I- r E Chapte PHAS SMENT: SES RISK AS se AUDIT AND wr OF OVERALL Deve NDIT STRATEGY Se Expected Learnin ‘After studying this chapter, 1 ng Outcomes you should be able to: plain the nature, scope end benefits of audit planning, Understand the concept of materaliy as applied to financial auc. Know the levels of planning for the audit such as: ‘+ Establishment of overall audt strategy, and + Development of detaled aucit plan Describe the process, benefits end documenting the overall audit strategy Explain the signiicant matters embodied ir it teen bodied in the detailed audit plan : oe objectives, timing and requited communications rection, supenision and review of audit work done Understand tne rita! mat Butt ted others” *22BEMENt planning including, Application of analytical rocedu Estabishment of autitteam : fesee cin Wty tbe sats partes ent of Chen legal cbigatene = @88umption, related. parties, Preparation of ntiay audi p ae, ao" time budget CHAPTER 3 PHASE I - RISK ASESSMENT: PLANNING THE AUDIT AND DEVELOPMENT OF OVERALL AUDIT STRATEGY PLANNING THE AUDITn of the expected nature and review I could be reasonably expected it Me et ken on the basis of the financial stall aso deere lat classes of ing PSA 320, (©) Recognize the on the use of estima and (2) Make reasonable economic decisions Financial statements. ion of future eve information ioF in the aggreyate, is higher ret, it would mean that the Specific mai In some cases, there may be a need to ident amounts than overall: material decisions of financial statement users. This could areas such as particular note disclosures remuneration or indusiry-specific data certain terms in a contract, or based, It could also, PSA 320 likewise requires that performance materiality be set. Panning the Adit errors and statements as 2 whole: and thu accumulate to reach an amount ‘be materially misstated. ‘materiality. For example. 2 spec lower amount than overall peforman. Imaitenance expenses if tere 6 @ ger ek Drocedures were planned 10 de ite possible that an error of s: Quite possible t ie Prsi000 misstatement wo ens ova tole wold ret Be rately== paige ll sterility of the financial How t Determine M nt ning maoriai”. TH called a. preliminary fe poise sai an re cies eed ing. planing materiality or proliminary judgment about ioe Pict must also consider any potential effect a rnislatement might have which may be gre tbe material based on qui et lg mally bse the or rong on egageret to ‘the potential for these types of material misstatement. me Roles of Thumb (For Use as Starting Point) Teal Specific Performan Tia a ep ee imeem lee |p notions Pk ones ‘ay | ovate fomcatinicgpeittoneersse, | based on | PSAs, Peroantages paid ut | oe” |e fon ot mania cn |e ree ‘oinancalstdereniaes Hier | tol specie or ell measure such eso gn o2 | sensive nana) eye pit sna | SATE eas ten censor tne aan a * Revenues ot expences, % Mio se 09% L*_Eally-360 5%, | Ce x perform. Relationship between Materiality and Audit Risk. ical procedures. This enables the sombination, can be expected t0 of rocedures For example, if, after planni procedures, the auditor determines that the acceptable materiality level is Tower, audit risk is increased, ‘The auditor would compensate for this by either: sk, where this is possible, and (@) reducing the assessed le 1g out extended or additional 1g the reduced level by eat isk by modifying the nature, timing and extent ofeae ee apie 3 aay thasration of @ memo O° determining and using wre 31. shows an illustration Fig material. in Jing Material Figure 3-1 aeative Memo on Deterining amd OS 1g Materiality = WZ Company tarilty Assessment and the shareholders. The ol th statements ae the bak ain sf cil tel nately rumber used Using our professional jadgmenl, we decided before tax. Other bases for mately, sch 25 fall that prot before tax was the most meninght! financial statement users. For this period, the plan i fo use P100000 as the overall mately. The concept of ‘malriaty and its use nthe audt has been discussed in general two terms withthe client, to base our maeity on 5% ofthe profit ‘revenues, wee also considered but it was ‘amount in relation to the identified Using professionel judgment, andthe types of misslatemerts identified in previous audit, cverll performance mately has been stat P75, 000. ‘A spactc matali forthe focal sales tases pad has been set at P10,000 as we are ‘uid o aut and repo on this mount othe local overt. Date: Date: ‘osu deficiency or inconsistency, fasion, anount or account if of related I statements. The ‘hal be 5% SA Bega ot ® be tse sal be 5% ed be material if the amount of More of the total of related ‘Statements, The test t. Aenea ee nate wed * The SEC requi independent au4b under the Securitization act yse Corporations registere implementing ules: ets Cn inn mh may be ens Yew to be supervised by the Com Group C Financial Companies; 2) Lending Companies; 5 (3) Transfer Agents; jons and other non-stoé ck non-profit organizations which 1s or with fund balance n year; and of more than P3S0 aggregating to more Group D (1) Companies not included above but are mandated by other regulatory agencies to have an independent avditor~ accredited by the Co ; Z 3 ‘0 For Groups A and B, both the independent auditor and auditing firms (itapplicable) shall be accredited by the Commission. ‘or Group C, the ace sufficient. Howeve vidual independent auditor shi accredited by the Commission as such, companies under Groups auditors with Group B- accred ies under Groups C and ceredited independent auditors ar all Accordingly, Group C lowed to audit Group D Phase 1~ Risk Ares LEVELS OF AUDIT PLany, Bi reporting_objectives of the engagement to plan the a required such as: 2. Key dates charged work. : +. Discussion with management regarding the expested eommunication fn the status of audit work thro Cs significant actos 3m of the engagement of areas where there may be higher risks 2. Preliminary ider of material misstatement 3. Preliminary identification of balances. ial components and accountnT a ant business developmen en we si of for specific suit areas, such as the use ed tas memes fr tg ik ares oF the budget in hours to allocate to high risk areas; (6) When these resources are deployed, such as whether at an i tof dates: and WS are expected to take OF site) and whether to complete ews, ing time allocation, engagement quality contro (©) Engagement budgeting includScope | tis per, Rut to comply with PSAS and the bctaonied ae sen ae pt ges in PFRS thal affect XYZ Caarpany tis ya Entity Changes XYZ Company is planing to make sales to oer Southeast Asian Countries, ‘Inter Sales are also increasing and XYZ IT capable wil be svetched. ow sling to Momentus Merchandising. Ths company is renowned for squeezing prot margins of suppers in exchange for giving lage orders It also requires ‘supplies 10 maintain eddieral invenlories of some produc for instant delivery 2s require. Risk Our assessment of risk at the financial level is low. Management is: not partic : s : particularly ‘Sophisticated but thre isa strong comment fo competence; it has inroduced a code of ethics and, in general, has @ good attude toward intemal contol Overall Strategy 4, POL pes pane es from P80,000 to ‘growth in and 000, cata ac 2. Use the some senior: staff as last abd anne 3, Perform our risk assessment proced ment of aut risk) has been Berfam the work atthe same ime. us tthe end of August. There are no plans ‘Audit Partner (signed): Mauricio Cruz | | Date: October 30, 20%5, ML, THE DETAILED AUDIT also serves as 2 record of procedures that can be reviewed and further audit procedures.+ management oF these mn ot the Scope of the ould determine Sc, the sir sel oe A description of the 1 procedures atthe assr bolance, and for each material class of transactions, to Assessed Risks." The plan for n whether to test the ing, and extent of procedures, and procedures required to be carried out for the ith PSAs (for example, seeking direct Planning for these audit procedures takes place over the course of the audit as the audit plan for the engagement develops. For example, planning of the auditor's risk assessment procedures ordinarily occurs the audit process. However, planning of the nature, timing and extent of specific further audit procedures depends on the outcome. of those risk assessment procedures. In addition, the auditor may begin the execution of further audit Procedures fr some classes of ansactons, account balances and disclosures Freeda ene the more detailed audit plan of al remaining further audit Scope of the Audit Engagement Industry-specific report " id fe i whem ch as reports mandaied by comport, tlt coverage, including the eae: mms the number and locations of ‘The auditor may consider the following objectives of the engagement, the communications required jons among engagement fof teams meetings andions wi «communication ‘ther expected nim esponsl Whe te ay ches Spm pon: any statu tract ‘Direction, Supervision and Review and extent of direction and supervision ing and ex jew oftheir work. ret rvision of engagement fae ireon and supervision oF Saag it, the risks of complexity ofthe aig =i mS ps nd comptes of persomnel Sei audit work, PSA 220 contains detailed guidance on the a person a view ee work. In audits of small entities, an audit miy be carried out entirely by the audit engagement partner (who may be a sole pract ‘questions of direction and supervision of engageme: OF their work do not arse asthe aut engagement partner, work, is aware of lems hen ihe Same arly complex or unusual 4 sole practitioner, it may be desi Suitahly-experienced audios or the adios roel ‘i The auditor's decisions cmet ——— ee Lae way eansider in developing thy nangements to be made with the or regulation. ne previous auditor's Working pl, to review” Jn of accounting principles or tegy and i «a cedures to obiain sufficient 9 ° hice peg opel Gee PSA 510, Eng wolvement of another partner or senior overall audit strategy prior to commencing icant audit procedures orto review reports prior to their issuance). Other Creal Maters In Engagement Planning 1 Aoplicaian of elie! Procedures in Plaming the Audit Purposes, analytical proced tur timing, and extent of a oF a nn siness and transactions, 3M iad mon ‘her visks, The auditors Derform a more effective ws these potential problem areas, aNd ‘analytical procedures as Teduires the audi fore fi : itora to pet Paneth plming process for every audit predecessor working papers. CommurWhen 2 portion of the client (eg, subsidiary in a distant city) is audited by another CPA firm, efforts may be coor 1 For ee ‘are to be consolidated with the overall enterprise, and if that subsidiary is audited by another A firm, the auditors must coordinate timing of necessary reports and procedures to be performed. CPAs may lack the qu: tec} tasks relating to the a knowledge and judgm ms_necessary to perform certain A specialist brings unique id other than accounting and extent to which the clients sta help prepare for ‘the audi aecounting records up-to-date n when the auditors arrive, ean audit working papers can be prepared for the auditors by the s reducing the cost of the au ing the routine work. The auditors may set up the éolumrar uch working papers and give instructions to the client’ formation t0 be gathered. These working papers label Prepared by Client, or PBC, and also the + avo verifies the work performed by the clients i papers. prepared by the client should never "e Pave; such papers must be reviewed and tested by 4 ‘woud be able to reduce the extent of s deciding whether to reduce the amount of testing for spe assertions because of work performed by int independent auditor should consider ‘amount, (2) the risk of misstatement, subjectivity involved in evaluating the accurmulates ‘As these factors increase, the auditor is less likely internal a tan audit is by assisting ‘The second way internal auditors affect independent auditors in example, an internal a inventory. “Assessment of Going Concern Assumption When planning and performing au results thereof, the auditor sh management’ use ofthe going coneem assump the financial s tors to evaluate whether substantial doubt exists jnue as a going concem, based onobtained during:the ity to continue in cal statements being calling attention to the fact ing that the entity will concer, But when information doubt about Bet owing te dat of adi a paragrap have been prepared essumi tandards require disclosure erty ip; a description of trnsayons, moun: an anced fo and ed pares, M assess inherent risk as high for rated parties and related sation, in rm transactions, both becuse ofthe accounting disclosure requirements and the lack of independencs . the bck of inkpendece tetveen the paties involved in. the Samp aay ee one of te pris canines he renee lde sales or purchase Subsidiary, exchan, “e The program whic! nable the audi taken as a whole. express an opinion on the Financial On initial engagements, the audit program typically develop in three stages: (1) the broad phases of the program can be outlined at the time of of the program can be identified after the review of ‘control structure and accounting procesures has begun; and ) procedures on specific phases of the audit can be further challenged {and revised as the work progresses.«tne preceding audit should be roar fo the Peat. The program ‘On recurring engagements the PEAT he studied before preparing the PORT tions or are required by the al control or accounting methods it should reflect for the cures ei expec gine inthe si ofthe client Preparation of Tne Buget con the information ae ae tang an understanding of the client. It takes into consideration such things as: {@) the client's size as indicated by its gross assets, sales, number of (@) the competence and experience of staff available. must be allocated by the preparation of work schedules do what and how long it should take. For repeat engagement, the development of time budget is facilitated by reference tothe preceding year’s detailed nine records. Figure 35 illustrates a Time Budget. ‘Figure 3-4 presents portion of an Audit Budget and ‘Time Summary. 65 Phase I~ Risk Assessment: Planning the Audit and Development. Time Budget Figure 3-3: DELVEE AIO IAYCEE WC, “Tine Accounting and Buepet Dezember, 200 i TT] ise" B.A = be FRETS Hl Hy | | | Es) | Po LL | Ly ) nit itr rr BR i mini } rFRT A ey r ‘ A 24) | ate FTF Ty a u Fl ale 2 TI i) al EH | {| ly F le H e belt hate EF ee lef le de Us ele sta5 Choprers Portion of an Audit Budget and Time Summary “etual Weekly Hours (by date): i in i Figure 3-4: Total W Budgeted Hours Total hours: Partner Manager ‘Senior Statt Hours by type of work: General Supervision Preparation of audit program Trial balances and adjusting entries Permanent file Financial statement comparisons Preparation of reports Sales and collection cycle ‘Study and-evaluation of intemal control Tests of controls - sales ‘Substantive tests ~ sales Tests of controls - collections POO ee year to year. A\ ‘most experienced nonpariner on the engagers Continuity helps the CPA firm maintain f requires a. dis the engagement. par$8 Chaprer 3 SB Sheps Key Areas to Address During the Engagement Team Planning Meeting Key Areas to Address ‘Share insights on the entity, such as the people, operations ‘and objectives. sion ——— : Purpose: To have an open discussion Po The Entity - Histor and business objectives. © Changes in operation, personnel, or system. the applicable nancial reporting framework re / structure ofthe entity and management tude toward internal contol. . to commit aud. ‘© Unexplained changes in the behavior or lifestyle of kay employees. ‘© Any indications of management bias Known Risk Factors + Experience fom previous audt engagements ‘+ Significant business risk factors. + Opportunity for fraud 1o be perpetrated. Key Areas to Purpose: To bralnstorm ideas and possible audit Address approaches Brainstorm — | Potential for Erors and Fraud Which financial statement areas may be susceptible to material is How coud assets be mis for portal pane isopropied or misused * Are there non-selish incentives (such as to maintain @ funding source for a not te the Franca or rote) to mani Using @ Service Orgenization = PSAS4D Auditing Accounting Estimates, Inuding Fair Value Accouning Estimates, and provided, fle review, and any other + Stress the importance of maintaining professional Skeplicism thoughoutthe auditEE discussic Phase I~ Risk Assessment: Planning dhe Audit and Development .. 71 mo on adit team discussions, Figure 3-5 shows an illustration of a mer 10. Scheduling of Work Figure 3-5: Illustrative Memo on Audit Team Discussion Client: XYZ Company Date of Meeting: December 10, 20X8 Agenda item 1. Materialty and signfcant account balances. 2. Timing, key dates, and availabilty o cent personnel 3. What can we leam from pasl experience suchas issues / events that caused delays and areas of ove-funder.audiing? 4. Any new concems about management integrity, going concern, liigation, et? Changes this period in business operations and/or financial condition, industy regulations, accounting polices used, and people, Susceptibility of the nancial statements o fraud. In what possible ways could {he entity be defrauded? Develop some possible scanaros, and then plan Drocedures that would confim or dispel any suspicions, 7. Significant risks that require special tention, 8. Appropriate audit responses othe sks identified, 9. Consider the need for specialized wad 6 ‘substantive procedures, the need: he a tat ere cont tests, and work ou be comple y hee eset some audit 10, Audit team roles, scheduling, and fle reves, auditors most perform add ing period. nal audit report and filing of income tax 's stafT to submit required schedules72 Chapter 3 ties PAPS 1005) mall Entities Special Consideration in the Audit atin ) contain basic principles ang H AS, - The Philippine Standard Audited oranee that apply t© the audit of the jal essential procedures together with rel an of its size, its legal Tone financial statements of any entity, "sf its activities. The ‘ann ownership or management structure, or oa umber of special a recognizes that small entities give rise t0 considerat ippine Auditing Practice Statement 1005, "The Special es ‘ation in the Audit of Small Entities," which was made effective for audits of financial statements for periods beginning on or after December 15, 2004 describes the characteristics commonly found in small entities and indicates how they may affect the application of PSAs. Reference may therefore be made by the auditor to PAPS 1005 when handling audit of small entities.