CHAPTER

5 TYPES OF
AUDIT PLANNING,
AUDIT TESTS, AND MATERIALITY

McGraw-Hill/Irwin
THE PHASES OF AN AUDIT
THAT RELATE TO AUDIT
PLANNING

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PRELIMINARY ENGAGEMENT
ACTIVITIES
Determine the Audit
Engagement Team
Requirements

Assess Compliance with

Ethical Requirements,
Including Independence
ESTABLISH TERMS OF THE ENGAGEMENT

In establishing the terms of the engagement,

three topics must be discussed:
1.The engagement letter;
2.Using the work of the internal auditors;
and
3.The role of the audit committee.

The terms of the engagement, which are documented in

the engagement letter, should include the objectives of
the engagement, managements responsibilities, the
auditors responsibilities, and the limitations of the
engagement.
Who signs the engagement letter?
THE ENGAGEMENT LETTER

The engagement letter formalizes the arrangement reached

between the auditor and the client.
In addition to the items mentioned in the
sample engagement letter in Exhibit 3-1 in
the textbook, the engagement letter may
include:
Arrangements for use of specialists or
internal auditors.
Any limitations of liability of the auditor
or client.
Additional services to be provided.
Arrangements regarding other services.
 LO# 5

INTERNAL AUDITORS

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THE AUDIT COMMITTEE
LO# 6

Section 301 of Sarbanes-Oxley Act requires the

following for audit committee members of
Subcommittee publicly held companies:
of the board of
Member of board of directors and independent.
directors
Directly responsible for overseeing work of any
registered public accounting firm employed by the
company.
No specific
requirements Must preapprove all audit and nonaudit services
provided by its auditors.
for privately
held companies Must establish procedures to follow for complaints.
Must have authority to engage independent counsel.

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 LO# 7

PLANNING THE AUDIT

When preparing the audit plan, the auditor should be guided
by the results of the client acceptance/continuance process,
procedures performed to gain an understanding of the entity,
and preliminary engagement activities.
Additional steps:
Assess business risks.
Establish materiality. Lets look at each
of these steps.
Consider multilocations.
Assess the need for specialists.
Assess the possibility of illegal acts.
Identify related parties.
Consider additional value-added services.

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 LO# 7

DOCUMENT AUDIT STRATEGY

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 LO# 9

TYPES OF AUDIT TESTS

Used to obtain an understanding of

Risk Assessment
the entity and its environment,
Procedures including its internal control.

Directed toward the evaluation of the

Tests of Controls effectiveness of the design and
operation of internal controls.

Detect material misstatements in a

Substantive transaction class, account balance,
Procedures and disclosure component of the
financial statements.

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 LO# 10

MATERIALITY

The
The magnitude
magnitude of of an
an omission
omission or or
misstatement
misstatement of of accounting
accounting information
information
that
that makes
makes itit probable
probable that
that the
the judgment
judgment ofof
aa reasonable
reasonable person
person relying
relying on
on the
the
information
information would
would be be changed
changed or or influenced
influenced
by
by the
the omission
omission oror misstatement.
misstatement.
Materiality is not an absolute and
it is not a black or white issue!
The determination of materiality
requires professional judgment.
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 LO# 11

STEPS IN APPLYING MATERIALITY

ON AN AUDIT

Step
Step 1: 1:
Determine
Determine aa materiality
materiality level
level for
for the
the overall
overall financial
financial statements
statements
(planning
(planning materiality)
materiality)

Step
Step 2:
2:
Determine
Determine tolerable
tolerable misstatement
misstatement
(allocation
(allocation of
of materiality
materiality at
at individual
individual account/class
account/class of
of transactions
transactions level)
level)

Step
Step 3:
3:
Evaluate
Evaluate auditing
auditing findings
findings
(near
(near the
the end
end of
of the
the audit)
audit)

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END OF CHAPTER 3

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