PLANNING AN AUDIT OF

FINANCIAL STATEMENTS
Objective
The primary objective auditor is to plan the audit so that the audit will
be performed in an effective manner. However, adequate planning also
leads to an efficient and timely audit engagement.
The Role and Timing of Planning
Planning an audit involves establishing the overall audit strategy for the
engagement and developing an audit plan. Benefits of an adequate planning
includes the following:

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 experts
6. Assistance in facilitating direction, supervision and review.
The nature and extent of planning activities will
vary according to the:
1. Size and complexity of the entity
2. Previous experience with the entity of key engagement 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
Major Audit Planning Activities
The auditor shall establish an overalla 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:
1. Obtaining an understanding of the client and its environment
2. Determining of need for experts
3. Establishing Materiality and Assessing Risks
4. Assessing the possibility of non-compliance
5. Identifying related parties
6. Performing preliminary analytical procedures
7. Development of the overall audit strategy and detailed audit plan
8. Preparation of preliminary audit programs
THE OVERALL AUDIT STRATEGY AND AUDIT PLAN
Overall Audit Strategy
In establishing the overall audit strategy, the auditor shall:
1. Identify the characteristics of the engagement that defines its scope
2. Ascertain the reporting objectives of the engagement to plan the
timing of the audit and the nature of the communications required;
3. Consider the factors that, in the auditor’s professional judgement,
are significant in directing the engagement team’s effort
4. Consider the results of preliminary engagement activities
5. Ascertain the nature, timing and extent of resources necessary to
perform the engagement
THE OVERALL AUDIT STRATEGY AND AUDIT PLAN

Audit Plan
After the overall audit strategy has been established, an audit plan can
be developed to address various matters identified in the overall audit
strategy, taking into account the need to achieve the audit objectives
through the efficient use of the auditor’s resources.

The Audit Plan is more detailed than the overall audit strategy in that it
includes the nature, timing and extent of the audit procedures to be
performed by engagement team members.
Changes to Planning Decisions during the Course
of the Audit
The overal audit plan and the audit program should be revised as
necessary during the course of the audit. Planning is continuous
throughout the engagement because of changes in conditions or
unexpected results of audit procedures.
Planning Documentation
The auditor shall document:
1. The overall audit strategy
2. The audit plan
3. Any significant changes made during the audit engagement to the
overall strategy or audit plan, and the reasons for such changes
DIRECTION, SUPERVISION AND REVIEW
The auditor should plan the nature, timing and extent of direction and
supervision of engagement team members and review of their work
and it varies depending on many factors, including:
1. The assessed risks of material misstatement;
2. Size and Complexity of the entity;
3. The are of the audit; and
4. Capabilities and competence of personnel performing the audit work
RISK ASSESSMENT PROCEDURES
Identifying and Assessing The Risks Of Material Misstatement
Through Understanding The Entity and Its Environment

It is the objective of the auditor to identify and assess risks of material

misstatements, whether due to fraud or error, at the financial
statement and assertion levels, through understanding the entity and
its environment, including the entity’s internal control, thereby
providing a basis for designing and implementing responses to the
assessed risks of material misstatements.
RISK ASSESSMENT PROCEDURES
Risk assessment procedures are 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.
Risk Assessment Procedures and Related Activities
The auditor shall:
1. Identify risks throughout the process of obtaining an understanding
of the entity and its environment, including relevant controls that
relate to the risks, and consider the classes of transactions, account
balances, and disclosures in the financial statements.
2. Relate the identified risks to what can go wrong at the assertion
level;
3. Consider whether the risks are of a magnitude that could result in a
material misstatement of the financial statements; and
4. Consider the likelihood that the risks could result in a material
misstatement of the financial statements.
The risk assessment procedures
a. Inquiries of management, and of others within the entity who in the
auditor’s judgement may have information that is likely to assist in
identifying risks of material misstatement due to fraud or error;
b. Analytical procedures; and
c. Observation and Inspection

Note: Risk assessment procedures by themselves, however, do not

provide sufficient appropriate audit evidence on which to base the audit
opinion.
Analytical Procedures during Planning Stage
Analytical procedures consist of evaluations of financial information
made by a study of plausible relationships among both financial and
non-financial data. Analytical procedures is required to be performed
during planning stage. It is designed to assist the auditor in planning
the nature, timing and extent of other auditing procedures
ASSESSMENT OF AUDIT RISK AND MATERIALITY

Materiality and audit risk affect the application of PSA, and are
reflected in the auditor’s report. The auditor must make judgements
about materiality and audit risk in determining the nature, timing and
extent of procedures to apply in evaluating the results.
ASSESSMENT OF AUDIT RISK AND MATERIALITY
Materiality
Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.

Materiality depends on the size of the item or error judged in the particular
circumstancews of its omission or misstatement. The auditor’s purpose in
considering materiality at the planning stage of the audit is to determine the
appropriate scope of their audit procedures.

Using Professional Judgement, the auditor shall determine materiality at:

1. Financial Statement Level - the smallest aggregate amount of misstatement
applicable to all financial statements
2. Assertion Level - for classes of transaction, account balances and disclosures -
largest tolerable misstatement
ASSESSMENT OF AUDIT RISK AND MATERIALITY

Audit Risk
Audit Risk is the risk that the auditor gives an inappropriate audit
opinion when the financial statements are materially misstated.
Components of Audit Risk
1. Risk of Material Misstatement
a. Inherent Risk is the susceptibility of an account balance or class of
transactions to misstatement that could be material, individually or
aggregate with misstatements in other balances or classes, assuming
that there were no related controls.
b. Control Risk is the risk that a misstatement, that could occur in an
account balance or class of transactions that could be material,
individually or aggregated with misstatements in other balances or
classes, will not be prevented or detected and corrected on a timely
basis by the accounting and internal control systems.
Components of Audit Risk
2. Risk of not Detecting the Misstatement
a. Detection Risk is the risk that the auditor’s substantive procedures
will not detect a misstatement that exists in an account balance or
class of transactions that could be material, individually or when
aggregated with misstatements in other balances or classes.

If the auditor wishes to reduce detection risk, procedures to be

performed shall be:
i. As to nature - more effective procedures
ii. As to timing - closer or nearer to year-end
iii. As to extent - larger sample size
Interrelationship of the Components of Audit Risk
Auditor’s Assessment of Control Risk is
High Medium Low
Auditor’s High Lowest Lower Medium
assessment of Medium Lower Medium Higher
inherent risk
Low Medium Higher Highest
Summary of Procedures Performed in Planning an Audit

Identify Detection
Consider
Obtain an Risk to determine
Materiality and Determine the
understanding of the nature, timing
Assess Risk of acceptable level
the entity’s and extent of
Material of Audit Risk
environment further audit
Misstatement
procedures