AUDIT

PLANNING
APPLICATION OF ANALYTICAL PROCEDURES
AUDIT PLANNING
INVOLVES DEVELOPING A GENERAL AUDIT
STRATEGY AND A DETAILED APPROACH FOR THE
EXPECTED CONDUCT OF THE AUDIT.
OBJECTIVE: TO DETERMINE THE SCOPE
OF THE AUDIT PROCEDURES TO BE
PERFORMED
PAS 315
requires the auditor to obtain sufficient
understanding of the entity and its
environment including its internal control.

Such understanding involves obtaining knowledge about the entity’s:

a. Industry, regulatory and other external factors, including financial reporting
framework;
b. Nature of the entity, including entity’s selection and application of accounting
policies;
c. Objectives and strategies and the related business risks that may result in a
material misstatement of the financial statements;
d. Measurement and review of the entity’s performance; and
e. Internal control
 DEVELOPING AN OVERALL AUDIT
STRATEGY

The best audit strategy is the approach that results in the most efficient
audit – that is, an effective audit performed at the least possible cost. An
audit plan should be made regarding:
○ How much evidence to accumulate;
○ How and when this should be done
When developing an audit strategy, the auditor must consider carefully
the appropriate levels of materiality and audit risk.
 MATERIALITY
Information is material if its omission or
misstatement could influence the economic
decision of users taken on the basis of the
financial statements.

It may be viewed as:

● The largest amount of misstatement that the auditor could tolerate in the
financial statement, or
● The smallest aggregate amount that could misstate the financial statements
 Materiality
● In designing an audit plan, the auditor should make preliminary estimate
of materiality for use during the examination.
● Materiality is a matter of professional judgment and necessarily involves
quantitative factors and qualitative factors.

IMPORTANCE OF MATERIALITY IN PLANNING AN AUDIT

The auditor should make a preliminary estimate of materiality to
determine the amount of evidence to accumulate.
There is an inverse relationship between materiality and evidence.
 Materiality
USES OF MATERIALITY
According to PSA 320, materiality should be considered by the
auditor
● In the planning stage, to determine the scope of audit
procedures; and
● In the completion phase of the audit, to evaluate the effect of
misstatements on the financial statements.
 USING MATERIALITY LEVELS

STEP 01 STEP 02
DETERMINE THE OVERALL DETERMINE THE TOLERABLE
MATERIALITY – FINANCIAL MISSTATEMENT – ACCOUNT
STATEMENT LEVEL BALANCE LEVEL
Smallest aggregate level of misstatement that could Allocation of the overall materiality to the
distort any one of the financial statements financial statemetn account balances

STEP 03
COMPARISON OF AGGREGATE UNCORRECTED
MISSTATEMENTS WITH OVERALL MATERIALITY
The comparison will determine whether or not the
financial statements are materially misstated
SUMMARY: USING MATERIALITY IN
AUDIT:

DETERMINE THE OVERALL PERFORM AUDIT

MISSTATEMENT PROCEDURES

02 04
01 03

DETERMINE THE TOLERABLE COMPARE AGGREGATE AMOUNT OF

MISSTATEMENT MISSTATEMENTS WITH THE OVERALL
MATERIALITY

PLANNING STAGE COMPLETION STAGE

 AUDIT RISK
Risk that the auditor gives an inappropriate audit
opinion on the financial statements. This occurs
because the auditor believes that the financial
statemetnts are fairly stated when in fact the FS are
materially misstated.
The auditor should use professional judgment to assess audit risk and to design
audit procedures to ensure it is reduced to an acceptably low level.
When designing substantive audit procedures, the auditor considers three
main issues and are also the preliminary basis for the development of the audit
risk model.
AR = IR x CR x DR
AUDIT RISK MODEL
RISK ASSESSMENT PROCEDURES

The procedures performed by auditors to obtain and understanding of

the entity and its environment including its internal control and to
assess the risks of material misstatements in the financial statements.

These include:
a. Inquiries of management and others within the entity
b. Analytical procedures; and
c. Observation and inspection
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 deviate from predicted amounts.

A basic premise underlying the use of analytical procedures is that

plausible relationships among date may reasonably be expected to exist
and continue in the absence of known conditions to the contrary.
PAS 520
requires the auditor to use analytical
procedures in the planning and overall
review stages of the audit.

Analytical procedures may be used for the following purposes:

• As a planning tool, to determine the nature, timing, and extent of other
auditing procedures.
• As a substantive test to obtain corroborative evidence about particular
assertions related to the acocunt balance or class of transactions.
• As an overall review of the financial statements in the completion phase
of the audit
STEPS IN APPLYING ANALYTICAL PROCEDURES

P Prior years’ financial statements

A Anticipated results from budgets or forecasts
DETERMINE EXPECTATIONS
REGARDING FINANCIAL STATEMENTS I Industry averages
1 N Non-financial information
T Typical relationships among FS account
balances

COMPARE THE EXPECTATIONS WITH

THE FINANCIALS STATEMENTS
2

INVESTIGATE SIGNIFICANT
DIFFERENCES
3
REVENUE AND
RECEIPT CYCLE
Understanding of Internal Control, Test of Controls
and Substantive Procedures of Related
Accounts
 Revenue and Receipt
Cycle Business Process
 Sales Sales Order Credit
Customer Order
Department Department

Approval

Shipping Warehouse
Goods Goods
Department

Stock
Shipping Issuance Slip
Notice

Inventory
Billing Accounting
Sales Invoice
Department

A/R Department A/R Subsidiary Ledger/ Sales

Journal/ General Ledger
RECEIPT
RECEIPT OF
OF PAYMENT
PAYMENT

Payment with
Customer Remittance Advice

A/R Remittance Advice Cashier

Department
List of Cash
Receipt

Deposit

A/R Subsidiary Ledger/ Sales

Journal/ General Ledger

Bank
 Internal Control – Revenue Cycle

Revenue/Receipt Process Department

1. Receipt of customer order and preparation of sales order Sales

2. Approval of credit Credit

3. Fulfilling of order Shipping

4. Billing of the customer, updating AR and aging of AR Billing, AR and general accounting

5. Receipt of customer’s payment Cashier/Collection

 Major Controls
SALES
1. Credit granted by a credit department
2. Sales orders and invoices prenumbered and controlled
3. Sales returns are presented to receiving clerk who
prepares a receiving report which supports prenumbered
sales return credit memoranda
 Major Controls
ACCOUNTS RECEIVABLE
1. Subsidiary ledger reconciled to control ledger regularly
2. Individual independent of receivable posting reviews
statements before sending to customers
3. Monthly statements sent to all customers
4. Write-offs approved by management official
independent of recordkeeping responsibility (e.g. the
treasurer is appropriate)
 Major Controls
CASH RECEIPTS
1. Proper segregation of duties (CARE)
2. Cash receipts received in mail listed by individuals with no record keeping
responsibility
a. Cash goes to cashier
b. Remittance advices go to accounting
3. Over-the-counter cash receipts controlled (cash register tapes)
4. Cash deposited daily
5. Employees handling cash are bonded
 Major Controls
CASH RECEIPTS
6. Lockbox – a post office box controlled by the company’s bank at which cash
remittances from customers are received. The bank collects customer remittances,
immediately credits the cash to the company’s bank account, and forwards the
remittance advices to the company.
7. Bank reconciliation prepared by individuals independent of cash receipts
recordkeeping
 Assessed Control Risk and Test of Controls
Ineffective/
Effectiveness of Effective most
Effective Not expected to be
the D&I of I/C of the time
effective

Control risk Low Moderate High

assessment (Below Maximum) (Below Maximum) (Maximum)

Yes, limited
TOC Required? Yes, full extent No
extent
 Understanding of Internal Control
● Deficiency of internal control
○ Unable to prevent, or detect & correct misstatement
○ Aspect
■ Design – capability
■ Operation – consistency

1. Internal Control: Design deficiency

a) Missing
b) Present but improperly designed
2. Internal Control: Operational deficiency
a) Does not operate as designed
b) No authority or competence of employee
 Understanding Internal Control: Assessment of deficiency

DEFICIENCY SEVERITY COMMUNICATE WITH

Control Deficiency (simple) Does not allow to prevent or
detect and correct
misstatement
Significant deficiency Less severe than a material
weakness
Material weakness Reasonable possibility of not
prevented or detected and
corrected material
misstatement
MNGT & TCWG
If merits attention
Yes (in writing via
management letter)
Yes (in writing via
management letter)
 Substantive Audit Procedures
SALES TRANSACTIONS

● Completeness: Sales transactions that occurred are recorded

Procedure: For a sample of shipping documents, trace sales invoice and entry into sales
journal and accounts receivable subsidiary ledger. Perform cut-off tests.
REMEMBER: tama lagi ang CTOV (kutob) mo

Completeness: Use Tracing (SD  FS)

Occurrence: Use Vouching (FS  SD)
● Occurrence: Recorded sales are for shipments actually made to customers

Procedure: For a sample of entries in the sales journal, compare sales invoice copy, customer
order, and sales invoices
 Substantive Audit Procedures
SALES TRANSACTIONS

● Classification: Sales and accounts receivable transactions have been recorded in the
proper accounts

Procedure: For a sample of entries in the sales journal, verify the accuracy of account
coding

● Accuracy (Valuation): Sales are correctly billed and recorded

Procedure: For a sample of entries in the sales journal, (a) examine sales invoice, shipping
document, and customer for consistency of descriptions and quantities; (b) examine sales
orders for credit approval; and (c) check prices and extensions. Foot sales journal and
general ledger account.
 Substantive Audit Procedures

SALES AND ACCOUNTS RECEIVABLE BALANCES

● Existence or occurrence: Sales and accounts receivable are shipments made to

customers
Procedure:
1. Confirm accounts receivable and perform procedures for confirmations not returned
REMEMBER:
2. Perform analytical procedures to CT
test (Cute) si accounts
sales and Maam VE (Venus)
receivables

Completeness: Use Tracing (SD  FS)

Existence: Use Vouching (FS  SD)

● Completeness: Sales transactions that occurred and existing receivables are recorded
Procedure: Perform a test of sales cut-off
 Substantive Audit Procedures
SALES AND ACCOUNTS RECEIVABLE BALANCES

● Rights and obligations: Accounts receivable are owned by the client

Procedure: Review minutes of the board of directors’ meetings, inquire of the client
personnel, read contracts and agreements, and confirm with lenders any indications that
accounts have been assigned, sold or pledged.

● Verification and allocation: Accounts receivable are properly valued

Procedure:
1. Verify mathematical accuracy of the accounts receivable aging schedule and trace it to
the accounts receivable subsidiary ledger
2. Test the adequacy of the allowance for uncollectible accounts
 Substantive Audit Procedures

SALES AND ACCOUNTS RECEIVABLE BALANCES

● Presentation and Disclosure: Sales and accounts receivable are properly presented
and disclosed in accordance with GAAP

Procedure: Review financial statements and perform analytical procedures to determine

whether accounts are classified and disclosed in accordance with GAAP
 Substantive Audit Procedures
CASH COLLECTION

● Completeness: All receipts of cash and checks are recorded

Procedure: For a sample of days, verify that all cash receipts are recorded by reconciling
daily listing(s) of cash receipts and validated deposit ticket to cash receipts journal

● Occurrence: Recorded receipts represent actual collection of cash from customers

Procedure:
1. For a sample of entries in cash receipts journal, trace to the prelisting of cash receipts
and to remittance advice.
2. For a sample of entries reconcile daily deposit to validated deposit ticket
 Substantive Audit Procedures

CASH COLLECTION

● Classification: Cash receipts transactions have been recorded in the proper accounts

Procedure: Review account coding for a sample of entries in the cash receipts journal

● Accuracy (Valuation): Debits to cash and credits to accounts receivable are valued
at amounts received

Procedure: For a sample of entries in cash receipts journal, examine remittance advice and
verify that discount taken was appropriate. Foot accounts receivable subsidiary ledger and
reconcile to general ledger.
End.
Any question?