AUDIT PLANNING – Understanding the

Entity and its Environment

Reading Material
•PSA 300 – Planning an Audit of Financial Statements
PSA 315 – Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and its
Environment

1
 Flowchart of an Audit

PPlan the Understand and Perform

test internal substantive Issue audit
audit report
PPre- control tests
engagement
PAssess PAssess control PEstablish PEvaluate
inherent risk risk detection risk overall audit risk
Audit Planning

1. Understanding the entity and its environment

2. Understanding the internal controls
3. Developing an overall audit strategy
4. Audit risk and materiality

2
 Obtaining understanding of the
client's business and industry
Analysis of the client's business and industry
assists the auditor in:
• directing the auditor's attention toward areas
suggesting intentional misstatements by
management
• helps in identifying factors that may lead the
auditor to question the ability of the entity to
continue as a going concern
• facilitates identification of complex transaction
areas contributing to higher probabilities of
recording errors

3
 Detailed steps in the general
planning of the audit engagement
1. obtain understanding of client's business and
industry
2. conduct preliminary analytical procedures
3. establish materiality and audit risk
4. assess client business risk
5. review internal control for strategy purposes
6. assess the possibility for errors, fraud and illegal
acts
7. identify related parties and related party
transactions

4
 Detailed steps in the general
planning of the audit engagement
8. consider other planning issues
• Work of internal auditors
• Work of another auditor(s)
• Work of experts

9. develop overall audit strategy

10. consider additional value-added services
11. prepare engagement planning memorandum

5
 Obtaining understanding of the
client's business and industry

Obtain an overall understanding of:

• the client
• it's industry
• it's operations
• nature of the client's business
• methods used by the client to process
transactions

6
 Obtaining understanding of the
client's business and industry
Procedures for obtaining an understanding of the
client's business:
• reviewing correspondence files, prior year's
working papers, permanent files, financial
statements and auditor's reports
• inquiring from client management about current
developments affecting the entity
• reading the client's current year financial
statements
• considering the impact of recently-issued
accounting and auditing pronouncements on the
audit examination

7
 Obtaining understanding of the
client's business and industry
Procedures for obtaining an understanding of the
client's business:
• touring the client's facilities
• reading minutes of meetings of shareholders
and the board of directors
• considering economic conditions and
governmental regulations that may affect the
client
• consulting industry trade publications and
individuals knowledgeable about the industry
and it's business