTROL RISK
 Substantive test depends on the reliability of
Internal control system
 More reliable internal control = lesser
substantive procedures
EFFECT OF AUDIT RIK ON AUDIT
PROCEDURES
↑ IR + CR
↓ DR
↑ Audit Procedures
 Audit risk and materiality has an inverse
relationship
↑ Audit risk
↓ Materiality
To compensate for a high audit risk and low
materiality:
 Reduce assessed risk of material misstatement
 Reduce detection risk by modifying NTE of
planned substantive procedures
D. Identifying Related Parties
Related party transaction- transfer of resources,
services, or obligations between related parties,
regardless of whether price is charged
(Table for related parties page 274)
Reasons why auditor needs to be aware of
related parties:
 Applicable FRF may require disclosure for
relationships and transactions
 Existence of such might affect FS
 Source of audit evidence affects the auditor’s
assessment of reliability. Greater degree of
reliance goes to the unrelated third party
 Related party transaction may be motivated
other than ordinary business considerations like
fraud
E. Performing Analytical review procedure
 Analytical procedures- evaluations of financial
information made by a study of plausible
relationship between a financial and non-
financial data
o Required in planning and final review
stages of audit
o Helps identify relationships among data
such as existence of unusual transactions
 Analytical Procedure during planning stage
o Objective: enhance auditor’s
understanding of the client, its business
and industry to identify potential risk
F. Determining the need for auditor’s expert
 Auditor is not expected to have the expertise of
a person trained in specific practice of another
profession
 Things to be considered in determining the
need for auditor’s expert:
1. Engagement team’s knowledge and previous
experience
2. Risk of material misstatement based on
nature, complexity and materiality
3. Quantity and quality of audit evidence
 Objectivity of the expert may be impaired
and increases when:
1. Employed by the entity
2. Related in some other manner to entity
G. Development of the Audit Strategy
 Designing optimized audit approach that seeks
to achieve the necessary audit assurance at the
lowest cost within the constraints of information
available
 Establishment of overall audit strategy
involves:
1. Characteristics of engagement that defines
the scope
2. Reporting objectives of the engagement to
plan timing of audit and the nature of
communication required
 Scope of an Audit Engagement (278)
 Reporting Objectives, Timing of the Audit
and Nature of Community (279)
 Direction of the audit
o Focus on:
 With respect to materiality
-Setting materiality for planning purposes
-Setting and communicating materiality
for auditors of components
-Reconsidering materiality as audit
procedures are performed during the
audit
-Identify material components
 Audit areas where there is higher risk of
material misstatement
 Impact of the assessed risk of material
misstatement
 Selection of the engagement team
 Engagement budgeting
 (more page 280)
H. Development of the Detailed Audit Plan
 Address various matters identified in overall
audit strategy
 Includes description of NTE of
o risk assessment procedures
o further audit procedures (test of control and
substantive test)
o other audit procedures
 Documentation serves as record of proper
planning and performance of audit procedures
 Planning takes place over the course of the
audit plan for the engagement develops.
I. Preparation of the preliminary audit programs
 Audit program- most important control
mechanism. It is a list of procedures used to
gather sufficient appropriate evidence
 Two types of audit programs:
o Test of control of audit program
(compliance test audit program)- when a
reliable control is identified by the auditor
o Substantive audit program- prepared
regardless of the approach used by the
auditor
J. Timing of Audit Work
 Key in maximizing the effectiveness and
monetary return of accounting firm
 Not all audit procedures must be performed
after the end of period being audited
 Significant dates-audit engagements
1. Physical inventory count
2. Confirmation of receivables
3. Commencement of field work
4. Submission of required schedules and
analysis
5. Work-papers and data for consolidation to
arrive from other location
6. Closing conference
7. Submission of auditor’s report and
management letter
8. Issuance of special report, if any
9. Availability of FS for BoD meeting
10. Filing of FS/returns with BIR, SEC and other
agency
Other Planning Consideration
 Arrangements for Company Assistance
o Listing of schedules and analysis to be
provided by client, with dates and by who,
should be prepared.
 Consider the work of the internal auditor
o Their works should be determined including
their availability for coordination or direct
assistance.
o In areas where works of internal auditor is
effective, arrange for coordination in areas
like:
1. Observation of inventory count
2. Confirmation of receivables
3. Review of fixed assets additions
and disposal
4. Review of depreciation provision
5. Bank recon preparation
6. Review of loss events
 Direction, Supervision and Review
o Supervision- directing the efforts of
assistance who are involved in the
objectives and determining whether
objectives were accomplished.
o Supervision involves following activities:
1. Coordinating staff assignments and
knowing whether they are capable of
doing it
2. Assigning work to assistant
3. Reviewing all fieldwork
4. Conducting job training
5. Resolving significant accounting,
auditing and matters relative to
engagement
AUDIT PLANNING
PRIMARY OBJECTIVE: to plan the audit so
that the audit will be performed in an effective
manner.
ROLE AND TIMING OF PLANNING
It involves:
 Establishing overall audit strategy for the
engagement
 Developing and audit plan
BENEFITS OF ADEQUATE PLANNING
(ITOWD)
1. Appropriate attention is devoted to
important areas
2. Potential problems are identified and
resolved on a timely basis
3. Proper organization and management of
the audit engagement leading to an
effective and efficient performance
4. Work are properly assigned to
appropriate engagement team members
5. Assistance in coordinating work done by
other auditors and expert
6. Assistance in direction, supervision and
review
NATURE AND EXTENT OF PLANNING
ACTIVITIES WILL VARY ACCRDNG T O
(SECTa)
1. Size and complexity of the entity
2. Previous Experience with the entity of key
management team members (partner,
manager, and staff-in-charge)
3. Changes in circumstances that occur during
the audit engagement
4. Timing of the Appointment of the
independent auditor
PLANNING AS A PHASE OF AUDIT
PROCESS
 It is not a discrete phase
 A continual and iterative process that
begins shortly after the completion of
previous audit
 Continues until the completion of current
audit engagement
MAJOR AUDIT PLANNING ACTIVITIES
An overall audit strategy that sets the scope,
timing and direction of the audit, and that
guides the development of the audit plan after
performing the following procedures:
9. Obtaining an understanding of the client
and its environment
10. Assessing the possibility of non-compliance
11. Establishing materiality and assessing risk
12. Identifying related parties
13. Performing preliminary analytical procedure
14. Determining the need for experts
15. Development of overall audit strategy and
detailed audit plan
16. Preparation of preliminary audit
THE OVERALL AUDIT STRATEGY AND
AUDIT PLAN
Overall audit strategy
 Identify the characteristics of the
engagement that define is 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 judgement, are significant in
directing the engagement team’s effort
 Consider results of preliminary engagement
activities and whether knowledge gained on
other engagements performed by the
engagement partner for the entity is
relevant
 Ascertain the NTE of resources necessary
to perform audit engagement
AUDIT PLAN
 Address various matters identifies in the
overall audit strategy, taking into account
the need to achieve the audit objectives
through the efficient use of the auditor’s
resources
 Audit plan is more detailed than audit
strategy
 Includes NTE of audit procedures
 This may be documented in an audit
program
AUDIT PROGRAM
Serve as a:
 Set of instructions to assistants involved in
the audit; and
 Means to control and record the proper
execution of the work
It contains:
 Audit objectives for each criteria; and
 Time budget in which hours are budgeted
for various audit areas or procedures
CHANGES OF OVERALL AUDIT STRATEGY
AND AUDIT PLAM
 Audit plan and audit program should be
revised as necessary
COMPLETION OF OVERALL STRATEGY
AND AUDIT PLAN
 They are closely interrelated since changes
in one may result in consequential changes
to the other
 Plan shall be initially completed prior to
consideration of internal controls or
performance
PLANNING DOCUMENTATION
Document the following:
a. Overall audit strategy
b. audit plan
c. any significant changes made during the c. Consider whether the risk are of a
audit engagement to the overall started or audit magnitude that could result in material
plan, and the reason for such changes misstatement of the FS
d. consider the likelihood that the risks
could result in a material misstatement of
ADDITIONAL CONSIDERATIONS IN INITIAL FS
AUDIT ENGAGEMENTS
For initial audits, the auditor may consider in RISK ASSESSMENT PROCEDURES
developing the overall audit strategy and audit
a. Inquiries
plan include the following:
b. Analytical procedures
 Arrangements to be made with the c. Observation and inspection
predecessor auditor to review prior year’ss
ANALYTICAL PROCEDURES DURING
working papers
PLANNING STAFE
 Any major issues discussed with the
management in connection with the initial  Consist of evaluations of financial
selection as auditors, the communication of information made by a study of plausible
these matters to those charged with relationships among both financial and non-
governance and how these matters affect financial data
the overall audit strategy and audit plan  Investigation of identified fluctuations and
 The planned audit procedures to obtain relationships that are consistent with other
sufficient appropriate audit evidence relevant information or that differ from
regarding opening balances; and expected values
 Other procedures required by the firm’s
REQUIRED UNDERSTANDING OF THE
system of quality control
ENTITY AND IYS ENVIRONMENT
DIRECTION, SUPERVISION AND REVIEW
NTE of these in the engagement team  Nature of the entity: operations, ownership
members and review of their work depends on: and governance structure, types of
investments that entity is making and plans
 The assessed risks of material
to make; and the way the entity is
misstatement
structured and how it is financed
 Size and complexity of the entity
 Entity’s selection and application of
 Area of audit
accounting policies, including reasons for
 Capabilities and competence of personnel
changes thereto;
performing the audit work
 Entity’s objectives and strategies, and those
reared business risk that may result in risk
of material misstatement
 Measurement and review of the entity’s
RISK ASSESSMENT PROCEDURES performance
 Identifying and assessing the risks of  Internal control
material misstatement through
understanding the entity and its
environment
 Risk assessment procedures are audit
procedures performed to obtain an
understanding of the entity to identify risks
of material misstatement
 Risk assessment procedures and related
activities
The auditor shall:
a. Identify risk throughout the process of
obtaining an understanding of the entity and
its environment
b. Relate the identified risk to what can
go wrong at the assertion level;
TYPES OF AUDIT MATERIALITY
 FINANCIAL STATEMENT LEVEL-
smallest aggregate amount applicable to all
FS
 ASSERTION LEVEL- largest tolerable
misstatement
To reduce detection risk:
a. As to nature- more effective procedure
b. As to timing- closer or nearer to year-end
c. As to extent-larger sample size