AUDITING AND

ASSURANCE CONCEPTS
AND APPLICATIONS

(Source: http://www.brmco.com/resource/Our-Services/audit-firms-in-india.aspx)
 CHAPTER 1
AUDIT PLANNNING- INTRODUCTION AND RISK
ASSESSMENT PROCEDURES

(Source: https://theaseanpost.com/article/audit-firms-urged-strengthen-capacity-building-and-improve-quality-controls)
Topic Outline
• Audit planning
• Major planning audit activities
• Overall audit strategy
• Direction, supervision and review
• Risk assessment and procedures
• Analytical procedures
• Materiality
• Audit risks and its components
• Interrelationship of the components of audit risks
DISCUSSION
Planning an audit of Financial Statements
Planning an audit involves establishing the overall audit strategy for the
engagement and developing an audit plan. Adequate planning benefits the
audit of financial statements in several ways.
 Appropriate attention is devoted to important areas.
 Potential problems are identified and resolved on a timely basis.
 Proper organization and management of the audit engagement leading to
an effective and efficient performance.
 Work are properly assigned to appropriate engagement team members.
 Assistance in coordinating work done by other auditors and experts.
 Assistance in facilitating direction, supervision and review.
The nature and extent of planning activities will vary according to the:
 Size and complexity of the entity
 Previous experience with the entity of key engagement team
members (partner, manager, and staff-in-charge)
 Changes in circumstances that occur during the audit engagement
 Timing of the appointment of the independent auditor
MAJOR AUDIT PLANNING ACTIVITIES
The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of audit plan after performing
the following procedures:
a) Obtaining an understanding of the client and its environment
b) Determining the need for experts
c) Establishing materiality and assessing risks
d) Assessing the possibility of non-compliance
e) Identifying related parties
f) Performing preliminary analytical procedures
g) Development of the overall audit strategy and detailed audit plan
h) Preparation of preliminary audit programs
THE OVERALL AUDIT STRATEGY AND AUDIT PLAN
Overall audit strategy- In establishing the overall strategy, the auditor shall:
 Identify the characteristics of the engagement that defines its scope
 Ascertain the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required
 Consider the factors that, in the auditor’s professional judgment, are significant in the
directing the engagement team’s efforts
 Consider the results of preliminary engagement activities and, when practicable.
Whether knowledge 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
Audit Plan
After the overall audit strategy has been established, an audit plan
can be developed to address the various matters identified in the overall
strategy, taking into account the need to achieve the audit objectives
through the efficient use of the auditor’s resources. The audit plan is
more detailed than the overall audit strategy in that it includes the
nature, timing and extent of audit procedures to be performed by the
engagement team members.
AUDIT PROGRAM
The audit program shall serve as:
 Set of instructions to assistants involved in the audit
 Means to control and record the proper execution of the work.
The audit program also contains:
 The audit objective for each area and
 A time budget in which hours ate budgeted for the various audit areas or
procedures.
CHANGES IN PLANNING DECISIONS DURING THE COURSE OF THE AUDIT
The overall audit plan and the audit program shall be revised as necessary
during the course of the audit. Planning is continuous throughout the
engagement because of changes in conditions.
DIRECTION, SUPERVISION AND REVIEW
Planning is discreet 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 completion of the current audit engagement.
The nature, timing and extent of the direction and supervision of engagement of team
members and review of their work vary depending on many factors including
 The assessed risks of material misstatement;
 size and complexity of the entity;
 the area od audit; and
 capabilities and competence of personnel performing the audit work.
RISK ASSESSMENT PROCEDURES
Risk assessment procedures are audit procedures performed to
obtain an understanding of the entity and its environment,
including the entity’s internal control, to identify and assess the
risks of material misstatements whether due to fraud or error at
the financial and assertion levels.
RISK ASSESSMENT PROCEDURES AND RELATED ACTIVITIES
The auditor shall
 identify risks throughout the process of obtaining an understanding of the
entity and its environment, including relevant controls that relate to the
risks, and consider the classes of transactions, account balances, and
disclosures in the financial statement;
 Relate the identified risks to what can go wrong at the assertion level;
 Consider whether the risks are of a magnitude that could result in a
material misstatement of the financial statements; and
 Consider the likelihood that the risks could result in a material
misstatement of the financial statements.
The risk assessment procedures shall include the following:
 Inquiries of management, and of others within the entity who,
in the auditor’s judgment may have information that is to assist
in identifying risks of material misstatement due to fraud or
error;
 Analytical procedures; and
 Observation and inspection.
ANALYTICAL PROCEDURES DURING PLANNING STAGE
Analytical procedures consist of evaluations of financial
information made by a study of plausible relationships among both
financial and non-financial data. Analytical procedures also
encompass the investigation of fluctuations and relationships that
are consistent with other relevant information or that differ from
expected values by a significant amount.
The Required Understanding of the Entity and Its Environment
The auditor shall obtain an understanding of the following:
 Relevant industry, regulatory and other external factors including the applicable financial
reporting framework;
 The nature of the entity, including its operations, ownership and governance structure; types of
investment that the entity is making and plans to male; and the way the entity is structured and
how it is financed;
 Entity’s selection and application of accounting policies, including reasons for changes thereto;
 Entity’s objectives and strategies, and those related business risks that may result in risks of
material misstatement;
 The measurement and review of the entity’s financial performance ; and
 Internal control.
MATERIALITY
Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements Materiality depends on the
size of the item or error judged in the particular circumstances of its omission or
misstatement.
Using professional judgment, the auditor shall determine materiality at
 Financial statement level- the smallest aggregate amount of misstatement applicable to all
financial statements
 Assertion level for classes of transaction, account balances and disclosures- largest
tolerable misstatement.
AUDIT RISK
Audit Risk is the risk that than the auditor gives an
inappropriate audit opinion when the financial statements
are materially misstated.
A. Risk of material misstatement
 Inherent Risk- is the susceptibility of an account balance or class of transaction to
misstatement that could be material, individually or when aggregated with misstatements
in other balances or classes, assuming that were no related controls.
 Control Risk is the risk that a misstatement, that could occur in an account balance or class
of transaction that 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
 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 transaction that could be
material, individually or when aggregated with misstatements in other balances of classes.