At 06 Audit Planning

Page 1 of 11 | AUD Handouts No.
06
AUDIT PLANNING
RAYMUND FRANCIS A. ESCALA, CPA, MBA
AUDIT PLANNING
RAYMUND FRANCIS A. ESCALA, CPA MBA
PLANNING AN AUDIT OF FINANCIAL STATEMENTS

PSA 330 further provides that the objective of the auditor is to plan the audit so that it will be performed in an effective
manner.
Roles of planning
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
Factors affecting the nature and extent of planning activities

The nature and extent of planning activities will vary according to the
1. Size and complexity of the entity
2. The key engagement team members’ previous experience with the entity
3. Changes in circumstances that occur during the audit engagement.
4. Timing of the appointment of the independent auditor.
Planning as a phase of and audit

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 audit and continues until the completion of the current audit
engagement.
Outputs of Audit Planning

Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan.
With this, the following are the main outputs of audit planning:
1. Overall audit strategy which sets the scope, timing and direction of the audit, and that guides the development of the
audit plan.
2. Audit plan which shall include a description of
1. the nature, timing and extent of the following audit procedures
 planned risk assessment procedures
 further audit procedures at the assertion level
2. other planned audit procedures that are required to be carried out so that the engagement complies with PSAs.
Moreover, the auditor shall update and change the overall audit strategy and the audit plan as necessary during the
course of the audit.
Documentation
The auditor shall document:
1. The overall audit strategy;
2. The audit plan; and
3. Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the
reasons for such changes.
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Page 2 of 11 | AUD Handouts No. 06

AUDIT PLANNING
MAJOR AUDIT PLANNING ACTIVITIES

A. IDENTIFYING AND ASSESSING RISK OF MATERIAL MISSTATEMENTS THROUGH UNDERSTANDING THE
ENTITY AND ITS ENVIRONMENT
To establish an overall audit strategy, which guides the development of the audit plan, the auditor needs to perform
procedures which will enable him or her to (1) obtain an understanding of the entity and its environment; and (2)
identify and assess risk of material misstatements. These procedures are known as risk assessment procedures
(RAPs).
Risk assessment procedures

Definition
As defined in PSA 315, 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.
AUDIT PROCEDURES
1. Obtain an understanding of the entity and its environment, including its internal control
Specific procedures
a. Inquiry
Inquiries during planning stage
Much of the information obtained by the auditor’s inquiries is obtained from management and those
responsible for financial reporting. However, the auditor may also obtain information, or a different
perspective in identifying risks of material misstatement, through inquiries of others within the entity and other
employees with different levels of authority. For example:
• those charged with governance
• internal audit personnel
• employees involved in initiating, processing or recording complex or unusual transactions
• in-house legal counsel
• marketing or sales personnel
b. Observation
Auditor aims to obtain an understanding of the entity thru observation of entity’s:
• processes used in processing information to be reported; and
• activities and operations.
c. Inspection
Inspection during planning stage
The auditor can obtain an understanding of the entity through the following inspection activities during
planning:
• Review of prior year’s working papers and prior year’s financial statements
• Review of reports prepared by the entity’s management (such as quarterly management reports and
interim financial statements) and those charged with governance (such as minutes of board of
directors’ meetings)
• Review of documents (such as business plans and strategies), records, and internal control manuals
• Reading articles, books, periodicals, and other publications related to the entity’s industry
• Visits to the entity’s premises and plant facilities
d. Analytical procedures
A basic premise underlying the application of analytical procedures is that plausible relationships among data
may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
Uses of analytical procedures

Below is a summary of phases where analytical procedures may be applied.
Phase Objective Required?
Planning • To enhance the understanding of the business
• To identify areas that may represent specific risks relevant to the audit
• To determine the nature, timing and extent of FAPs
Substantive • To evaluate the reasonableness of financial information
tests • To obtain corroborative evidence relating to a particular assertion
• To detect material misstatement
Overall review • To identify unusual or unexpected account balances that were not previously identified
in planning and substantive testing
• To assist in determining whether or not the auditor’s has the ability to issue the report

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AUDIT PLANNING
Analytical procedures during planning stage

Analytical procedures may help identify the existence of unusual transactions or events, and amounts, ratios,
and trends that might indicate matters that have audit implications. Unusual or unexpected relationships that
are identified may assist the auditor in identifying risks of material misstatement, especially risks of material
misstatement due to fraud.
Procedures when applying analytical procedures

1. Develop expectations regarding financial statements using (PAA RIN)
 Prior year’s financial statements
 Annualized interim financial statements
 Anticipated results such as budgets, forecasts or projections
 Typical Relationships among financial statements account balances
 Industry averages
 Non-financial information
2. Compare expectations with the items presented in the financial statements

3. Define and investigate significant differences
2. Consider materiality
Definition
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
circumstances of its omission or misstatement.
The concept of materiality recognizes that some matters, but not all, are important for fair presentation of the
financial statements in conformity with PFRS.
Materiality in the Context of an Audit

Materiality generally explains 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.
Uses of materiality
Accordingly, materiality should be considered by the auditor in the following phases:
a. Planning phase
 To identify and assess the risks of material misstatement;
 To determine the nature, timing and extent of further audit procedures
b. Completion phase
 To evaluate the effect of uncorrected misstatements, if any, on the financial statements and in forming the
opinion in the auditor’s report
Determination of materiality
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.
Using professional judgment, auditor is required to determine the following three different levels of materiality.
1. Materiality for the financial statements as a whole
 the materiality determined at the overall financial statement level
 represented by the smallest aggregate amount of misstatement applicable to all financial statements
 it helps the auditor determine whether the proposed audit adjustments are significant or not
 if the audit adjustments exceed this level, the auditor may need to adjust the financial statements
2. Materiality applied to specific classes of transactions, account balance or disclosures

 is the amount set by the auditor for particular classes of transactions, account balances or disclosures for
which misstatements,
 though lower than overall materiality, it could reasonably be expected to influence the economic decisions
of users of the financial statements


AUDIT PLANNING
In determining the specific materiality, the auditor normally considers the following factors:
 laws and regulations (e.g. related party transactions)
 financial reporting framework
 key industry disclosures of the entity
 particular aspects of the entity’s business
 understanding of the view of those charged with governance and management
3. Performance materiality
 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
 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
 calculated as a certain percentage of overall materiality in order to capture any uncorrected
misstatements, the total amount of which may exceed overall materiality
 used in scoping of financial statement line items to be tested by the auditor and ensures that significant
accounts in the financial statements are covered by audit testing
In determining performance materiality, an understanding of the following factors may affect the auditor’s
judgment such as:
 nature of the entity’s business and transactions
 risk assessment procedures
 nature and extent of misstatements identified in previous audits
AUDIT RISK
Definition
Audit risk is the risk that the auditor gives an inappropriate audit opinion when the financial statements are
materially misstated.
Components of Audit risk

a. Risk of material misstatement
Risk of material misstatement is the possibility that material misstatements exist on the financial statements
prepared and presented by the entity. Items contributing to this risk include:
• Inherent Risk is the susceptibility of an account balance or class of transactions to misstatement that
could be material, individually or when aggregated with misstatements in other balances or classes,
assuming that there were no related controls.
• Control Risk is the possibility that a misstatement, that could occur in an account balance or class of
transactions that could be material, individually or when 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.
b. Risk of not Detecting the Misstatement (more popularly known as detection risk)
• 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.
These components may be expressed in a formula which shows how they will comprise the audit risk:
AUDIT RISK = Risk of material misstatement x Risk of non-detection

OR
AUDIT RISK = Inherent risk x Control risk x Detection risk
3. Identifying and Assessing the Risks of Material Misstatement

Using the understanding of the entity and its environment, including its internal control, obtained by the auditor,
the auditor identifies and assesses risk of material misstatement at
 financial statements level; and
 assertion level for classes of transactions, account balances, and disclosures.
Effects of assessment to auditor’s procedures

Since the objective of the auditor when auditing financial statements is to provide reasonable assurance that the
financial statements are free from material misstatements, a higher risk of material misstatements will require
the auditor to perform more effective and extensive audit procedures.


AUDIT PLANNING
4. Determine the acceptable level of audit risk

The determination of acceptable level of audit risk is a matter of professional judgment to be made by the
auditor. When making that judgment, the auditor considers the level of assurance to be provided by his or report
and the extent of reliance to be placed by users to his or her work.
5. Identify detection risk to determine the nature, timing and extent of further audit procedures
Definition
As defined previously, 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.
Determination of detection risk

Detection risk may be determined by rearranging the formula for audit risk:
AUDIT RISK = Inherent risk x Control risk x Detection risk
DETECTION RISK = Audit Risk / (Inherent risk x Control risk)
Use of assessed level of detection risk

From the assessed level of detection risk, the auditor will then design substantive procedures. The following table
summarizes the effects of detection risk to auditor’s procedures.
Lower DR Higher DR
Nature More effective procedures may be applied Less effective procedures may be applied
Timing Procedures will be performed closer or nearer to Procedures will be performed at interim or several
year-end dates
Extent Larger sample size will be tested Smaller sample size will be tested
Materiality in relation to audit risk

There is an inverse relationship between materiality and the level of audit risk, that is, the higher the
materiality level, the lower the audit risk and vice versa.
B. ESTABLISHING THE OVERALL AUDIT STRATEGY

In establishing the overall audit strategy, the auditor shall:
 Identify the characteristics of the engagement that define its scope such as
1. the financial reporting framework used;
2. industry-specific reporting requirements; and
3. the locations of the components of the entity.
 Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the
communications required such as
1. deadlines for interim and final reporting; and
2. key dates for expected communications with management and those charged with governance.
 Consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement
team’s efforts such as
1. determination of appropriate materiality levels;
2. preliminary identification of areas where there may be higher risks of material misstatement;
3. preliminary identification of material components and account balances;
4. evaluation of whether the auditor may plan to obtain evidence regarding the effectiveness of internal control;
and
5. identification of recent significant entity-specific, industry, financial reporting or other relevant developments.
 Considers the results of preliminary engagement activities and, where practicable, whether knowledge
(experience) gained on other engagements performed by the engagement partner for the entity is relevant.
 Ascertain the nature, timing and extent of resources necessary to perform the engagement.
Considerations in Establishing the Overall Audit Strategy

Characteristics of the Engagement
 The financial reporting framework on which the financial information to be audited has been prepared, including
any need for reconciliations to another financial reporting framework.
 Industry-specific reporting requirements such as reports mandated by industry regulators.
 The expected audit coverage, including the number and locations of components to be included.
 The nature of the control relationships between a parent and its components that determine how the group is to
be consolidated.
 The extent to which components are audited by other auditors.
 The nature of the business segments to be audited, including the need for specialized knowledge.
 The reporting currency to be used, including any need for currency translation for the financial information
audited.


AUDIT PLANNING
 The need for a statutory audit of standalone financial statements in addition to an audit for consolidation
purposes.
 The availability of the work of internal auditors and the extent of the auditor’s potential reliance on such work.
 The entity’s use of service organizations and how the auditor may obtain evidence concerning the design or
operation of controls performed by them.
 The expected use of audit evidence obtained in previous audits, for example, audit evidence related to risk
assessment procedures and tests of controls.
 The effect of information technology on the audit procedures, including the availability of data and the expected
use of computer-assisted audit techniques.
 The coordination of the expected coverage and timing of the audit work with any reviews of interim financial
information and the effect on the audit of the information obtained during such reviews.
 The availability of client personnel and data.
Reporting Objectives, Timing of the Audit, and Nature of Communications

 The entity's timetable for reporting, such as at interim and final stages.
 The organization of meetings with management and those charged with governance to discuss the nature, timing
and extent of the audit work.
 The discussion with management and those charged with governance regarding the expected type and timing of
reports to be issued and other communications, both written and oral, including the auditor's report, management
letters and communications to those charged with governance.
 The discussion with management regarding the expected communications on the status of audit work throughout
the engagement.
 Communication with auditors of components regarding the expected types and timing of reports to be issued and
other communications in connection with the audit of components.
 The expected nature and timing of communications among engagement team members, including the nature and
timing of team meetings and timing of the review of work performed.
 Whether there are any other expected communications with third parties, including any statutory or contractual
reporting responsibilities arising from the audit.
Significant Factors, Preliminary Engagement Activities, and Knowledge Gained on Other Engagements
 The determination of appropriate materiality levels, including:
1) Setting materiality for planning purposes.
2) Setting and communicating materiality for auditors of components.
3) Reconsidering materiality as audit procedures are performed during the course of the audit.
4) Preliminary identification of material components and account balances.
 Preliminary identification of areas where there may be a higher risk of material misstatement.
 The impact of the assessed risk of material misstatement at the overall financial statement level on direction,
supervision and review.
 The manner in which the auditor emphasizes to engagement team members the need to maintain a questioning
mind and to exercise professional skepticism in gathering and evaluating audit evidence.
 Results of previous audits that involved evaluating the operating effectiveness of internal control, including the
nature of identified weaknesses and action taken to address them.
 The discussion of matters that may affect the audit with firm personnel responsible for performing other services
to the entity.
 Evidence of management's commitment to the design, implementation and maintenance of sound internal control,
including evidence of appropriate documentation of such internal control.
 Volume of transactions, which may determine whether it is more efficient for the auditor to rely on internal control.
 Importance attached to internal control throughout the entity to the successful operation of the business.
 Significant business developments affecting the entity, including changes in information technology and business
processes, changes in key management, and acquisitions, mergers and divestments.
 Significant industry developments such as changes in industry regulations and new reporting requirements.
 Significant changes in the financial reporting framework, such as changes in accounting standards.
 Other significant relevant developments, such as changes in the legal environment affecting the entity.
Nature, Timing and Extent of Resources

 The selection of the engagement team (including, where necessary, the engagement quality control reviewer) and
the assignment of audit work to the team members, including the assignment of appropriately experienced team
members to areas where there may be higher risks of material misstatement.
 Engagement budgeting, including considering the appropriate amount of time to set aside for areas where there
may be higher risks of material misstatement.
Important note:
 When establishing the overall audit strategy, the auditor aims to create a strategy or approach that will result to an
effective and efficient audit. Thus, appropriate levels of materiality and audit risk must be considered carefully.


AUDIT PLANNING
C. DEVELOPING AN AUDIT PLAN

Audit plan
The audit plan is more detailed than the overall audit strategy in that it includes the nature, timing and extent of audit
procedures to be performed by engagement team members. An audit plan shall include a description of the
 nature, timing and extent of the risk assessment procedures;
 further audit procedures; and
 other planned audit procedures that are required to be carried out so that the engagement complies with
PSAs.
Audit program
The form and content of the audit program may vary for each particular engagement but would generally contain the
following:
 The audit objectives for each area;
 The nature, timing, and extent of audit procedures required to implement the overall audit plan; and
 A time budget in which hours are budgeted for the various audit areas or procedures.
The audit program shall serve as a:

 Set of instructions to assistants involved in the audit; and
 Means to control and record the proper execution of the work.
Communication during planning phase

The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and
management of the audit engagement (for example, to coordinate some of the planned audit procedures with the
work of the entity's personnel).
D. DIRECTION, SUPERVISION, AND REVIEW

The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and
the review of their work.
E. OTHER PLANNING CONSIDERATIONS

1. Determining the need of an auditor’s expert
An auditor’s expert is an individual or organization possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate
audit evidence. An auditor’s expert may be either an auditor’s internal expert (who is a partner or staff, including
temporary staff, of the auditor’s firm or a network firm), or an auditor’s external expert.
When using the work of an auditor’s expert, the following shall be considered by the auditor
 Selecting an expert
 Obtaining an understanding of the field of expertise of the expert
 Considering the nature, timing and extent of audit procedures
2. Additional considerations in initial audit engagements

Preliminary engagement activities
The auditor shall perform the following activities prior to starting an initial audit:
1. Perform procedures regarding the acceptance of the client relationship and the specific audit engagement;
and
2. Where there has been a change of auditors, communicate with the previous auditor in compliance with
relevant ethical requirements.
Establishing overall audit strategy and audit plan

For initial audits, additional matters the auditor may consider in establishing the overall audit strategy and audit
plan include the following:
 Unless prohibited by law or regulation, arrangements to be made with the previous auditor (for example: to
review the predecessor auditor’s working papers).
 Any major issues (including the application of accounting principles or of auditing and reporting standards)
discussed with management in connection with the initial selection as auditor, the communication of these
matters to those charged with governance and how these matters affect the overall audit strategy and audit
plan.
 The audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances.
 Other procedures required by the firm’s system of quality control for initial audit engagements (for example,
the firm’s system of quality control may require the involvement of another partner or senior individual to
review the overall audit strategy prior to commencing significant audit procedures or to review reports prior to
their issuance).


AUDIT PLANNING
3. Considerations specific to smaller entities

Less complex or time-consuming planning activities
Establishing the overall audit strategy and plan for the audit of a small entity need not be a complex or time-
consuming exercise; it varies according to the size of the entity, the complexity of the audit, and the size of the
engagement team.
Consultation
When an audit is carried out entirely by an audit engagement partner, who may be a sole practitioner, it may be
desirable to consult with other suitably-experienced auditors or the auditor’s professional body.
ILLUSTRATIVE QUIZZERS
1. Which of the following statements is/are correct?
Statement 1: The client should plan the audit work so that the audit will be performed in an effective manner.
Statement 2: The auditor should conduct the audit with an attitude of professional skepticism.
Statement 3: The auditor should develop and document an overall audit plan describing the scope and conduct of the
audit.
A. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect
2. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:
A. Gathering of all corroborating audit evidence.
B. Ensuring that appropriate attention is devoted to important areas of the audit.
C. Identifying the areas that need a service of an expert.
D. The audit work is completed efficiently.
3. Which of the following statements is incorrect?

A. The auditor should plan the audit so that the engagement will be performed in an effective manner.
B. Planning an audit involves establishing the overall audit strategy for the engagement and developing the audit
plan, in order to reduce audit risk to an acceptably low level.
C. Planning involves the engagement partner and other key members of the engagement team to benefit from their
experience and insight and to enhance the effectiveness and efficiency of the planning process.
D. 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 audit and continues until the finalization of the audit
program.
4. The auditors plan should

A B C D
• Precede action Yes No Yes No
• Be flexible Yes No No Yes
• Be cost-beneficial Yes Yes Yes Yes
5. Which of the following statements is/are correct?

Statement 1: According to PSA 300, the auditor may discuss elements of planning with those charged with
governance and the entity's management.
Statement 2: The audit plan sets the scope, timing and direction of the audit guides the development of the more
detailed overall audit strategy.
Statement 3: The overall audit strategy is more detailed than the audit plan and includes the nature, timing and
extent of audit procedures to be performed engagement team members to obtain sufficient appropriate audit evidence
to reduce audit risk to an acceptably low level.
A. Only 1 statement is correct
B. Only 2 statements are correct
C. All statements are correct
D. All statements are incorrect
6. In developing an overall audit strategy, an auditor should consider:

A. Whether the allowance for sampling risk exceeds the achieved upper precision limit.
B. Findings from substantive tests performed at interim dates.
C. Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the
financial statements.
D. Preliminary evaluations of materiality, audit risk, and internal control.


AUDIT PLANNING
7. Which of the following is least likely considered by the CPA when he makes an overall audit plan?
A. Identification of complex accounting areas including those involving accounting estimates
B. The effect of information technology on the audit
C. The content of the representation letters
D. The nature and timing of reports and other communication with the entity that are expected under the
engagement
8. An audit program provides a proof that

A. Audit work is adequately planned and documented
B. Sufficient appropriate evidence is obtained
C. Generally accepted standards of reporting has been complied
D. Proper study and evaluation of internal control has been performed
9. Audit procedures may be classified as risk assessment procedures and further audit procedures. Which of the
following best describes risk assessment procedures?
A. These procedures test the operating effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
B. These procedures are used detect material misstatements at the assertion level.
C. These are procedures for obtaining an understanding of the entity and its environment, including its internal
control, to assess the risks of material misstatement at the financial statement and assertion levels.
D. These procedures include tests of details of classes of transactions, account balances, and disclosures and
analytical procedures.
10. On performing risk assessment, which of the following is correct?

A. Compared to the management, the auditor is required to have more knowledge of the entity’s business.
B. Risk assessment procedures, by themselves, provide sufficient appropriate evidence on which to base the audit
opinion
C. “Observation”, as a risk assessment procedure is normally applied to records, documents and assets with
physical substance.
D. Risk assessment procedures are required on every audit engagement, even if it is a continuing audit
engagement.
11. An auditor is require to understand (choose the exception)

A. The nature of the entity, including its operations, ownership and governance
B. The measurement and review of the entity’s financial performance
C. All the controls established by the entity
D. Entity’s selection and application of accounting policies, including reasons for changes thereto
12. The primary purpose for obtaining and understanding of an entity's internal control is to
A. Determine the nature, timing and extent of tests to be performed in the audit.
B. Obtain sufficient appropriate audit evidence from which to draw conclusion as a basis for forming an opinion on
the financial statements.
C. Test whether controls are suitable designed, implemented and operating effectively.
D. Determine whether to accept or reject an audit engagement.
13. In assessing risk of material misstatement, an auditor is required to perform

A. Confirmation
B. Inquiry of the entity’s legal counsel
C. Inspection
D. Recalculation
14. Analytical procedures are required to be performed as a:

I. Risk assessment procedure
II. Further audit procedure (Substantive analytical procedure)
III. A procedure in the overall review phase
A. I and II only
B. I and III only
C. II and III only
D. I, II and III only
15. Analytical procedures performed in planning an audit aims to

A. Enhance the auditor’s understanding of the auditee’s business
B. Reduce further audit procedures
C. Detect material misstatements
D. Assist the auditor whether to continue of withdraw from the engagement


AUDIT PLANNING
16. The auditor’s aim in performing analytical procedures in planning an audit is to identify the existence of
A. Matters not previously addressed or for which previous conclusions were no longer appropriate
B. Material misstatements
C. Fraud
D. Unusual transactions and events
17. An auditor understands the client’s business primarily to

A. Make suggestions on how to improve internal control
B. Assess the level of control risk
C. Develop an questioning attitude during the audit
D. Identify transactions that may impact the financial statements
18. It is the risk that the auditor gives an opinion that the financial statements are fairly presented when they are not.
A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk
19. A higher level of inherent risk is present in

A. Cash and marketable securities
B. Revenues and receivables
C. Shareholders’ equity accounts
D. Fixed assets
20. Control risk

A. Is the risk that no controls exist to prevent, detect or correct material misstatement on a timely basis
B. Should be assessed in quantitative terms to provide a frame for setting audit risk and materiality levels
C. Can be reduced to zero by a strongly effective operation of the controls
D. May be assessed separately or in combination with the assessment of inherent risk
21. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:
A. Elements of audit risk while detection risk is not.
B. Changes at the auditor’s discretion while detection risk is not.
C. Considered at the individual account balance level while detection risk is not.
D. Functions of the client and its environment while detection risk is not.
22. The risk of material misstatement is related to detection risk in what manner?
A. Direct
B. Inverse
C. Proportional
D. Indeterminable
23. When the combined assessed level of inherent and control risks is high, detection risk is set
A. At the same level
B. High
C. Low
D. At zero
24. Which of the following is incorrect concerning materiality?

A. Information is material if its omission or misstatement could influence the economic decisions of users taken on
the basis of the financial statements
B. Not all matters are important to achieve fair presentation of the financial statements.
C. Materiality is directly related to audit risk.
D. In financial reporting, materiality is not a qualitative characteristic, but rather a threshold or cut-off point.
25. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about
materiality?
A. The anticipated sample size of the planned substantive tests.
B. The entity’s annualized interim financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.


AUDIT PLANNING
26. Which of the following statements is not correct about materiality?

A. The concept of materiality recognizes that some matters are important for fair presentation of financial statements
in conformity with GAAP, while other matters are not important.
B. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements
that could be material to any one of the financial statements.
C. Materiality judgments are made in light of surrounding circumstanced and necessarily involve both quantitative
and qualitative judgments.
D. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable
person who will rely on the financial statements.
27. In considering materiality for planning purposes, the auditor believes that misstatements aggregating P60,000 would
have material effect on an entity’s income statement, but that misstatements would have to aggregate P40,000 to
materially affect the statement of financial position. Ordinarily, it would be appropriate to design auditing procedures
that would be expected to detect misstatements that aggregate:
A. P40,000
B. P50,000
C. P60,000
D. P100,000
28. In connection with the planning phase of an audit engagement, which of the following statements is always correct?
A. Final staffing decisions must be made prior to completion of the planning stage.
B. Observation of inventory count should be performed at year-end.
C. A portion of the audit of a continuing audit client can be performed at interim dates.
D. An engagement should not be accepted after the client’s financial year-end
29. A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that
the documentation of details of transactions will be retained for only a short period of time. To compensate for this
limitation, the auditor most likely would:
A. Compare a sample of paid vendors' invoices to the receiving records at year-end.
B. Plan for a large measure of tolerable misstatement in substantive tests.
C. Perform tests several times during the year, rather than only at year-end.
D. Increase the sample of transactions to be selected for cutoff tests.
30. The auditor should plan the nature, timing and extent of direction and supervision of engagement team members and
review their work. Which of the following statements is incorrect regarding direction, supervision and review?
A. The auditor plans the nature, timing, and extent of direction and supervision of engagement team members based
on the assessed risk of material misstatement.
B. As the assessed risk of material misstatement increases, for the area of audit risk, the auditor ordinarily increases
the extent and timeliness of direction and supervision of engagement team members.
C. As the assessed risk of material misstatement decreases, for the area of audit risk, the auditor performs a more
detailed review of their work.
D. The auditor plans the nature, timing and extent of the review of the team’s work based on the capabilities and
competence of the individual team members performing the audit work.
“Continuous effort, not strength or intelligence, is the key to unlocking our potential”
--- END OF HANDOUTS ---


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Page 1 of 11 | AUD Handouts No.

PLANNING AN AUDIT OF FINANCIAL STATEMENTS

Factors affecting the nature and extent of planning activities

Planning as a phase of and audit

Outputs of Audit Planning

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

MAJOR AUDIT PLANNING ACTIVITIES

Risk assessment procedures

Uses of analytical procedures

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Analytical procedures during planning stage

Procedures when applying analytical procedures

2. Compare expectations with the items presented in the financial statements

Materiality in the Context of an Audit

2. Materiality applied to specific classes of transactions, account balance or disclosures

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Components of Audit risk

AUDIT RISK = Risk of material misstatement x Risk of non-detection

3. Identifying and Assessing the Risks of Material Misstatement

Effects of assessment to auditor’s procedures

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

4. Determine the acceptable level of audit risk

Determination of detection risk

Use of assessed level of detection risk

Materiality in relation to audit risk

B. ESTABLISHING THE OVERALL AUDIT STRATEGY

Considerations in Establishing the Overall Audit Strategy

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

Reporting Objectives, Timing of the Audit, and Nature of Communications

Nature, Timing and Extent of Resources

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

C. DEVELOPING AN AUDIT PLAN

The audit program shall serve as a:

Communication during planning phase

D. DIRECTION, SUPERVISION, AND REVIEW

E. OTHER PLANNING CONSIDERATIONS

2. Additional considerations in initial audit engagements

Establishing overall audit strategy and audit plan

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

3. Considerations specific to smaller entities

3. Which of the following statements is incorrect?

4. The auditors plan should

5. Which of the following statements is/are correct?

6. In developing an overall audit strategy, an auditor should consider:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

8. An audit program provides a proof that

10. On performing risk assessment, which of the following is correct?

11. An auditor is require to understand (choose the exception)

13. In assessing risk of material misstatement, an auditor is required to perform

14. Analytical procedures are required to be performed as a:

15. Analytical procedures performed in planning an audit aims to

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

RAYMUND FRANCIS A. ESCALA, CPA MBA

17. An auditor understands the client’s business primarily to

19. A higher level of inherent risk is present in

20. Control risk