The table below lists the four major parts and the related activities in audit planning.
Phases of the audit Activities
a.Accept client and perform initial audit 1.Send an engagement letter to the client
planning 7.Identify whether any experts are required for
9. Determine the likely users of the financial
b.Understand the client's business and industry 2.Tour the client's plant and offices
5. Identify potential related parties that may
6.Review the company's constitution
8. Review accounting principles unique to the
c.Assess client business risk 4. Review management risk, managemenent
controls and procedures.
d.Perform preliminary analytical procedures 3.Compare key ratios for the company with
those of industry competitors.
Sending engagement letter to the client is the final step in the client acceptance phase. The
engagement letter to the client documents and conforms the auditor's acceptance of the
appointment, the objective and the scope of the audit and the extent of the responsibilities to the
Identifying whether any experts are required for the engagement is one of the major steps in
accepting an audit. If the auditor thinks the technical competence of the audit team is insufficient to
perform audit ,the auditor may use the work of experts to obtain sufficient appopriate audit
Determining the likely users of the financial statements is important part in initial audit planning
because auditor owes duty of care to groups like investors, creditors, managers, shareholders,
suppliers and public who rely and make decisions based on auditor's report. He/she is liable under
statute and common law to the plantiff for any negligent performance.
Touring the client's plant and offices is the part of understanding the client's business and industry.
Tours to the client's plant and offices provides background knowledge on material handling
methods, the physical layout of facilities and the general condition of fixed assets and inventory.
During the visit the auditor is able to meet key people.
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Identifying potential related parties that may require disclosure is one of the major parts of
understanding client’s business and industry. Auditor identifies whether transactions are with
independent parties or related parties. It is auditor’s responsibility to make sure that there is no
transactions of client with related parties (i.e. with directors or their relatives) because the related
parties may be paying lower prices for the deal.
Reviewing the company's constitution contributes to an understanding the client's business and
industry. Constitution contains information about specific items that should be compared with data
in the accounting records and any mismatch indicates the poor integrity of management.
Reviewing accounting principles unique to the client's industry is the part of understanding the
client's business and industry.Reviewing accounting principles helps in the selection and application
of accounting policies. For example, the terms and conditions of sales made in the normal course of
business willn influence revenue recognition principles.
Reviewing management risk, managemenent controls and procedures gives the auditor an idea of
what the controlling mechanism for internal and external risk associated with the business are. The
auditor attempts to minimize the risks by risk assessment and corporate governance.
Comparing key ratios (liquidity, activity, profitability and solvency) of the company with those of
industry competitors is one of the major parts in analytical procedures. Ratio analysis helps auditor
in understanding of business and identifying areas of potential risk. Thus any ratios that don't meet
with the auditor's expectation indicates areas requring significant audit attention.
1. Gay and Simnett (2007), Auditing and Assurance Services in Australia, McGraw-Hill,
2. Leung, Coran and Cooper (2007), Auditing and Assurance Services, 3rd ed,Wiley, Chapter 5
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