AUDIT PLANNING

General Principles Regarding the Independent Audit of Financial Statements (PSA

200)
1. The auditor should comply with relevant ethical requirements.
2. The auditor should conduct the audit in accordance with the PSA.
3. The auditor should exercise professional judgement in planning and performing an
audit
4. The auditor should obtain sufficient appropriate audit evidence to reduce audit
risk.
5. The auditor should plan and perform the audit with an attitude of professional
skepticism.

The Risk-Based Audit Process

Phase 1 RISK ASSESSMENT
A. Preliminary engagement activities to decide whether to accept or continue an
Audit Engagement
B. Planning the Audit for overall Strategy and Audit Plan Development
C. Risk Assessment Procedures to identify and assess risk of material misstatement
through understanding the entity

PHASE 1 - B PLANNING THE AUDIT TO DEVELOP AN OVERALL AUDIT STRATEGY

AND AUDIT PLAN

Start of Planning?
"As the client has been obtained and the engagement letter signed by both parties
(auditor and client), the planning process intensifies...
(Cabrera)

Start of Planning Activities

Even before the client is obtained and the engagement letter is signed by both
parties (auditor and client), planning activities should be initiated by the auditor..…

PSA 300 "Planning an Audit of Financial Statements"

 Establishes standards and provides guidance on the considerations and activities
applicable to planning and audit of financial statements.
 It states that the auditor should plan the audit so that the engagement will be
performed in an effective manner

AUDIT PLANNING Definitions:

 Audit Planning involves the establishment of the overall audit strategy for the
engagement and developing an audit plan, in order to reduce audit risk to an
acceptably low level
(Cabrera)
 Audit Planning means establishment of the overall audit strategy for the
engagement and developing an audit plan to reduce audit risk to an acceptably
low level
(Mark Eranes Ng)

 Audit Planning means developing a general audit strategy and a detailed

approach for the expected conduct of the audit
(Salosagcol, Tiu, Hermosilla)

Systematic Process
Auditing consists of:
 Structured, logical, and organized series of steps and procedures
 A series of sequential steps that independent auditors follow
 To ensure that the audit is conducted in:
 Organized
 Effective
 Efficient manner

SYSTEMATIC PROCESS INVOLVES COMPLETE PLANNING

Features in Audit Planning:

 Establish overall audit strategy for the engagement and audit plan to reduce risk
 Team members benefit from experience and insight
 Nature and extent of activities will vary according to size and complexity of the
entity
 Continuous and iterative, not discrete
 Enhance effectiveness and efficiency of the planning process
 Timing of planning activities and procedures needing completion prior to
considering other procedures.

Benefits of Audit Planning

 Helps ensure that appropriate attention is devoted to important areas of the
audit
 Aids identify potential problems and resolving them on a timely basis
 Ensures proper organization, management at performance in an effective and
efficient manner.
 Assists in proper manner, coordination, and review of the work of the team
 Allows the work to be completed expeditiously
 Helps coordinate the work by other auditors and other parties

Other Activities in Audit Planning

Modifying (Updating) the overall audit strategy and the audit plan as necessary
during the audit
 Unexpected events
 Changes in conditions
 Audit evidence obtained from audit procedures
Two Levels of Planning
 Overall Audit Strategy
 Scope
 Objectives and Timing
 Materiality
 Key aspects of focus
 Staffing needs, selection, & supervision
 Approach to Audit

 Detailed Audit Plan

 Understanding the entity and its environment (PSA 315)
 Auditor's response to assessed risk (PSA 330) (risk-based audit)
 Other planned audit procedures for compliance to PSA (various PSA)

AUDIT STRATEGY
PSA 300 par 6
 Requires that the auditor establishes the overall strategy for the audit
 This overall audit strategies sets the scope, timing and direction of the audit and
guides the development of the more detailed audit plan.

 An abstract idea that occurs in the brainstorming stage of the audit planning
process
 Main ideas of the auditor on how to plan and conduct the audit and set the
scope, timing, and direction of the audit
 This guides the development of the more detailed audit plan

The process of establishing the audit strategy should involve:

 Identifying the characteristic of the engagement that defines the scope
 Ascertaining the reporting objectives of the engagement to plan the timing of
the audit and the nature of the communication required
 Considering the important factors that will determine the focus and direction of
the engagement team efforts
 Considering the results of preliminary engagement activities, and relevance of
knowledge gained by the team on other engagements performed
 Ascertaining the nature, timing and extent of resources necessary to perform
the engagement
PSA 300 par 7

OVERALL AUDIT STRATEGY

Identifying the characteristic of the Engagement that defines the scope
 Financial Reporting Framework
 Industry specific reporting requirements
 Locations of the components of the entity
Ascertaining the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communication required.
 Deadline for interim and final reporting
 Key dates and organizations of meeting with management and those charged
with governance to discuss the nature and extent of audit work
 Discussion with management regarding the expected communication on the
status of audit work

Considering the important factors that will determine the focus and direction of the
engagement team efforts
 Determination of appropriate materiality level
 Identification of areas where there may be higher risks of material
misstatements
 Identification of material components and account balances
 Evaluation whether the auditor plan to obtain evidence on effectivity of internal
control
 Identification of recent entity specific, industry, financial reporting, or other
relevant developments

 Considering the results of preliminary engagement activities, and relevance of

knowledge gained by the team on other engagements performed

 Ascertaining the nature, timing and extent of resources necessary to perform

the engagement

Other Benefits of Audit Strategy:

 Resources to deploy for specific areas
 Amount of resources to be allocated in specific areas
 When the resources are to be deployed
 How such resources are managed, directed and supervised

The Best Audit Strategy:

 The approach that results in the most efficient audit, that is, an effective audit
performed at the least possible cost.

 Audit strategy normally identifies and sets after the audit objective but before or
at the same time as the audit plan is performed. Managing the time frame of the
audit assignment is also part of the audit strategy.

 The right audit strategy could lead to minimizing auditor risks, meeting audit
deadlines, and using audit resources efficiently.

 The auditor will have to make sure that the audit assignment is not only
complete within the time required by its client, but they have to make sure that
there is sufficient time to ensure that the maximum audit quality is maintained.
Examples of Audit Strategy
Auditors will:
✓use risks-based audit approach
✓apply a top-down approach to conduct audit assignments
✓ audit of new clients and they decided not to rely on the internal control financial
statements by deciding not to test of control. Go to a substantive test.
✓Income Tax season, audit the classes of transactions then account balances.

THE AUDIT PLAN

 Formalizes the audit strategy and is more detailed than the Audit Strategy
 It includes the nature, timing, and extent of audit procedures to be performed
 The purpose is to obtain sufficient appropriate audit evidence to reduce risk to
an acceptably low level
 An Audit Plan is a detailed plan that professionals create before performing an
audit on a company or organization.
 This plan includes information about the standards the auditors aim to uphold
while performing the audit.
 Includes the specific procedures and policies that the auditors are to use to
complete the audit.
 Contains information about:
 the scope of the audit
 the name and other defining information about the company in question
 the time frame over which the audit occurs
 the professionals in charge of the audit.

Typical Audit Plan

 Description of the client company
 Structure
 Nature of business
 Organization
 Audit objectives (tax filing, for end users)
 Description of the nature and extent of other services such as tax returns
 Required governmental reports
 Timetable of the audit work
 Work to be done by the client's employer
 Assignment of audit staff
 Target completion dates
 Preliminary evaluation and judgement about materiality level
 Any special problems to be resolved during the engagement
 Conditions that may require revision in materiality

Matters of Importance
Difference between audit strategy and audit plan.
 An AUDIT STRATEGY is about implementing a program for tackling the audit, and
the AUDIT PLAN is about how you will use this strategy to tackle the audit.
 An AUDIT PLAN is more detailed than the AUDIT STRATEGY and includes the
nature, timing, and extent of audit procedures to be performed to obtain
sufficient evidence to reduce the audit risk at an acceptable low level.

Take note:
 Development of audit strategy and audit plans is not sequential
 Audit strategy and audit plans should be updated and changed as necessary
during the course of the audit

RELATIONSHIPS IN AUDIT PLANNING

THE AUDIT STRATEGY

THE AUDIT PLAN

THE AUDIT PROGRAM

THE AUDIT PROCEDURES

Areas for consideration in Audit Strategy

 Characteristics of the engagement that defines the scope
 Reporting objectives to plan the timing and nature of communications required
Results of preliminary activities and previous engagement experience
 Nature, Timing, and extent of available resources

AUDIT STRATEGY
When developing an audit strategy, the auditor must consider the appropriate levels
of materiality and audit risk

Materiality
Definition
 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
 Judgement about materiality are made in light of surrounding circumstances,
and are affected by the size and nature of misstatement, or a combination of
both; and
 Judgement 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.
PSA 320 par 2

 Information is material if its omission or misstatement could influence the

economic decision 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.
 Thus, materiality provides a threshold or cut-off point rather than being a
primary qualitative characteristic which information must have if it is to be
useful.
Financial Reporting Standard Council (FRSC)

Concept of Materiality:
 The largest amount of misstatement that the auditor could tolerate
 The smallest aggregate amount that could misstate the financial statement

Materiality therefore relates to:

 the significance of transactions
 balances and errors contained in the financial statements.
 threshold or cut-off point after which financial information becomes relevant to
the decision making needs of the users.

Consideration of Materiality
Materiality should be considered by the auditor
 Determining the nature, timing and scope of the audit engagement
 Identifying and assessing the risks of material misstatement
 Adjustments, revisions of audit plans

Features of Materiality
 Involves both quantitative and qualitative considerations
 Relative to size and particular circumstance of the entity
 To determine what is material is a matter of professional judgment of the
auditor
 In designing audit plan, the auditor should establish materiality level to detect
material misstatements
 Even immaterial matters can have material effect in the Financial Statements
 An error may not be material quantitatively but material qualitatively
 Small amounts but collectively could have a material effect
 Materiality refers to an amount or transaction that would influence the decision
of users
 Materiality depends on the size of the item
 It is a threshold point not a characteristic to be useful
 The auditor's determination of materiality is
 A matter of professional judgment,
 Affected by the auditor's perception of the financial information needs of the
users of financial information.

The auditor can assume that users:

 Have knowledge of the business, economic and accounting activities of the firm
and will diligently study the information in the financial statement
 Understand that FS are prepared and audited to levels of materiality
 Recognize uncertainties that measurement used are based on estimates,
judgment, forecasts
 Make economic decision based on the information in the financial statement

(PSA 320 Par 4)

Relationship Between Materiality and Risk

Materiality Level Risk Materiality Level Risk

Higher Lower Lower Higher

Materiality in Terms of Amount and Level

Assumption: P100,001 as the base amount

2,000,001 to 5,000,000
1,000,001 to 2,000,000
500,001 to 1,000,000
200,001 to 500,000
100,001 to 200,000
50,001 to 100,000
10,001 to 50,000
5,001 to 10,000
1,001 to 5,000
0 to 1,000
High level of materiality
 Lower the amount to P50,001
 More strict in the conduct of the audit
 More evidence to gather
 More extensive procedures
 Only below P50,000 is tolerated
Low level of materiality
 Increase the amount to P200,001
 The auditor is more lax in the conduct of the audit
 Lesser evidence to gather
 Toleration of more errors
Use of Materiality
 Planning and performing the audit
 Evaluating effect of identified misstatements and uncorrected misstatements
 Forming the opinion in the auditor's report

Importance of materiality: To determine the volume of evidence to be accumulated

Different Levels of Materiality

(PSA 320 par 10)
 Financial Statement level or overall materiality- materiality for the financial
statement as a whole
 Specific materiality -materiality applied to classes of transactions, account
balances, disclosures
 Performance materiality -scoping of financial statements line items to be tested
by the auditor to ensure that significant accounts are covered in the audit
testing (PSA 320 par 9)

Overall Materiality
 Based on financial statement as a whole
 The highest amount of misstatement without affecting the economic decision of
the users
 Financial Statements are interrelated
 Based on the common financial information needs of the users.
 Percentage is often applied to a chosen benchmark as starting point

Materiality Benchmarks
 The elements of financial statements
 Items which users tends to be focused
 Life cycle of the entity
 Economic environment which the entity operates
 Ownership structure and the way it is financed

Technical Benchmark
 Reported income such as profit before tax, total revenue
 Gross profit and total expense
 Total equity or net asset value
 Total Assets
 Total Revenues
 Profit before tax from continuing operations (for profit-oriented entities)
 Average of three years' net income before taxes

Starting Points
PSA does not require any range of percentages, based in actual practice
 Income from continuing operations - 3% to 7%
 Assets - 1% to 3%
 Equity -3% to 5%
 Revenues - 1% to 3%
 Less than 5% immaterial & than 10% materiality
 1% to 1.5% larger of total assets or revenue
 Suggestion: ranges from 5% -20% of the factor

Specific Materiality
 Lesser amount than the overall materiality that may be relevant to users
 Refers to sensitive accounts in the financial statements or disclosures
 Done by allocating the overall materiality to the respective account balances
 Allows the auditor to determine audit procedures to each specific accounts
 Allocation is not provided in the and highly subjective

Factors affecting application of specific materiality:

 Law, regulation or applicable reporting framework affect user's expectations on
measurement or disclosures on accounts
 Key disclosures in relation to industry it operates
 Certain aspect in the business that is separately disclosed in the financial
statements
Tolerable misstatement: The allocated materiality to an account

Performance Materiality
Definition (PSA 320 par 9)
 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. If applicable,
performance materiality also refers to the amount set by the auditor at less than
the materiality level or levels for particular classes of transactions, account
balances or disclosures
 Margin of safety or buffer against undetected misstatement and uncorrected
errors .
 Consideration of immaterial items on the aggregate to cause misstatement
exceeding materiality level
 Set at lower amount than the overall materiality and specific materiality
 To lower audit risk to an appropriately low level

Other pertinent matters on performance materiality

 Not a simple mechanical calculation but an exercise of professional judgment
 affected by the auditor's understanding of the entity
 updated during the execution of the auditor's risk assessment procedures
 nature and extent of accumulated misstatements from past engagements
 required for an auditor to establish under PSA 320 par 11

Steps in using Materiality

 Establish a preliminary judgement about materiality
 Determine tolerable misstatement
 Establish performance materiality
 Estimate likely misstatements and compare totals to the preliminary judgement
about materiality
 Done near the end of the audit when gathered evidences are evaluated
 Aggregates misstatements gathered from specific accounts and previous
identified unacted & unadjusted misstatements in the prior periods
 Comparison of these aggregate misstatements against the adjusted preliminary
materiality
 If aggregate misstatements are less than adjusted preliminary materiality, there
is fair presentation
 Conversely, if greater the auditor should recommend adjustments of the
financial statements
 If client refuses, the auditor should issue a qualified or adverse opinion

WARNING!!!
NEVER MENTION THE LEVEL OF MATERIALITY TO THE CLIENT OR AUDITEE
OTHERWISE EVIDENCE COULD BE MANIPULATED BY THE MANAGEMENT..

AUDIT PLAN
Detailed Audit Plan
 Understanding the entity and its environment (PSA 315)
 Auditor's response to assessed risk (PSA 330)
 Other planned audit procedures for compliance to PSA (various PSA)

Documentation
 The overall audit strategy
 The audit plan
 Significant changes discovered during the audit engagement and the reasons for
such changes
 Pre-engagement activities
 Letter of engagement
 Materiality level

Initial Audit Engagements

Considerations in initial audit engagements:
 Acceptability of the client relationship and specific engagement
 Communication with the previous auditor, if there is a change, in compliance
with ethical requirements
 Review the previous auditor's working paper but consider the ethical
requirements

Direction, Supervision and Review

Auditor plans the nature, timing, and extent of direction and supervision of
engagement and review their work.

Direction and supervision:

 extent of instructions to team members on procedures to undertake
 supervising how procedures are undertaken

Review:
 to determine if members have conducted the procedures properly and
effectively

Nature & timing varies and dependent on:

 size and complexity of the entity
 area of the audit
 assessed risk of material misstatement
 capabilities and competence of individual team members

Additional Matters
 Unless prohibited by law, review the previous auditor's working paper
 Major issued discussed with management (accounting issues and reporting
standards)
 Planned audit procedures regarding opening balances (PSA 520 par 3)
 Assignment of firm personnel regarding competence and capabilities .
 Other procedures required of the firm's system of quality control

PSA 510-Opening Balances

PSA 510 par 3
Objective of the auditor regarding opening balances whether:
 Opening balances contain misstatement and affect current period's financial
statement
 Consistency in the application of appropriate accounting policies reflected in the
opening balances
 Opening balances: those account balances that exist at the beginning of the
period
(PSA 510 par 4)

Other Critical Matters in Engagement Planning

 Application of Analytical Procedures
 Establishment of an engagement or audit team
 Consideration of work performed by others:
 predecessor auditor
 other CPA
 specialists
 use of client's staff
 internal auditors
 Assessment of going concern
 Identification of related parties
 client's legal obligation
 completion of the initial audit program
 preparation of time budget
 assignment of personnel to the engagement
 scheduling of work
ANALYTICAL PROCEDURES
 Involves analysis of significant ratios and trends, including the resulting
investigation of fluctuations and relationships that are inconsistent with other
relevant information or deviations from predicted amounts.

 Importance: It helps the auditor in identifying unusual transactions and events

that may affect fair presentations of the FS and material misstatements.

 PSA 520 "Analytical procedures" requires the auditor to use analytical

procedures in the planning and overall review stages of the audit,

Substantive Analytical procedures:

 Existence of unusual transactions or events
 Amounts, ratios, and trends that might indicate matters that have financial
statement and audit implications
 Development of expectations about plausible relationships that are reasonably
expected to exist
 Ratios and trends should be compared with a certain benchmark
 Ratios and balance indications may contradict each other

Features:
 Analytical procedures consist of the analysis of significant ratios and trends
including the resulting investigation of fluctuations and relationships that are
inconsistent with other relevant information or deviate from predictable
amount.
 Some material errors, unusual transactions, material deviations, vital activities
can be viewed thru the financial statements even prior to the actual audit
engagements.
 Auditors are strictly instructed to do this procedure.
 Mastery of analytical process, just a glimpse of the Assertions, errors and
management fraud is suspected.

Compare and investigate:

 Prior years' Financial Statements
 Anticipated results such as budget forecast (income & expense performance)
 Industry averages
 Non-financial factors
 Typical relationships among Financial Statement balances
 Analysis of significant ratios and trends
 Changes in the industry in which the entity operates
 Changes in key personnel
 Observation and inspection

Analytical procedures used in planning an audit

 Simple comparisons
 Ratio analysis
 Common-size statements
 Trend statements
 Time series
 Comparison of client ratio vs. industry

Establishment of an Audit Team

Matters to consider:
 Qualification
 Ability
 Experienced and knowledgeable
 Varied in expertise
 Audit size and complexity
 Continuity and rotation of personnel

Consideration of Work Performed by Other Auditors/Parties

To be considered:
 Involvement of other auditors in the audit components
 Involvement of experts
 Number of locations

Assessment of Going Concern Assumption

 Financial
 Operations
 Loss of customers
 Availability of capital and credit
 Others Matters
 DANGER OF COMMITING MANAGEMENT FRAUD
 Non-compliance capital or statutory requirements .
 Legislations or government policy expected to adversely affect the entity

Identification of Related Parties

Related party: if one party has the ability to control the other part or exercise
significant influence over the other party in making financial and operations
decisions
Examples of related party transactions:
 sales or purchase transactions between parent company and subsidiary
 cash advances between branches
 inventory warehousing among offices within the holding company
 foreign currency transactions between offices
 intercompany loans :significant transactions with related parties

Client's Legal Obligation

 Changes to articles of incorporation
 Minutes of meeting
 Significant contracts executed during the year
 major agreements or contracts
 current situation and future plans
 authorization of dividends
 Inquiries into the entity's operations or financial results by regulatory or
government bodies.
 Pending litigation and contingent liabilities

Scheduling of Work
 Deadline
 Ability of the audit staff
 Cost
 Other audit clients
 Manpower Availability

AUDIT PROGRAM
Definitions
 Set of instructions or manuals to assistants or the audit team as a mean to
control the proper execution of the work. A program sets out the nature, timing
and extent of the planned audit procedures required to implement the overall
audit plan.
 A detailed list of procedures to be performed in an audit.
 A list of audit procedures to be performed so that the auditor will have evidence
as a basis for expressing an opinion on the financial statements
 A more detailed plan of the procedures to be used in the audit of specific
accounts and transactions
 Includes detailed instructions and procedures to be performed by audit team
members

Types of Audit Program

 Standard All-Purpose Audit Program
 Tailor-Made Audit Program
 Standard Form

Uses of an audit program:

 Aids in the effective and efficient conduct of the evidence gathering phase of the
audit
 Help in directing and supervising of audit staff
 Facilitates review procedures
 Coordinate the different audit procedures with client's staff and personnel
 Document the performance of audit procedures

Preparation of the Time Budget

Definition
 An estimated total hours to finish the audit engagement
 Based on information obtained in understanding the client
 Allocated to work schedules indicating who, what to do, and length of time
 Basis for determining fees
 Used to measure efficiency of staff
 Indicates progress of the engagement
Factors to consider:
 the client's size as indicated by sales, number of employees, branches, offices
location of client facilities
 anticipated accounting and auditing problems
 competence and experience of staff available

Personnel Assignment
PSA 220 par 8 to 25
 The auditor, and assistants with supervisory responsibilities, will consider the
professional competence of assistants performing work delegated to them when
deciding the extent of direction, supervision and review appropriate for each
assistant
 Any assignment to team member shall provide reasonable assurance that the
work will performed with due care by someone with professional competence
required in the situation

Scheduling of Work
The firm should consider:
 Type of engagement
 Deadline for submission of final audit report
 Ability of the audit staff
 Costs
 Other audit clients
 Manpower availability

Documentation of Audit Plan / Audit Program

 Audit Strategy
 Audit Plans
 Audit Programs
 Time Budget
 Significant Changes
 Letter of Engagement