AUDIT PLANNING

Definition:
 It 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.
 The extent of planning will vary according to the size of the entity, the complexity of the
audit and the auditor’s experience with the entity, and the knowledge of the business.

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT

 The auditor should obtain a sufficient level of knowledge of the entity’s business to
identify and understands the events, transactions and practices that may have
significant effect on the financial statement.

 The better the auditor understands the client’s operations, the more efficient the
examination is likely to be, and the greater the value to the client of the auditor’s
services.

 An auditor’s understanding of business risks encountered by the entity increases the

likelihood of identifying risks of material misstatement and helps the auditor design
appropriate audit procedures.

 To make effective use of knowledge about the client’s business and industry, the
auditor should consider how it affects the financial statements and whether the
assertions in the financial statements are consistent with the auditor’s knowledge of
business.

 It is a continuous and a cumulative process.

UNDERSTANDING THE INTERNAL CONTROL

 The auditor should obtain an understanding of the accounting and internal control
systems sufficient to plan the audit and develop an effective audit approach.

DEVELOPING AN OVERALL AUDIT STRATEGY

 An auditor should formulate an overall audit strategy for the upcoming engagement.

 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.

 The auditor must consider carefully the appropriate levels of materiality and audit risk.
 AUDIT RISK
 Refers to the risk that the auditor gives an inappropriate audit opinion on the financial
statements.

 This occurs because the auditor believes that the financial statements are fairly stated
when in fact the financial statements are materially misstated.

 Audit risk has an inverse relationship to the audit assurance. If the auditor is willing to
accept a 5% audit risk, he must design the audit to have 95%assurance or confidence
level that his opinion is correct.

 As the desired level of the audit risk decreases, the auditor should design more effective
substantive procedure.

 INHERENT RISK
 The susceptibility of an account balance or class of transactions to a material
misstatements assuming that there were no related internal control.

 Some account balances, by nature, are more susceptible to misstatement than others.

 As the assessed level of inherent risk increases, the auditor should design more effective
substantive procedure.

 CONTROL RISK
 The risk that a material misstatement that could occur in an account balance will not be
prevented or detected and corrected on a timely basis by accounting and internal
control system.

 Control risk is related to the effectiveness of the client’s internal control.

 As the level of control risk increases, the auditor should design more effective
substantive procedures.

 DETECTION RISK
 The risk that an auditor’s substantive procedure will not detect a material
misstatement.

 This is a function of the effectiveness of the auditor’s substantive procedures.

 As the acceptable level of detection risk decreases, the assurance provided from
substantive tests increases. Hence, the auditor should design more effective audit
procedures in order to achieve the desired level of assurance.

 Has an inverse relationship to assessed level of inherent and control risk

  RELATIONSHIP BETWEEN MATERIALITY AND AUDIT RISK
 The auditor’s assessment of materiality related to a specific account helps the
auditor select audit procedures that can be expected to reduce audit risk to an
acceptable level.

 There is an inverse relationship between materiality and the level of audit risk.
If the acceptable materiality level is lower, audit risk is increased, thus, the
auditor should design more extensive audit procedures and vice versa.

RISK ASSESSMENT PROCEDURES

 In performing risk assessment procedure, the auditor may obtain audit evidence about
the fair presentation of financial statements or about the operating effectiveness of
internal control even though such procedures were not specifically planned as
substantive tests or tests of control.

1. Inquiries of management and others within the entity

2. Observation and inspection
3. Analytical procedure
- Involves analysis of significant ratios and trends, including the resulting investigation
of fluctuations and the relationships that are inconsistent with other relevant
information.
- Helps the auditor in identifying the unusual transaction or events that may affect
the fair presentation of the financial statement.

DOCUMENTING THE AUDIT PLAN

 Audit Plan
 an overview of the expected scope and conduct of the audit
 the overall audit plans sets out in broad terms the nature, timing and the extent of the
audit procedure to be performed.