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AU - 8 - Audit Planning - PSA 300 To 320
AU - 8 - Audit Planning - PSA 300 To 320
PSA 300
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
FOCUS NOTES:
Planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan.
Adequate planning benefits the audit of financial statements in several ways, including the
following:
Helping the auditor to devote appropriate attention to important areas of the audit.
Helping the auditor identify and resolve potential problems on a timely basis.
Helping the auditor properly organize and manage the audit engagement so that it is
performed in an effective and efficient manner.
Assisting in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks, and the proper assignment
of work to them.
Facilitating the direction and supervision of engagement team members and the review
of their work.
Assisting, where applicable, in coordination of work done by auditors of components and
experts.
Planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after (or in connection with) the completion of the previous
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audit and continues until the completion of the current audit. Planning includes the need to
consider, prior to the auditor’s identification and assessment of the risks of material
misstatement, such matters as:
Objective
The objective of the auditor is to plan the audit so that it will be performed in an effective
manner.
Requirements
Involvement of Key Engagement Team Members
The engagement partner and other key members of the engagement team shall be
involved in planning the audit, including planning and participating in the discussion
among engagement team members.
Preliminary Engagement Activities
The auditor shall undertake the following activities at the beginning of the current audit
engagement:
(a) Performing procedures required by PSA 220 regarding the continuance of the
client relationship and the specific audit engagement;
(b) Evaluating compliance with relevant ethical requirements, including
independence, in accordance with PSA 220, and
(c) Establishing an understanding of the terms of the engagement, as required by
PSA 210.
Planning Activities
The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan.
In establishing the overall audit strategy, the auditor shall:
(a) Identify the characteristics of the engagement that define its scope;
(b) Ascertain the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required;
(c) Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts;
(d) Consider the results of preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the
engagement partner for the entity is relevant; and
(e) Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures, as
determined under PSA 315 (Revised).
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The nature, timing and extent of planned further audit procedures at the assertion
(b)
level, as determined under PSA 330.
(c) Other planned audit procedures that are required to be carried out so that the
engagement complies with PSAs.
The auditor shall update and change the overall audit strategy and the audit plan as
necessary during the course of the audit.
The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and the review of their work.
Documentation
The auditor shall include in the audit documentation:
(a) The overall audit strategy;
(b) The audit plan; and
(c) Any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes.
Additional Considerations in Initial Audit Engagements
The auditor shall undertake the following activities prior to starting an initial audit:
(a) Performing procedures required by PSA 220 regarding the acceptance of the client
relationship and the specific audit engagement; and
(b) Communicating with the predecessor auditor, where there has been a change of
auditors, in compliance with relevant ethical requirements.
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MULTIPLE CHOICE
1. Establishing overall audit strategy for the engagement and developing audit plan.
a. Planning
b. Directing
c. Supervision
d. Controlling
2. The overall audit strategy and detailed audit plan are the responsibility of:
a. client’s management
b. auditor
c. audit committee
d. board of directors
3. It sets the scope, timing and direction of the audit, and guides the development of the more
detailed plan.
4. It converts the audit strategy into a more detailed plan and includes the nature, timing and
extent of audit procedures to be performed by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
6. Which of the following is not a planning consideration by the auditor prior to the identification
and assessment of the risks of material misstatement?
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7. Which of the following is a required documentation for an audit in accordance with PSA?
8. The magnitude of omission or misstatements that could influence the economic decisions of
users taken on the basis of the financial statements. It is matter of professional judgment.
a. Materiality
b. Consistency
c. Audit risk
d. Control risk
10. During the planning phase, materiality is used by the auditor in:
a. Inverse
b. Direct
c. Inverse and direct
d. None of the above
12. The auditor performs preliminary engagement activities prior to performing the planning
activities. Preliminary engagement activities include the following, EXCEPT:
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13. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
14. When a CPA is approached to perform an audit for the first time, the CPA should make
inquiries of the predecessor auditor. This is a necessary procedure because the predecessor
may be able to provide the successor with information that will assist the successor in
determining
15. How can the audit program best be described at the beginning of the audit process?
a. tentative
b. conclusive
c. comprehensive
d. optional
17. Which of the following concepts is most useful in assessing the scope of an auditor’s program
relating to various accounts?
a. attribute sampling
b. materiality
c. the reliability of information
d. management fraud
a. observing the client’s annual physical inventory taking and making test counts of selected
items
b. making arrangements with the client concerning the timing of audit field work an use of
the client’s staff in completing certain phases of the examination
c. obtaining an understanding of the business
d. developing audit programs
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19. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
20. Why should the auditor plan more work on individual accounts as lower acceptable levels of
both audit risk and materiality are established?
21. Which of the following statements is true with regard to the relationship among audit risk, audit
evidence, and materiality?
a. the lower the inherent risk and control risk, the lower the aggregate materiality threshold
b. under conditions of high inherent and control risk, the auditor should place more emphasis
on obtaining external evidence and should reduce reliance on internal evidence
c. where inherent risk is high and control risk is low, the auditor may safely ignore inherent
risk
d. aggregate materiality thresholds should not change under conditions of changing risk
levels
22. Prior to the acceptance of an audit engagement with a client who has terminated the services
of the predecessor auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstance leading to the termination with the understanding that
all information disclosed will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can
include audit procedures to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the
auditor to violate the confidential relationship between auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request
permission for the contact.
23. Which of the following situations would most likely require special audit planning by the
auditor?
a. Some items of factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client's tax return differ from those used on the books.
c. Assets costing less than P500 are expensed even though the expected life exceeds one
year.
d. Inventory comprises precious stones.
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24. In planning an audit engagement, which of the following affects the independent auditor's
judgment as to the quantity, type, and content of working papers?
25. The independent auditor's plan for an audit in accordance with generally accepted auditing
standards is influenced by the possibility of material errors. The auditor will therefore conduct
the examination with an attitude of
a. Professional skepticism.
b. Objective indifference.
c. Subjective mistrust.
d. Professional responsiveness.
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PSA 315
IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT THROUGH UNDERSTANDING THE
ENTITY AND ITS ENVIRONMENT
FOCUS NOTES:
Objective: The auditor should obtain an understanding of the entity and its environment,
including its internal control:
in order to identify and assess the risks of material misstatement of the financial
statements;
thereby providing a basis for designing and implementing responses to the assessed
risks of material misstatement.
Definitions
Assertions – Representations by management, explicit or otherwise, that are embodied
in the financial statements, as used by the auditor to consider the different types of
potential misstatements that may occur.
Business risk – A risk resulting from significant conditions, events, circumstances, actions
or inactions that could adversely affect an entity’s ability to achieve its objectives and
execute its strategies, or from the setting of inappropriate objectives and strategies.
Internal control – The process designed, implemented and maintained by those charged
with governance, management and other personnel to provide reasonable assurance
about the achievement of an entity’s objectives with regard to reliability of financial
reporting, effectiveness and efficiency of operations, and compliance with applicable laws
and regulations. The term “controls” refers to any aspects of one or more of the
components of internal control.
Risk assessment procedures – The audit procedures performed to obtain an
understanding of the entity and its environment, including the entity’s internal control, to
identify and assess the risks of material misstatement, whether due to fraud or error, at
the financial statement and assertion levels.
Significant risk – An identified and assessed risk of material misstatement that, in the
auditor’s judgment, requires special audit consideration.
Requirements:
The auditor shall perform risk assessment procedures to provide a basis for the
identification and assessment of risks of material misstatement at the financial statement
and assertion levels.
The risk assessment procedures shall include the following:
a. Inquiries of management, of appropriate individuals within the internal audit function
(if the function exists), and of others within the entity who in the auditor’s judgment
may have information that is likely to assist in identifying risks of material
misstatement due to fraud or error.
b. Analytical procedures.
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Internal control is the process designed and effected by those charged with
governance, management, and other personnel to provide reasonable assurance
about the achievement of the entity’s objectives with regard to
a. reliability of financial reporting;
b. effectiveness and efficiency of operations; and
c. compliance with applicable laws and regulations.
Internal control, as discussed in this PSA, consists of the following components:
a. The control environment.
b. The entity’s risk assessment process.
c. The information system, including the related business processes, relevant to
financial reporting, and communication.
d. Control activities.
e. Monitoring of controls.
Obtaining an understanding of internal control involves evaluating the design of a
control and determining whether it has been implemented.
Evaluating the design of a control involves considering whether the control,
individually or in combination with other controls, is capable of effectively preventing,
or detecting and correcting, material misstatements
Implementation of a control means that the control exists and that the entity is using
it.
Identifying and Assessing the Risks of Material Misstatement (RMM)
a. at the financial statement level; and
b. at the assertion level for classes of transactions, account balances, and disclosures
Assessment of RMM - basis for designing and performing further audit procedures.
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MULITPLE CHOICE
1. Which of the following is NOT a required understanding by the auditor in an audit of financial
statements?
a. Relevant industry, regulatory, and other external factors, including the applicable financial
reporting framework.
b. Nature of the entity, its operations, ownership and governance structures, the types of
investments that the entity is making and plans to make, including investments in special-
purpose entities and the way that the entity is structured and how it is financed.
c. Entity’s selection and application of accounting policies, including reasons for changes
thereto.
d. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
e. Measurement and review of the entity’s financial performance.
f. All controls pertaining to financial reporting.
2. Which of the following is the reason why auditors obtain understanding of the nature of the
entity’s operations, ownership and governance structures, the types of investments that the
entity is making and plans to make, including investments in special-purpose entities and the
way that the entity is structured and how it is financed?
a. Obtain understanding of the entity and its environment including its internal
control.
b. Perform procedures regarding the continuance of the client relationship and
the specific audit engagement.
c. Design and perform further audit procedures.
d. Identify and assess the risks of material misstatement of the financial
statement
a. ABCD
b. BADC
c. DCBA
d. CBAD
4. The procedures used by the auditor to obtain understanding of the entity and its environment
including its internal control are called:
a. tests of controls
b. substantive procedures
c. analytical procedures
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5. All of the following procedures are risk assessment procedures except one. Which is it?
a. inquiries
b. observation and inspection
c. analytical procedures
d. test of details of transaction
7. It sets the tone of an organization influencing the control consciousness of its people. It is
the foundation for effective internal control.
a. control activities
b. control environment
c. accounting system
d. internal control
8. It refers to the overall attitude, awareness and actions of directors and management
regarding the internal control and its importance in the entity.
a. control activities
b. control environment
c. accounting system
d. internal control
9. The entity’s process for identifying business risks relevant to financial reporting objectives
and deciding about actions to address those risks and the results thereof.
10. Consists of the procedures and records established to initiate, record, process and report
entity transactions and to maintain accountability for the related assets, liabilities and equity.
It encompasses the accounting system. This element of internal control is:
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11. Policies and procedures that help ensure that management directives are carried out.
12. The process to assess the effectiveness of internal control performance over time. It
involves assessing the design and operation of controls on a timely basis and taking
necessary corrective actions modified for changes in conditions.
13. To obtain understanding of the internal controls relevant to the audit, all but one are used by
the auditor.
a. variable sampling
b. management inquiry
c. inspection of documents
d. observation of entity’s activities and operations.
14. After obtaining an understanding of the client’s accounting and internal control systems, the
auditor makes a preliminary assessment of control risk. If the auditor wants to reduce the
preliminary assessment of control risk to less than high, the auditor should:
15. For an audit in accordance with PSA, which of the following is a required documentation?
a. Effectiveness of the design and operation of the internal controls throughout the period.
b. Nature, timing and extent of audit procedures.
c. Appropriateness of the materiality level.
d. All of the above.
17. Evidence of the effectiveness of the design and operation of internal control is used by the
auditor to:
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19. Which of the following techniques could an auditor use to obtain evidence of the
effectiveness of the design and operation of internal control?
a. inquiry
b. observation
c. inspection
d. reperformance
e. all of the choices.
20. Which of the following is the correct order for performing the auditing procedures A through
C below?
A = Tests of controls.
B = Preparation of a flowchart depicting the client's internal ontrol structure.
C = Substantive tests.
a. ABC.
b. BAC.
c. ACB.
d. BCA.
22. The primary purpose of the auditor's consideration of internal control is to provide a basis for
a. Determining whether procedures and records that are concerned with the safeguarding
of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal control.
c. Determining the nature, timing, and extent of audit tests to be applied.
d. The expression of an opinion.
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23. In obtaining an understanding of an entity’s internal controls that are relevant to audit
planning, an auditor is required to obtain knowledge about the:
a. Design of relevant internal controls pertaining to financial reporting in each of the five
internal control components.
b. Effectiveness of the internal controls that have been place in operation.
c. Consistency with which the internal controls are currently being applied.
d. Controls related to each principal transaction class and account balances.
25. Which of the following elements is not a part of an entity's internal controls?
a. Control risk.
b. The accounting system.
c. Control activities.
d. The control environment.
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PSA 320
MATERIALITY IN PLANNING AND PERFORMING AN AUDIT
FOCUS NOTES:
Materiality in the Context of an Audit
Financial reporting frameworks often discuss the concept of materiality in the context of
the preparation and presentation of financial statements. Although financial reporting
frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they,
individually or in the aggregate, could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements;
Judgments about materiality are made in light of surrounding circumstances,
and are affected by the size or nature of a misstatement, or a combination of
both; and
Judgments about matters that are material to users of the financial statements
are based on a consideration of the common financial information needs of
users as a group. The possible effect of misstatements on specific individual
users, whose needs may vary widely, is not considered.
The auditor’s determination of materiality is a matter of professional judgment, and is
affected by the auditor’s perception of the financial information needs of users of the
financial statements.
The concept of materiality is applied by the auditor:
in planning,
performing the audit,
and in evaluating the effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial statements and in forming
the opinion in the auditor’s report.
Performance Materiality
performance materiality means the amount or amounts set by the auditor at less than
materiality for the financial statements as a whole to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the financial statements as a whole.
performance materiality also refers to the amount or amounts set by the auditor at less
than the materiality level or levels for particular classes of transactions, account
balances or disclosures.
Requirements
In establishing overall audit strategy, auditor is required to:
Determine materiality for the financial statements as a whole.
Determine the materiality level or levels to be applied to those particular
classes of transactions, account balances or disclosures
For purposes of assessing the risks of material misstatement and determining the
nature, timing and extent of further audit procedures:
The auditor shall determine performance materiality.
Revise materiality and performance materiality and the nature, timing and extent of
further audit procedures in the event of becoming aware of information during the audit
that would have caused the auditor to have determined a different amount (or amounts)
initially.
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Documentation
The auditor shall include in the audit documentation the following amounts and the
factors considered in their determination:
a. Materiality for the financial statements as a whole;
b. If applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures;
c. Performance materiality ; and
d. Any revision of (a)-(c) as the audit progressed.
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MULTIPLE CHOICE
1. The magnitude of omission or misstatements that could influence the economic decisions
of users taken on the basis of the financial statements. It is matter of professional
judgment.
a. Materiality.
b. Consistency
c. Audit risk
d. Control risk
a. Inverse
b. Direct
c. Inverse and direct
d. None of the above
a. Professional judgment.
b. The amount of the accounts involved.
c. Relative percentages.
d. All of the above.
4. When establishing overall audit strategy, the auditor shall determine materiality:
a. At the overall financial statement level and, when applicable, in relation to classes of
transactions, account balances, and disclosures (assertion level).
b. Only for overall financial statement level.
c. Only for assertion level.
d. Only for balance sheet.
5. Performance materiality:
a. is required to be determined.
b. is not required for audit.
c. is not a consideration in audit .
d. none of the above.
6. In planning the audit, the auditor makes judgments about misstatements that will be
considered material. These judgments provide a basis for the following, Except:
a. Determining the nature, timing and extent of risk assessment procedures.
b. Identifying and assessing the risks of material misstatement.
c. Determining the nature, timing and extent of further audit procedures.
d. Determining the type of opinion to be issued,
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7. Which of the following is often used as a benchmark materiality for profit – oriented
entities?
a. Profit before tax from continuing operations.
b. Gross profit
c. Total revenues.
d. Total assets.
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