AUDIT PLANNING
PSA 300
AUDITOR’S OBJECTIVE
“The objective of the auditor is to plan the audit so that it
will be performed in an effective manner.”
The overall audit strategy
The overall audit plan
Draft of the preliminary audit program
Planning Memorandum
Summary of planning procedures
Considerations
Audit or review
Need for specialists
Staff assignment and timing schedules
Assessed level of control risk
Significant client or industry risks
Utilization of internal auditors
Identification of unusual accounting principle problems
Basis for audit program
Goals of Planning
• Obtain (or update) an
understanding of IMPORTANT
EVENTS that have affected the
client and its operations
• Identify areas of the audit
engagement that may represent
SPECIAL RISKS to the auditor
• Ensure that the audit is
completed in a TIMELY fashion
McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved.
Understanding the Client’s Business
(PSA 315)
Understand Industry, regulatory, and
applicable financial framework
Nature of the entity
Objectives, strategies and other risks
Entity’s financial performance
Internal control
McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved.
Understanding the Client’s Business(PSA 315)
RISK ASSESSMENT PROCEDURES
►Inquiry
►Inspection
►Observation
►Analytical Procedures (PSA 520)
Analytic Procedures: Stages of Use
Preliminary - required
Substantive testing - optional
Final Review - required
Planning considerations
Extent to which computers are used
Complexity of computer operations
Organizational structure of computer
processing
Availability of data
Use of CAATS
Need for specialized skills
Audit Documentation Files
Current
Permanent
Prior Year Working
Papers
Audit Documentation
Information on Workpaper
Name, date, purpose, page
number
Procedures performed and
conclusions reached by the
auditor
Evidence that auditor
followed general
standards and standards
of field work
Audit Mark Legend
Reviewers’ initials
Other Issues Related to Audit Documentation
Ownership
Auditors maintain ownership, even after auditor-client
relationship is over.
Confidentiality
Only can be made public with permission, or if
subpoenaed, or as part of a peer review of firm practices,
or as part of an ethics investigation of firm personnel.
Review
Hierarchical review process.
Retention
Sarbanes-Oxley requires that most records be kept for 7
years.
Internal Control
A process, effected by an entity's board of directors,
management, and other personnel, designed to provide
reasonable assurance regarding the achievement of
objectives in the following categories:
(1) Reliability of financial reporting,
(2) Compliance with applicable laws and regulations,
(3) Effectiveness and efficiency of operations.
UNDERSTANDING AND CONSIDERATION OF
INTERNAL CONTROL
Components of internal control
•Control environment
•Risk assessment
•Control activities
•Information & communication
•Monitoring
Phase 1: Understand and Document
Understand the Client’s Internal Control
Document the Internal Control understanding
Internal Control questionnaire
Narrative
Accounting and Control System Flowcharts
Phase 2: Assess Control Risk (Preliminary)
Phase 3: Testing - Perform Test of Controls Audit Procedures
Document the assessed level of control risk
Phase 4: Reassessment - Re-Assess Control Risk
Phase 5: Determine the nature, timing and extent of
substantive testing
Phases of a Control Evaluation
Inquiry
Inspection
Observation
Reperformance
Nature, timing and extent of Test of Control
Unreliable Informal Standardized Monitored Optimized
Unpredictable Controls are Standardized controls Integrated internal
Controls are designed,
environment designed and in with periodic testing for controls with real-time
in place, and are
where controls are not place but are effective design and monitoring by
adequately documented.
designed or in place. not adequately operation with reporting management and
documented. to management. . continuous
improvement. .
Internal Controls Maturity Framework
Source: PricewaterhouseCoopers, The Sarbanes-Oxley Act of 2002: Strategies for Meeting New Internal Control
Reporting Challenges: A White Paper.
Audit Materiality (PSA 320)
“Information is material if its omission or
misstatement could influence the economic
decisions of users taken on the basis of the
financial statements.”
• The largest amount auditor could tolerate
• The smallest aggregate amount that could
misstate the financial statements
Materiality
• Materiality refers to an amount (or transaction) that would
influence the decisions of users (i.e., an amount (or event) that
would make a difference).
• Materiality Criteria:
Quantitative Criteria: Qualitative Criteria
Absolute size Nature of the item or
issue
Relative size
Circumstances
Cumulative effects
Uncertainty
• Ultimately, materiality is a matter of professional judgment.
Materiality should be considered by the auditor when:
(a) During planning stage; and
(b) Completion phase
Determine the Tolerable Misstatement (Performance
Materiality)
“ The lower the tolerable misstatement, the more
extensive the required audit procedures.”
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