Chapter 4

Auditing Discipline - UEH

AUDIT PLANNING

1 Auditing Dept. - School of

Accounting - UEH
Auditing Discipline - UEH

Relevant guidance
ISA/VSA 200 Overall objectives of the independent auditor and
the conduct of an audit in accordance with ISA
ISA/VSA 300 Planning of an audit of a financial statements
ISA/VSA 315 Identifying and assessing the risks of material
misstatement through understanding the entity and
its environment
ISA/VSA 320 Materiality in Planning and Performing an audit
ISA/VSA 330 The auditor’s responses to assessed risks
ISA/VSA 450 Evaluation of misstatements identified during the
audit
ISA/VSA 520 Analytical procedures

2 Auditing Dept. - School of

Accounting - UEH
 LEARNING OBJECTIVES
Auditing Discipline - UEH

1. Explain the concept of materiality in an audit

2. Understanding the definition of audit risk and components
of audit risks
3. Outline the audit risk model
4. Understanding business-risk approach in an financial
report audit
5. Understanding the interrelationship between audit risk,
materiality and audit evidence
6. Explain how an auditor develops an overall audit strategy
and prepares an audit plan
7. Outline the logical process of identifying financial
statements assertions, developing specific audit
objectives and selecting auditing procedures
8. Define types of audit tests
3 Auditing Dept. - School of
Accounting - UEH
 CONTENTS
Auditing Discipline - UEH

1. Materiality in a financial statement audit

(chapter 7)
2. Audit risk and client business risk (chapter
5,6,7)
3. Client acceptance and continuance (chapter
6)
4. Audit planning (chapter 6)
5. Financial statement assertions, audit
objectives and audit procedures (chapter 5)
6. Types of audit tests (chapter 5)
4 Auditing Dept. - School of
Accounting - UEH
 Materiality and Audit risk
Auditing Discipline - UEH

v Materiality
v Audit risk
v The relationship
between materiality
and audit risk

5 Auditing Dept. - School of

Accounting - UEH
 Materiality
Auditing Discipline - UEH

vDefinition of materiality
§ In accounting
§ In auditing
vApply the concept of materiality
§ In audit planning
§ Evaluating misstatements identified during an
audit and withdraw suitable conclusions.

6 Auditing Dept. - School of

Accounting - UEH
 Materiality in accounting
Auditing Discipline - UEH

“Information is material if omitting it or misstating

it could influence decisions that users make on the
basis of financial information about a specific
reporting entity. In other words, materiality is an
entity-specific aspect of relevance based on the
nature or magnitude, or both, of the items to which
the information relates in the context of an
individual entity’s financial statements.”

(The Conceptual framework for financial reporting)

7 Auditing Dept. - School of

Accounting - UEH
 Materiality in accounting
Auditing Discipline - UEH

Economic transactions and

events occurred during
the period and could be
reported in financial
statements

Process Economic transactions

and events are actually
presented and disclosed
in financial statements

8 Auditing Dept. - School of

Accounting - UEH
Auditing Discipline - UEH

Misstatements
above 500 million
dongs are
considered as
material

TOTAL ASSETS:
VND 10 BILLION

financial statements’ user

9 Auditing Dept. - School of
Accounting - UEH
 Materiality in accounting
Auditing Discipline - UEH

No disclosure on
changes in depreciation
method would reduce
the comparability of
financial statements.

STRAIGHT LINE METHOD

OR DECLINING BALANCE
METHOD?
20% OR 5% ?

10 Auditing Dept. - School of

Accounting - UEH
 Materiality in auditing
Auditing Discipline - UEH

We need to obtain reasonable

assurance about whether the financial
statements as a whole are free from
material misstatement, whether due to
fraud or error.

Auditors
11 Auditing Dept. - School of
Accounting - UEH
 Materiality in auditing
Auditing Discipline - UEH

vMateriality is determined on quantitative

and qualitative basis.
§ On quantitative basis, materiality is the
maximum amount of misstatement that is
considered as acceptable in financial
statements.
§ On qualitative basis, materiality is used to
evaluate the effect of frauds, errors on users’
decision beside the quantitative aspect.

12 Auditing Dept. - School of

Accounting - UEH
 Materiality in auditing
Auditing Discipline - UEH

v ISA 320 deals with the auditor’s responsibility

to apply the concept of materiality in planning
and performing an audit of financial
statements.
v ISA 450 explains how materiality is applied in
evaluating the effect of indentified
misstatements on the audit and of
uncorrected misstatements, if any, on the
financial statements.

13 Auditing Dept. - School of

Accounting - UEH
 Materiality in auditing
Auditing Discipline - UEH

ISA 320
In planning the audit, the judgments about
misstatement that is material provide the basis for:
v Determining the nature, timing and extent of risk
assessment procedures;
v Identifying and assessing the risks of material
misstatement; and
v Determine the nature, timing and extent of
further audit procedures.

14 Auditing Dept. - School of

Accounting - UEH
 Materiality in auditing
Auditing Discipline - UEH

Materiality for the financial statements as a whole

Performance materiality

Clearly trivial threshold

15 Auditing Dept. - School of

Accounting - UEH
Auditing Discipline - UEH

Materiality for the financial statements as a whole

This is the amount applied at financial statements level, at
which it may influence users’ economic decisions taken on the
basis of the financial statements as a whole.
v Determining materiality involves the exercises of
professional judgment. A percentage is often applied to a
chosen benchmark at a starting point in determining
materiality for the financial statements as a whole.
v The benchmark may be the elements of financial
statements such as assets, liabilities, equity, revenues,
expenses etc.
v The appropriate benchmark depends on the circumstances
of the entity and relevant changes of conditions in the
industry or economic environment in which the entity
operates (for example entity’s life cycle, ownership
structure, the relative volatile of the benchmark).
16 Auditing Dept. - School of
Accounting - UEH
Auditing Discipline - UEH

Rules of thumb for Overall Materiality (OM)

v The auditor selects a base and a suitable
percentage to apply to that base. There is no
specific quantitative guidelines. The auditor can
use the most appropriate percentage method or a
blend of these by taking the average.
§ 5-10% net profit
§ 0.5-1% total revenue
§ 0.5-1% total assets
§ 1-2% equity

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Accounting - UEH
Auditing Discipline - UEH

Performance Materiality (PM)

v PM is set to reduce to an appropriate low level
the probability that the aggregate of uncorrected
and undetected misstatements in the financial
statements exceeds the materiality level for the
financial statements as a whole.
v The purpose of PM is
§ To assess the risks of material misstatements, and
§ To determine the nature, timing and extent of further
audit procedures that needs to be performed.

18 Auditing Dept. - School of

Accounting - UEH
Auditing Discipline - UEH

Performance Materiality (PM)

v Method to determine PM
Although no specific guidance is given in the auditing
standards regarding the dollar amounts or percentages to be
used in the setting of PM, in practice, PM is determined at a
percentage of overall materiality, depending on the assessed
level of risk.
v Determination of PM is not a simple mechanical calculation,
but a matter of the auditor’s professional judgment. It is
affected by the auditor’s understanding of the entity,
updated during the performance of risk assessment
procedures; and the nature and extent of misstatements
identified in the previous audits and thereby the auditor’s
expectations in relation to misstatements in the current
period. 19 Auditing Dept. - School of
Accounting - UEH
Auditing Discipline - UEH

Clearly trivial threshold

v It is not another expression of “not material”.
v The auditor designate an amount below which
misstatements of amounts in the individual
statements would be clearly trivial, and would not
need to be accumulated because the auditor expects
that the accumulation of such amounts clearly would
not have a material effect on financial statements.
v It is used in the performance of an audit and
determined at the same time as the determination of
OM and PM.
v In practice, it is set at a rather small percentage of PM
(3%-5%).

20 Auditing Dept. - School of

Accounting - UEH
 ISA 450
Auditing Discipline - UEH

vThe auditor uses the materiality to

§ Evaluate the effect of identified misstatement
on the audit; and
§ The effect of uncorrected misstatements, if
any, on the financial statements.

21 Auditing Dept. - School of

Accounting - UEH
 ISA 450
Auditing Discipline - UEH

Types of misstatements in the financial statements

v Factual misstatements are misstatements about which
there is no doubt.
v Judgmental misstatements are differences arising
from the judgement of management including those
concerning recognition, measurement, presentation
and disclosure in the financial statements.
v Projected misstatements are the auditor’s best
estimate of misstatements in population, involving the
projection of misstatements identified in audit
samples to the entire populations from which the
samples were drawn.

22 Auditing Dept. - School of

Accounting - UEH
 EXAMPLE
Auditing Discipline - UEH
23

Guideline for determining materiality:

Accounts receivable
OM = 5% Profit after tax
31.12.200X
PM = 50%*OM
Profit after tax: 28.000 Corp A 3.000
Corp B 2.200
BALANCE SHEET (ABC Company Ltd.)
Assets Corp C 1.800
Corp D 1.000
Cash 500
Accounts receivable 20.000 Corp E 600

Inventories 19.500 95 others 11.400

under 500
Fixed assets 40.000
Total 80.000 Total 20.000
23 Auditing Dept. - School of
Accounting - UEH
 EXAMPLE
Auditing Discipline - UEH
24

Guideline for determining materiality:

Accounts receivable
OM = 5% x 28.000 = 1.400
31.12.200X
PM = 50%*OM = 700
Corp A 3.000
Corp B 2.200
BALANCE SHEET (XYZ Company Ltd.)
Assets Corp C 1.800
Corp D 1.000
Cash 500
Accounts receivable 20.000 Corp E 600

Inventories 19.500 95 others 11.400

under 500
Fixed assets 40.000
Total 80.000 Total 20.000
24 Auditing Dept. - School of
Accounting - UEH
 EXAMPLE
Auditing Discipline - UEH

Auditor’s decision:
Apply substantive test on Accounts Receivable (A/R) to
collect sufficient appropriate evidence supporting
“Existence” assertion.
v Substantive test on balance would be applied to
accounts receivable by the way of sending
confirmation letters to XYZ’s customers.
v Confirmation letters to be sent to A, B, C, D.
v Sampling technique was applied on remaining
customers as follow:
[(20.000 - 8.000) : 700] x 1,5 = 26 customers
(Assumed risk factor = 1,5)
25 Auditing Dept. - School of
Accounting - UEH
 EXAMLE
Auditing Discipline - UEH

Evaluate test results

v To give opinion on the truth and fairness of an
account
§ Assessment on size of misstatements
§ Assessment on nature of misstatements
v To give opinion on the truth and fairness of the
financial statements as a whole
§ Assessment on size of misstatements
§ Assessment on nature of misstatements

26 Auditing Dept. - School of

Accounting - UEH
 EXAMPLE
Auditing Discipline - UEH

Results of confirmation letters

v The balance of A, B, C, D on the books of audit client (ABC)
matched with what were on the books of A, B, C, D.
v The confirmation letters from other 26 customers showed a
misstatement of 111 in the balance of 2 customers as
compared to what were recorded in ABC’s books. ABC agreed
to adjust the misstatement of 111.
v The projected misstatement of entire A/R balance: [(111 : 26)
x 96] – 111] = 300
v Auditor’s assessments:
§ On the size of misstatements: 300 < PM (700)
§ On the nature of misstatements: Errors (not frauds)
v Auditor’s conclusion:
§ The balance of A/R existed.27 Auditing Dept. - School of
Accounting - UEH
 EXAMPLE
Auditing Discipline - UEH

Misstatements identified in the financial statements

SUMMARY OF UNCORRECTED MISSTATEMENTS (A)
Impact on
Misstatements Total assets
Factual misstatements
Inventories (Cut-off) 100
Accounts Receivable (Allowance) 150
Fixed assets (Capitalisation) 200
450
Projected misstatements
Inventories (Cost allocation) 200
Accounts receivable (Confirmation) 300
500
TOTAL 950

28 Auditing Dept. - School of

Accounting - UEH
 EXAMPLE
Auditing Discipline - UEH

Misstatements identified in the financial statements

SUMMARY OF UNCORRECTED MISSTATEMENTS (B)
Impact on
Misstatements Total assets
Factual misstatements
Inventories (Cut-off) 100
Accounts Receivable (Allowance) 150
Fixed assets (Capitalisation) 850
1.100
Projected misstatements
Inventories (Cost allocation) 200
Accounts receivable (Confirmation) 300
500
TOTAL 1.600

29 Auditing Dept. - School of

Accounting - UEH
 EXAMPLE
Auditing Discipline - UEH

Misstatements identified in the financial statements

SUMMARY OF UNCORRECTED MISSTATEMENTS (C)
Impact on
Misstatements Total assets
Factual misstatements
Inventories (Cut-off) 100
Accounts Receivable (Allowance) 100
Fixed assets (Capitalisation) 750
950
Projected misstatements
Inventories (Cost allocation) 100
Accounts receivable (Confirmation) 100
200
TOTAL 1.150

30 Auditing Dept. - School of

Accounting - UEH
 EXAMPLE
Auditing Discipline - UEH

Misstatements identified in the financial statements

SUMMARY OF UNCORRECTED MISSTATEMENTS (D)
Impact on
Misstatements Total assets
Factual misstatements
Inventories (Cut-off) 200
Accounts Receivable (Allowance) 150
Fixed assets (Capitalisation) 500
850
Projected misstatements
Inventories (Cost allocation) 200
Accounts receivable (Confirmation) 300
500
TOTAL 1.350

31 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

ISA 200

Audit risk is the risk that the auditor

expresses an inappropriate audit opinion
when the financial statements are materially
misstated.

32 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

ISA 200
v“Audit risk (AR) is a function of the risks
of material misstatement (RoMM) and
detection risk (DR)”
v“Risk of material misstatement (RoMM) is
the risk that the financial statements are
materially misstated prior to audit”.

AR = Risks of material misstatement X Detection risk

33 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

vThe risk of material misstatement (RoMM)

may exist at 2 levels:
§ The overall financial statement level
§ The assertion level for classes of
transactions, account balances, and
disclosures.

34 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

RoMM at Overall F/S level

RoMM at Assertion level

for transactions

RoMM at Assertion level

of account balances

RoMM at Assertion level

of disclosures

35 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

RoMM at the Overall financial statement level

v RoMM at the Overall F/S level refers to the
risks of material misstatement that relate
pervasively to the financial statements as a
whole and potentially affect any many
assertions.
v For example: Auditor may assess that the
whole financial statements are likely materially
misstated (e.g. RoMM at the overall F/S is
assessed at high level) if the board of directors
are not of integrity or competence.
36 Auditing Dept. - School of
Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH
RoMM at the Assertion level
v RoMM at the assertion level reflects the possible
occurrence of material misstatements related to a
particular assertion of an account, transaction or
disclosure.
v For example, when the audit client’s business
involves in trading perishable products (i.e.
food), auditor may assess RoMM of “valuation
and allocation” assertion for Inventories account
at high level. It is because there is a risk that
inventories are not written down to their net
realisable values to reflect the reduction in value
due to damages or declining in price if the food
products are close to expiry
37
date. Auditing Dept. - School of
Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

RoMM at the assertion level

v RoMM at the assertion level consists of 2
components: Inherent risk and Control risk.
v Inherent risk and Control risk are the entity’s
risks; they exist independently of the audit of the
financial statements (A39-ISA 200).
v Three components of audit risk model:
§ Inherent risk
§ Control risk
§ Detection risk

38 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

Inherent risk (IR)

Factors influence IR:
§ Entity’s Industry characteristics
§ Nature of entity’s business enviroment
The susceptibility of an (changes in politics, regulations,
assertion about a class of technological advance, lack of sufficient
transaction, account working capital to continue operation, a
balance or disclosure to a declining industry characterised by a
misstatement that could be large number of business failures …)
material, either § Complexity of underlying transactions
individually or when (difficult calculations, complex accounting
aggregated with other
standard…)
misstatements, before
consideration of any
§ Account balances derived from
related controls. accounting estimates which require
judgment.
§ The susceptibility of assets to loss or
missappropriation.
Auditing Dept. - School of
39 Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

Control risk (CR)

The risk that a Factors influence CR:

misstatement in an
§ Poor control environment
assertion about a class of
transaction, account § Lack of relevant controls
balance or disclosure and
that could be material, § Controls designed ineffective
either individually or when
aggregated with other
misstatements, will not be
prevented, detected or
corrected on a timely basis
by the entity’s internal
control.

40 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

Detection risk (DR)

Factors influence DR:
§ The effectiveness of audit
The risk that procedures
procedures and their application
performed by the auditor by the auditor
to reduce audit risk to an
acceptably low level will
§ Adequate audit planning
not detect a misstatement § Proper assignment of personnel
that exists and that could
be material, either
to the engagement team
individually or when § The application of professional
aggregated with other
misstatements.
skepticism
§ Supervision and review of the
audit work performed
41 Auditing Dept. - School of
Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

The relationship of audit risk components

Misstatem
ents Inherent risk

Internal Control risk

control

Audit Detection risk

procedures

Audit risk
Financial
statements
42 Auditing Dept. - School of
Accounting - UEH
 AUDIT RISK - Exercises
Auditing Discipline - UEH

For each situation, select the component of audit risk that is most
directly illustrated
1. One personnel is in charge of both recording and custody of
inventories.
2. Senior auditor did not supervise and review the work performed
by audit assistant properly.
3. Sample size is too small to represent the whole population.
4. Audit client is a listed company.
5. Invoices are not pre-numbered before use.
6. Products are jewelries made from gold and gemstones.
7. Allowance for doubtful debts account.
8. There is no Code of conducts in place at audit client.

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Accounting - UEH
Auditing Discipline - UEH

v4.25 page 180

v6.14;
v6.15 page 258

44 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

Audit risk (AR) model

Risk of Material Misstatements

AR = IR x CR x DR

AR
DR =

IR x CR

45 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

Detection risk matrix

Assessment of control risk

High Medium Low

Assessment High Very Low Low Medium

of inherent
risk Medium Low Medium High

Low Medium High Very High

46 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK - Exercise
Auditing Discipline - UEH

Determine detection risk and comment on the

results.

Audit 1% 1% 5% 5% 5% 10% 10%

risk
Inherent 20% 50% 20% 50% 50% 20% 50%
risk
Control 50% 50% 50% 50% 100% 50% 50%
risk
Detection 10% 4% 50% 20% 10% 100% 40%
risk

47 Auditing Dept. - School of

Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

Reduce audit risk

Audit risk

At the overall level

At the assertion level

Inherent Control Detection

Risk Risk Risk

Sampling Non-sampling
Risk Risk
48 Auditing Dept. - School of
Accounting - UEH
 AUDIT RISK
Auditing Discipline - UEH

Reduce audit risk

v Manage audit risk at the overall level
§ Obtain a thorough understanding of audit client before
continuance or acceptance the relationship
§ Determine the acceptable level of audit risk at the assertion level
v Manage audit risk at the assertion level
§ Understanding of audit client -> Inherent risk, control risk
§ Determine appropriate level of detection risk based on which the
nature, timing and extent of the auditor’s procedures are
determined
§ Control audit quality

49 Auditing Dept. - School of

Accounting - UEH
 BUSINESS-RISK APPROACH
Auditing Discipline - UEH

Assess audit risk through clients’ business risk

v Business risk is the 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.
v Business risk may arise from:
§ Industry developments
§ New products or services
§ Expansion of business
§ Regulatory requirements
50 Auditing Dept. - School of
Accounting - UEH
 BUSINESS-RISK APPROACH
Auditing Discipline - UEH

Assess audit risk through clients’ business risk

Business risk affects audit risk as
v It might result in material misstatements in
financial statements.
v It might have impact on the prevention,
detection of material misstatements of entity’s
internal control.

51 Auditing Dept. - School of

Accounting - UEH
 BUSINESS-RISK APPROACH
Auditing Discipline - UEH

Assess audit risk through clients’ business risk

The auditor assesses the specific business risks that
the entity faces in order to determine whether they
result in errors, fraud or other irregularities, and
ultimately in a materially misstated financial
statements.
The result of this risk assessment process will help
the auditor to design appropriate audit procedures
to address the risk.

52 Auditing Dept. - School of

Accounting - UEH
 BUSINESS-RISK APPROACH
Auditing Discipline - UEH

Assess audit risk through clients’ business risk

The relationship between Audit approach

business risk and audit risk
Business risk Obtain understanding of entity’s business
environment, strategy

Inherent risk Control risk Obtain understanding of entity’s internal

control

Assess the risk of material misstatements

The risk of materially misstated remaining in the financial statements
financial statements

Detection risk Select appropriate audit procedures

53 Auditing Dept. - School of

Accounting - UEH
 Relationship between Materiality and Audit risk
Auditing Discipline - UEH

There is an inverse
relationship b/t
Materiality and Audit
risk

Relationship b/t R M
Materiality, Audit Risk
and Audit Evidence
E

54 Auditing Dept. - School of

Accounting - UEH
Auditing Discipline - UEH

v6.13
v6.14
v6.15

55 Auditing Dept. - School of

Accounting - UEH
 AUDIT PLANNING
Auditing Discipline - UEH

v Pre-planning phase
Establish policies and procedures for investigating
potential clients and acceptance of an engagement/
and for periodically reviewing continuance of
clients.
v Audit planning
§ Establish an overall audit strategy
§ Develop an audit plan

56 Auditing Dept. - School of

Accounting - UEH
 PRE-PLANNING PHASE
Auditing Discipline - UEH

Apply procedures to accept a new client or continue a

client relationship
v Obtaining and reviewing available finanical information
concerning prospective client
v Making inquiries of third parties concerning the integrity of
the prospective client and its management
v Communicating with the previous auditor
v Considering circumstances where the engagement would
require special attention or present unusual risks
v Evaluating the firm’s independence and ability to serve the
client
v Determining that acceptance of the client would not violate
the Code of Ethics
ENGAGEMENT RISK !!!!!
57 Auditing Dept. - School of
Accounting - UEH
 PRE-PLANNING PHASE
Auditing Discipline - UEH

v Engagement risk is the auditor’s exposure to loss or

injury to the professional practice from litigation, reputation
or other events arising in connection with a financial
statement audit.
v For example: management lacks integrity, risk of litigation,
client entity in a weak financial position …
v Manage engagement risk:
§ Avoid engagement that have a relatively high business risks
§ Accept engagement but establish a low acceptable audit risk
together with expanding audit procedures to compensate for the
unusually high levels of risk.

58 Auditing Dept. - School of

Accounting - UEH
 PRE-PLANNING PHASE
Auditing Discipline - UEH

Engagement letter

Purpose of 1. Procedure to proceed an engagement

engagement leter
letter
2. Agree on the terms of engagement and
Engagement other matters
letter is a
contract 3. An audit performed for many financial
years

Other matter Agree to potential modifications of

engagement lettter

59 Auditing Dept. - School of

Accounting - UEH
 Establish an overall audit strategy
Auditing Discipline - UEH

v Set the scope of the audit;

v Ascertain the reporting objectives of the engagement to
plan the timing of the audit and the nature of the
communication required;
v Consider factors that, in the auditor’s professional
judgment, are significant in directing the engagement
team’s efforts;
v Consider the results of preliminary engagement activities
and whether knowledge gained on other engagements
performed by the engagement partner for the entity is
relevant;
v Ascertain the nature, timing and extent of resources
necessary to perform the engagement.
v (ISA 300 Para 8)
60 Auditing Dept. - School of
Accounting - UEH
 Develop an audit plan
Auditing Discipline - UEH

v An audit plan includes a description of

§ The nature, timing and extent of planned risk
assessment procedures;
§ The nature, timing and extent of planned further audit
procedures at the assertion level;
§ Other planned audit procedures that are required to
be carried out so that the engagement complies with
ISAs.
(ISA 300 para 9)

61 Auditing Dept. - School of

Accounting - UEH
 Develop an audit plan
Auditing Discipline - UEH

Risk assessment procedures (ISA 315)

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 risk of material misstatement,
whether due to fraud or error, at the financial
statement and assertion levels.

62 Auditing Dept. - School of

Accounting - UEH
 Develop an audit plan
Auditing Discipline - UEH

Understanding of the entity and its

environment (ISA 315)
1. The required understanding of the entity and its
environment
2. The entity’s internal control

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Accounting - UEH
 Develop an audit plan
Auditing Discipline - UEH

The required understanding of the entity and its

environment (ISA 315)
1. The relevant industry, regulatory and other external
factors including applicable financial reporting framework.
2. The nature of the entity including its operations, its
ownership and governance structures, the types of
investment, the way the entity is structured and how it is
financed.
3. The entity’s selection and application of accounting
policies, including the reasons for changes thereto.
4. The entity’s objectives and strategies and those related
business risks.
5. The measurement and review of the entity’s financial
performance.
64 Auditing Dept. - School of
Accounting - UEH
 Develop an audit plan
Auditing Discipline - UEH

The entity’s internal control (ISA 315)

v The auditor shall obtain the undertanding of
internal control relevant to the audit.
v The auditor shall evaluate the design of those
controls and determine whether they have been
implemented, by performing procedures in
addition to inquiry of the entity’s personnel.

65 Auditing Dept. - School of

Accounting - UEH
 Develop an audit plan
Auditing Discipline - UEH

Risk assessment procedures (ISA 315)

The risk assessment procedures shall include the
following:
1. Inquiries of management, of appropriate
individuals within the internal audit function (if
exist)
2. Analytical procedures
3. Observation and inspection of documents and
records

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Further audit procedures (ISA 330)

v Overall responses
v Tests of control
v Substantive procedure
v Dual-purpose tests (a combination of tests of
control and substantive tests)

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Overall responses to address the assessed the RMM at

the financial statement level (ISA 330)

1. Emphasizing to the engagement team the need to

maintain professional skepticism.
2. Assigning more experienced staff or those with special
skills or using experts.
3. Providing more supervision.
4. Incorporating additional elements of unpredictability in the
selection of further audit procedures to be performed.
5. Making general changes to the nature, timing or extent of
audit procedures.

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Tests of controls (ToCs)

v An audit procedure designed to evaluate the operating

effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
v The auditor shall design and perform ToCs if:
§ The auditor intend to rely on the operating effectiveness of
controls in determining the nature, timing and extent of
substantive procedures.
§ Substantive procedures alone cannot provide sufficient
appropriate audit evidence at the assertion level.

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Substantive procedure
v An audit procedure designed to detect material
misstatements at the assertion level.
v Substantive procedures comprise:
§ Substantive analytical procedures; and
§ Tests of details (of classes of transactions, account
balances and disclosures).

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Dual-purpose tests
v Tests that apply both test of controls and substantive
test together to the same group of documents.
v For example:
The auditor inspected a sample of invoices to determine if
these invoices were approved for payments by authorised
personnel, at the same time with inspecting the arithmatic
accuracy of amounts shown on those invoices.
v Dual-purpose tests assist the auditor in improving the
efficiency of the audit.

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Accounting - UEH
 Examples of audit tests
Auditing Discipline - UEH

TEST OF CONTROL • Tests of controls on

sales transactions

SUBSTANTIVE • Calculate receivables

ANALYTICAL PROCEDURE turnoverï ratio and days in
receivables

TESTS OF DETAILS • Send confirmation letters

• Perform cut-off test on
Sales transactions
• Inspect Allowance for
Doubtful Debts

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v8.21
v8.24

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 Financial statement assertions
Auditing Discipline - UEH

v Assertions are expressed or implied claims by

management about information reflected in the
financial statements.
v used by the auditor to consider the different
types of potential misstatements that may occur.
v Assertions may fall in 3 categories:
§ Assertions about classes of transactions and events
§ Assertions about account balances
§ Assertions about presentation and disclosure

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Accounting - UEH
 Financial statement assertions
Auditing Discipline - UEH

Assertions about account balances at the period end

1. Existence – Assets, liabilities and equity interests exist
2. Rights and obligations – The entity holds or controls
the rights to assets and liabilities are the obligations of
the entity
3. Completeness – All assets, liabilities and equity
interests that should have been recorded have been
recorded
4. Valuation and allocation – Assets, liabilities and equity
interests are included in the financial statements at
appropriate amounts and any resulting valuation
adjustments are appropriately recorded

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Accounting - UEH
 Financial statement assertions
Auditing Discipline - UEH

Assertions about classes of transactions and events for

the period under audit
1. Occurrence – Transactions and events that have been
recorded have occurred and pertain to the entity
2. Completeness – All transactions and events that
should have been recorded have been recorded
3. Accuracy – Amounts and other data relating to
recorded transactions and events have been recorded
appropriately
4. Cut-off – Transactions and events have been recorded
in the proper periods
5. Classification- Transactions and events have been
recorded in the proper 76
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Accounting - UEH
 Financial statement assertions
Auditing Discipline - UEH

Assertions about presentation and disclosure

1. Occurrence and rights and obligations – Disclosed
events, transactions and other matters have occurred
and pertain to the entity
2. Completeness – All disclosures that should have been
included in the financial statements have been
included
3. Classification and understandability – Financial
information is appropriately presented and described,
and disclosures are clearly expressed
4. Accuracy and valuation – Financial and other
information is disclosed fairly and at appropriate
amounts
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Accounting - UEH
 AUDIT PLANNING
Auditing Discipline - UEH

We will verify We assert what

those was presented
assertions and disclosed on
our financial
statements

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Accounting - UEH
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Auditing Discipline - UEH

Audit objectives
Audit objectives are aspects that the auditor needs to
collect sufficient appropriate audit evidence concerning
the fair presentation of an account, class of transactions
or disclosure when designing an audit program.

1. Existence and Occurrence

2. Rights and Obligations
Audit objectives 3. Completeness
4. Accuracy
5. Valuation and allocation
6. Presentation and disclosure
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Accounting - UEH
 Example of audit objectives
Auditing Discipline - UEH

Assertions and objectives for the account balance of

inventory of a manufacturing company

Financial statement Illustrative audit objectives

assertions
Existence • Inventories included in the statement of financial position
physically exist.
• Inventories represent items held for sale in the normal
course of business.
Rights • The company has legal title or similar rights of ownership to
the inventories.
• Inventories exclude items billed to customers or owned by
others.
Completeness • Inventory quantities as per the accounting records include
all products, materials and supplies owned by the company
that are on hand, in transit or stored at outside locations.
Valuation and • Inventories are properly stated at the lower of cost and net
allocation realisable value.
• Slow-moving, excess, defective and obsolete items included
in inventories are propertly identified and valued.
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 Assertions
Auditing Discipline - UEH

Account balances Transactions Disclosures

1. Existence 1. Occurence 1. Occurence
2. Rights and
Obligations
3. Completeness 2. Completeness 2. Completeness
4. Valuation and 3.Accuracy 3. Accuracy and
allocation Valuation
4.Classification 4. Classification
and
Understandability
5. Cut-off

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 EXISTENCE
Auditing Discipline - UEH

Ø Perform physical counts

on tangible assets
The auditor has to prove Ø Confirm assets stored
that ASSETS and outside entity or used by
LIABLITIES presented on third parties.
the financial statemetns Ø Inspect costs and
actually exist. assess the future
economic benefits of
intangible assets.
Ø Send confirmation letters
on accounts payable.
Identify overstated Assets
and Liabilities Ø Inspect supporting
documents of accounts
payable.

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Accounting - UEH
 OCCURRENCE
Auditing Discipline - UEH

The auditor has to prove ØInspect supporting

that TRANSACTIONS documents of
presented in the financial transactions occurred.
statements actually occur
ØInspect indirectly
and belong to the entity.
through verifying the
existence of relevant
assets and liabilities
Identify overstated/non- accounts.
occurrence transactions
or transactions not
belong to the entity

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Accounting - UEH
 RIGHTS AND OBLIGATIONS
Auditing Discipline - UEH

The auditor has to prove ØInspect supporting

that ASSETS are owned documents regarding
by the entity and ownership/control of the
LIABILITIES are the entity over assets.
obligations of the entity.
ØInspect the obligation
of the entity to accounts
payable.

Identify Assets and

Liabilities that the entity
does not have ownership
or obligation

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Accounting - UEH
 COMPLETENESS
Auditing Discipline - UEH

The auditor has to prove ØObtain understanding of

that the entity has the entity’s internal control.
presented all ASSETS, ØObtain evidence
LIABILITIES AND supporting Completeness
TRANSACTIONS that through verifying the
existed or occurred in the existence and occurrence.
financial statements. ØInspect relevant
accounts.
Identify ØPerform cut-off tests.
unrecorded/understated
Assets, Liabilities and ØPerform analytical
Transactions procedures.
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Accounting - UEH
 ACCURACY
Auditing Discipline - UEH

The auditor has to prove ØObtain detailed

that the entity has balances and
performed accurate transactions.
calculations, footed and
ØAgree numbers b/t
posted numbers correctly
general ledgers and
between the financial
subsidiary ledgers.
statements and general
ledgers, subsidiary ØPerform footing of
ledgers. detailed balances and
agree the totals with
general legders.
Identify inconsistencies
b/t F/S and Ledgers
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Accounting - UEH
 VALUATION AND ALLOCATION
Auditing Discipline - UEH
The auditor has to prove
that the entity has valued
and allocated ASSETS,
LIABILITIES and
TRANSACTIONS
properlly in accordance
with current accounting
standards and accounting
regulations.
Identify the applications
of inappropriate and
inconsistent valuation
methods
87
ØAssess whether the
valuation methods applied
by the entity are in
accordance with current
accounting standards and
accounting regulations.
ØAssess whether
valuation methods are
applied consistently.
ØAssess whether the
allocations are appropriate.
Auditing Dept. - School of
Accounting - UEH
 PRESENTATION AND DISCLOSURE
Auditing Discipline - UEH

The auditor has to prove Ø Verify the presentation

that the financial statements of the financial
were presented and statements:
disclosed properly in
accordance with • Classifications of
requirements of current accounts
accounting standards and • Off-setting balances
accounting regulations.
Ø Verify the fulfillment of
requirements of
Identify inappropriate or disclosure and
insufficient presentation
additional information
and disclosure.
on the financial
88 statements.
Auditing Dept. - School of
Accounting - UEH
 Example of audit objectives
Auditing Discipline - UEH

Assertions and objectives for the account balance of

inventory of a manufacturing company

Financial statement Illustrative audit objectives

assertions
• Inventories included in the statement of financial position
physically exist.
• Inventories represent items held for sale in the normal
course of business.
• The company has legal title or similar rights of ownership to
the inventories.
• Inventories exclude items billed to customers or owned by
others.
• Inventory quantities as per the accounting records include
all products, materials and supplies owned by the company
that are on hand, in transit or stored at outside locations.
• Inventories are properly stated at the lower of cost and net
realisable value.
• Slow-moving, excess, defective and obsolete items included
in inventories are propertly identified and valued.
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v9.18
v9.23
v9.21

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