Lesson 2 - Audit Planning

Auditing and Assurance Principles
Audit Planning
FUNDAMENTAL PRINCIPLES OF ASSURANCE SERVICES
PRACTICE AND REGULATION OF THE ACCOUNTANCY PROFESSION
PRE-ENGAGEMENT RISK ASSESSMENT RISK RESPONSE EVALUATE/CONCLUDE
Introduction to FS Evidence Completing the Audit

Audit Planning
Audit
Pre-engagement Consideration of Selecting Items for

Reporting
Activities Internal Controls/IT Testing (Sampling)
Transaction Cycles
FRAUD, ERROR AND NON-COMPLIANCE
CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS
QUALITY CONTROLS FOR AUDIT AND ASSURANCE FIRMS

Pre-Engagement Considerations
• Competence
• Independence
• Ability to serve the client properly
• Integrity of prospective client’s
management
Preliminary Engagement Activities (PSA 300)
1
Perform procedures regarding the continuance of the
client relationship and the specific audit engagement.
First time audit: Communicate with the predecessor

auditor (client management’s consent is NECESSARY)
• Reasons for the change of the auditor
• Integrity of the management
• Disagreement between the predecessor auditor and
the client about accounting and audit procedures
Preliminary Engagement Activities (PSA 300)
2
Evaluate compliance with ethical requirements,
including independence.
3
Establishing an understanding of the terms of the
engagement.
Preconditions for an Audit
The use by management of an acceptable financial reporting framework in the

preparation of the financial statements.
The agreement of management, and whether appropriate, those charged with
governance to the premise on which an audit is conducted.
• Management responsibility on the preparation of the financial statements
• Management responsibility on internal controls necessary to enable the preparation of financial
statements that are free from material misstatements
• Management to provide the auditor with access to all information relevant to the preparation of
the financial statements, additional information auditor may request from management, and
unrestricted access to persons from whom to obtain necessary audit evidence.
If preconditions for an audit are not present, the audit shall not accept the
proposed audit engagement unless required by law or regulations.
Agreement on Audit Engagement Terms
• To avoid misunderstanding about the respective

responsibilities of management and the auditor.
Engagement Letter • To document and confirm the auditor’s acceptance of the
appointment.
Form and Content of Engagement Letter (Required)

• Objective and scope of the audit of the financial statements;
• Responsibilities of the auditor and of management;
• Identification of the applicable financial reporting framework for the preparation of the financial
statements;
• Reference to the expected form and content of any reports to be issued by the auditor and
statement that there may be circumstances in which a report may differ from its expected form
and content.
• To avoid misunderstanding about the respective

responsibilities of management and the auditor.
Engagement Letter • To document and confirm the auditor’s acceptance of the
appointment.
Recurring YES, if the terms of the audit engagement to be

audit revised and whether there is a need to remind the entity
Need a new of the existing terms of the audit engagement.
engagement
No need to send new engagement letter every year.
letter?
YES, if there is a reasonable justification for doing so.
If prior to completing the audit engagement, the auditor

requested to change to a lower level of assurance, the
auditor shall determine whether there is a reasonable
Accept justification for doing so.
change in
the terms? If there is reasonable justification: stop performing and
referring to the old engagement, start performing the new
engagement.
If there is no reasonable justification: continue the

original audit engagement or when prohibited to continue,
withdraw from the audit engagement.
Audit Planning
Knowledge Check
Which of the following appropriately relates to the auditor’s
objective in planning the audit?
a. The auditor plans the audit to ensure that only Certified Public
Accountant will carry-out the procedures.
b. The auditor plans the audit to determine the planned audit opinion to
be issued on the financial statements.
c. The auditor plans the audit so that it will be performed in an effective
manner.
d. The audit plans the audit so that it will be performed in an effective
and efficient manner.
Benefits of Adequate Planning
Proper management of
Identification and
Devote appropriate the audit so that it is
addressing potential
attention to important performed in an
problems on a timely
areas of the audit. effective and efficient
basis.
manner.
Assist in the selection Facilitating the direction Assist, where applicable,

of engagement team and supervision of in coordination of work
members*, and the engagement team done by auditors of
proper assignment of members and components and
work to them. the review of their work. experts.
*with appropriate levels of capabilities and competence to respond to anticipated risks

Nature and Extent of Audit Planning
More extensive - Large entity - Small entity

- More complex - Less complex
transactions transactions
- Initial audits - Recurring audits
Less extensive
- Significant changes - Little or no changes
- Before year-end - After year-end
appointment appointment
Planning as a Phase of an Audit
Evaluate
Pre-
and Planning is not a discrete phase of
Engagement
Conclude
an audit, but rather a continual
and iterative process that often
begins shortly after the completion
of the previous audit and continues
until the completion of the current
Risk Risk audit engagement.
Response Assessment
Outputs of Audit Planning
• Audit strategy sets out • Audit plan contains the • Standard audit programs
the direction, scope and nature, timing and or audit completion
focus of the audit. extent of risk checklists, tailored as
assessment procedures needed to reflect the
and further audit particular engagement
procedures. circumstances.
Audit Audit
Audit Plan
Strategy Programs
Audit Planning Activities: Risk Assessment
Objective: Obtain an understanding of the entity and its environment to:
• Identify and assess the risk of material misstatement, whether
due to fraud or error, at the financial statement and assertion levels
• Design of further audit procedures.
Risk Assessment Further Audit Test of Controls /

Procedures Procedures Substantive Tests
Analytical
Inquiry Inspection Observation
Procedures
• Seeking • Involves • Consists of • Evaluations of
information examining looking at a financial
from records or process being information made
knowledgeable documents performed by by a study of
parties: (prior year others plausible
management and working papers, (observation of relationships
those responsible quarterly inventory count) amount
for financial management financial and
reporting, internal reports, minutes non-financial
audit personnel, of meetings, data.
legal counsel, internal control
and employees manuals) or
involved in the physical
processes. examination of
assets.
Analytical Procedures
Expectations
•
•
Prior year FS
Industry averages VS Actual
• Non-financial Financial
information
• Typical relationship
Information
among balances
Required during planning and conclusion phase.

May be performed during evidence-gathering (substantive analytical procedures).
Audit Planning Activities: Define Materiality
Information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements.
Audit Risk
Audit Evidence
Audit Procedures
Materiality
Note: The lower the materiality set will generally require the auditor to
perform more effective and extensive audit procedures.
Audit Planning Activities: Define Materiality
Perceived need of users
Benchmark (for example, Income before Tax)
Overall materiality (smallest aggregate amount of misstatement

applicable to all financial statements)
Performance materiality (amounts set by the auditor at less than

overall materiality) and Specific materiality (amounts set by
auditor at less than overall materiality for specific accounts)
Clearly trivial threshold (amount below which misstatements

would be clearly trivial and would not need to be accumulated)
3. Overall Audit Strategy
Scope Timing Direction

• Industry • Client • Materiality
• Coverage timetable • Scope
• Effect of IT • Audit timetable • Volume of
• Effect of • Timing of transactions
Reviews deliverables • Internal
• Availability of Control
client data Considerations
• Resources
4. Audit Plan
Nature Timing Extent

• Purpose • Interim vs. • Quantity of
and type of year-end the specific
procedures procedures
References
PSA 210
PSA 300
PSA 315
PSA 320

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Auditing and Assurance Principles

PRACTICE AND REGULATION OF THE ACCOUNTANCY PROFESSION

PRE-ENGAGEMENT RISK ASSESSMENT RISK RESPONSE EVALUATE/CONCLUDE

Introduction to FS Evidence Completing the Audit

Pre-engagement Consideration of Selecting Items for

FRAUD, ERROR AND NON-COMPLIANCE

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

QUALITY CONTROLS FOR AUDIT AND ASSURANCE FIRMS

First time audit: Communicate with the predecessor

The use by management of an acceptable financial reporting framework in the

• To avoid misunderstanding about the respective

Form and Content of Engagement Letter (Required)

• To avoid misunderstanding about the respective

Recurring YES, if the terms of the audit engagement to be

YES, if there is a reasonable justification for doing so.

If prior to completing the audit engagement, the auditor

If there is no reasonable justification: continue the

Assist in the selection Facilitating the direction Assist, where applicable,

*with appropriate levels of capabilities and competence to respond to anticipated risks

More extensive - Large entity - Small entity

Risk Assessment Further Audit Test of Controls /

Required during planning and conclusion phase.

Perceived need of users

Benchmark (for example, Income before Tax)

Overall materiality (smallest aggregate amount of misstatement

Performance materiality (amounts set by the auditor at less than

Clearly trivial threshold (amount below which misstatements

Scope Timing Direction

Nature Timing Extent

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