The document discusses audit planning which involves developing an audit strategy and approach. Adequate planning ensures important areas are addressed, potential problems identified, and work is completed efficiently. It involves understanding the client's business, internal controls, and risks. Analytical procedures are used in planning to identify audit areas and risks. The auditor estimates materiality and assesses inherent, control and detection risks to determine the audit approach using the audit risk model. Documentation includes the audit plan, program and time budget.

1. AUDIT PLANNING
CHAPTER 5

2. Audit planning:
 Involves developing a general audit
strategy and detailed approach for the
expected conduct of the audit.
 Auditor’s main objective in planning:
determine the scope of the audit
procedures to be performed.

3. Importance of adequate planning of the
audit work:
 Ensures that appropriate attention is devoted to
important areas of the audit;
 Helps to identify potential problems;
 Allows the work to be completed expeditiously;
 Assists in the proper assignment and coordination of work,
and
 And, it helps ensure that the audit is conducted
effectively and efficiently.

4. PSA 315 requires the auditor to obtain
sufficient understanding of the entity and
its environment including its internal
control.

5. Understanding the Client:
 The auditor should obtain a sufficient level of knowledge
of the entity’s business to identify and understand the
events, transactions and practices that may have a
significant effect on the financial statements.
 If the auditor understands the operations of the client,
the auditor is often able to evaluate the reasonableness
of the client’s estimates.
 It would also include understanding the entity’s
objectives and strategies, and the related business risks.

6. Sources of information
 Review of prior years’ working papers;
 Tour of the client’s facility;
 Reading relevant books, periodicals and
other publications;
 Discussion with people within and outside
the entity; or
 Reading corporate documents and financial
reports.

7. Uses of information obtained
 Assessing risks and identifying potential
problems;
 Planning and performing the audit effectively
and efficiently;
 Evaluating audit evidence as well as the
reasonableness of client’s representations
and estimates; and
 Providing better services to the client

8. Additional Consideration on New Engagements
PSA 510 requires the auditor to obtain sufficient
appropriate audit evidence that:
 The opening balances do not contain misstatements
that materially affect the current year’s financial
statements;
 The prior period’s closing balances have been
correctly brought forward to the current period or,
when appropriate, have been restated; and
 Accounting policies are appropriate and have been
consistently applied

9. Understanding the Internal Control
 The main reason the auditor is required to
understand the internal control is for the auditor
to anticipate the type of potential misstatements
that can occur in the financial statements and
thus helping the auditor plan the appropriate
audit procedures.

10. Developing an Overall Audit Strategy
 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.
 An audit plan should be made regarding:
- how much evidence to accumulate:
- what are the procedures to be performed; and
- when should procedures be performed
Adequate consideration of materiality and audit risk
should enable the auditor to answer these questions.

11. MATERIALITY

12. MATERIALITY
 Materiality is defined in accounting literature in the following
terms:
“ Information is material if its omission or misstatement could
influence the economic decision of users taken on the basis of
the financial stetments.”
 In designing an audit plan, the auditor should make a preliminary
estimate of matestatementsriality. Materiality may be viewed as:
a. the largest amount of misstatement that the auditor could
tolerate in the financial statement; or
b. the smallest aggregate amount that could misstate any one of
the financial statements.
1

13. Importance of materiality in planning an
audit
 The auditors should make preliminary estimate of
materiality to assist them in determining the
amount of evidence needed to support their
opinion.
 There is an inverse relationship between
materiality and the audit evidence.
This means, more evidence is needed as the level
of materiality for the account decreases.

14. Using Materiality in an Audit
PLANNING
STAGE
COMPLETION
STAGE
Determine the Overall Materiality
(Financial Statement Level)
Determine the Tolerable Misstatement
(Account Balance Level)
Perform audit procedures
Compare the aggregate amount of
misstatements with the overall
materiality.

15. AUDIT RISK

16. Audit Risk
 The audit of financial statements is not a
guarantee that all material misstatements in the
financial statements are detected.
 The auditor’s objective is not to eliminate this
risk but to reduce the risk an acceptability low
level by applying effective audit procedures.

17. Audit Risk Model
Audit Risk = Inherent Risk * Control Risk * Detection Risk

18.  Step 1. Set the acceptable Level of Audit Risk
• The auditor uses his judgment in determining the risk of accepting an assertion as
fairly stated when in fact it is materially misstated. The auditor should plan the auditor
in such a way that, after performing audit procedures, an opinion can be issued on the
financial statements at a low level of audit risk.
 Step 2. Assess the level of Inherent Risk
• Consider the specific factors related to the client that may affect the risk of material
misstatement for a particular amount. In making the assessment, the auditor relies
primarily on the entity, and the results of preliminary analytical procedures
 Step 3. Assess the Level of Control Risk
• Assessment of control risk would involve studying and evaluating the effectiveness of
the client’s accounting and internal control systems.
 Step 4. Determine the Acceptable Level of Detection Risk
• The acceptable level of detection risk can be determined as follows:
Acceptable Level = Acceptable level of audit risk
Of detection Risk Inherent Risk * Control Risk

19. Audit Risk Model
Audit Risk = Inherent Risk * Control Risk * Detection Risk
Refers to the risk that
the auditor might give
an inappropriate audit
opinion on the financial
statements.

20. Audit Risk Model
Audit Risk = Inherent Risk * Control Risk * Detection Risk
Is the susceptibility of an
account balance or class
of transactions to
material misstatements
assuming that there were
no related internal
controls.

21. Audit Risk Model
Audit Risk = Inherent Risk * Control Risk * Detection Risk
is the risk that the material
misstatement that could occur in
an account balance or class of
transactions will not be prevented
or detected, and corrected in a
timely manner by accounting and
internal control systems

22.  Control risk is related to the effectiveness
of the client’s internal control system.
 If the entity’s internal control is effective,
then the risk that the control will fail to
detect or prevent material misstatement
(control risk) decreases.
Control Risk

23. Audit Risk Model
Audit Risk = Inherent Risk * Control Risk * Detection Risk
is the risk that an auditor
may not detect a
material misstatement
that exists in an
assertion.

24.  Detection risk is a function of the
effectiveness of the auditor’s substantive
procedures.
 Hence, as the acceptable level of detection
risk decreases, the assurance provided by
substantive tests should increase with the
application of more effective substantive
procedures.
Detection Risk

25. Steps in using the Audit Risk Model
Audit Planning
Consideration of
Internal Control
Performing
Substantive test
Step 1. Set the acceptable Level of
Audit Risk
Step 2. Assess the level of
Inherent Risk
Step 3. Assess the Level of Control
Risk
Step 4. Determine the Acceptable
Level of Detection Risk
Step 5. Design Substantive Tests

26. Materiality, Audit Risk, and Audit Procedures
MATERIALITY
Planning materiality
and/or tolerable error
AUDIT RISK
Risk of material error
occurring and/or not being
determined
PLANNED AUDIT
PROCEDURES
LOW HIGH MORE EXTENSIVE
HIGH LOW LESS EXTENSIVE

27. ANALYTICAL
PROCEDURES

28. ANALYTICAL PROCEDURES
 Involves analysis of significant ratios and
trends, including the resulting investigation
of fluctuations and relationships that are
inconsistent with other relevant information
or deviate from predicted amounts.
 PSA requires the auditor to use analytical
procedures in the planning and overall
review stages of the audit.

29. Steps in Applying Analytical Procedures
STEP 1. DEVELOP
EXPECTATIONS REGARDING
FS USING:
 Prior year’s financial
statements
 Anticipated results such as
budgets or forecasts
 Industry averages or FS of
other entities operating
within the same industry.
 Non-financial information
relevant to the financial
statements
 Typical relationships
among FS account
balances
STEP 2. COMPARE THE
EXPECTATIONS WITH THE
FINACIAL STATEMENTS
UNDER AUDIT
STEP 3. INVESTIGATE
SIGNIFICANT UNEXPECTED
DIFFERENCES (UNUSUAL
FLUCTUATIONS) TO
DETERMINE WHETHER
FINANCIAL STATEMENTS
CONTAIN MATERIAL
MISSTATEMENTS.

30. USES OF ANALYTICAL PROCEDURES
Analytical procedures may be used for the following purposes:
 As a planning tool, to determine the nature,
timing, and extent of other auditing
procedures;
 As a substantive test to obtain corroborative
evidence about particular assertions related to
the account balance or transaction class; or
 As an overall review of the financial
statements in the completion phase of the
audit.

31. The Use of Analytical Procedures in an
Audit
Stage of Audit Objective
Planning the Audit
• To understand the client’s business
• To identify areas that may represent
specific risks
Substantive Tests
• To obtain evidence to confirm (or
refute) individual account balances
Overall Review
• To identify unusual fluctuations that
were not identified in the planning and
testing phase of the audit
• To confirm conclusions reached with
respect to the fairness of the FS.

32. Using Analytical Procedures in Planning
Compare financial statements
with Expectations
Determine the difference
between the expected and
recorded balances
Is the
difference
significant?
Design less
extensive
substantive test
Design more
extensive
substantive test
YES
Design less
extensive
substantive test
NO

33. DOCUMENTING THE AUDIT PLAN
 AUDIT PLAN – The overview of the expected scope
and conduct of the audit. It sets out in broad terms
the nature, timing, and extent of the audit
procedures to be performed.
 AUDIT PROGRAM – It sets out in detail the audit
procedures to be performed in each segment of the
audit.
 TIME BUDGET – Is an estimate of the time that will
spent in executing the audit procedures listed in
the audit program.

34. THANK YOU