This document provides an overview of audit planning based on chapters 8 and 9 of an auditing textbook. It discusses the key stages and activities of audit planning, including understanding the client's business and industry, assessing risks, determining materiality, understanding internal controls, planning audit procedures, and developing an audit program. The overall purpose of audit planning is to obtain sufficient evidence for the audit in an effective and efficient manner.

1. TOPIC 7: AUDIT PLANNING
References: Chapter 8 & 9
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AUDITING AND ASSURANCE
SERVICES
IN MALAYSIA

2. LEARNING OUTCOMES
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 ENGAGEMENT LETTER
 PLANNING ACTIVITIES
 UNDERSTANDING THE CLIENT’S BUSINESS &
INDUSTRY
 FUNDAMENTAL CONCEPTS OF MATERIALITY &
AUDIT RISK
 RELATIONSHIP BETWEEN MATERIALITY VALUE &
EVIDENCE
 PREPARATION OF AUDIT PROGRAMME
 DETERMINATION OF AUDIT OBJECTIVES
 ANALYTICAL PROCEDURES - PLANNING,
FIELDWORK & COMPLETION STAGE

3. OVERVIEW OF AUDIT
PLANNING
 Definition: involves general strategy and detail
approach for the expected nature, timing and extent of
an audit
 Reasons for Audit Planning
 To enable the auditor to obtain sufficient competent
evidence for the circumstances
 To help keep audit costs reasonable
 To avoid misunderstandings with the client
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4. Overall Timing Of Engagement
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5. STAGES OF AUDIT
PLANNING
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6. Accept Client & Perform
Initial Audit Planning
 Initial Audit Planning:
1. Decides whether to accept a new or continue
serving an existing one
2. Identifies why the client wants or needs an audit
3. Obtains an understanding with the client about the
terms of the engagement
4. Select the staff for the engagement
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7. 1. Client Acceptance & Continuance
 New Client Investigation
 Reasons for investigation:
Prospective client’s standing in the business
community
Financial stability
Relations with previous auditor
 Procedure to communicate with predecessor auditor
1. The successor auditor should get the prospective
client’s permission to communicate with the existing
predecessor auditor. If the permission is not given,
the successor auditor should decline the
appointment.
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8. Cont…
2. The successor auditor should inquire the predecessor
auditor whether there is any professional reason for the
proposed change. If there are such reasons, the
successor auditor should request the predecessor
auditor to provide him with all necessary details in order
to decide the acceptance of the appointment.
3. If the successor auditor does not receive a reply to his
inquiry, he is required to send a reminder to the
predecessor auditor or communicate with him through
other means.
4. If no response within a reasonable period after sending
of 2 reminders, the successor auditor should inform the
predecessor auditor of his attention to accept the
engagement.
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9. Cont…
 Continuing Clients
 Determine reason for not continuing to do the audit
Is there any previous conflicts over scope of audit, the
type of opinion to issue or audit fees?
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10. 2. Identify Client’s Reason for Audit
 Statutory requirements
 Financial statement audit
 Compliance audit
 Weaknesses noted in the operations
 Operations audit
 Audit on Internal Control System
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11. 3. Obtain an Understanding With the Client
 ISA210 requires that auditors must document their
understanding of an engagement in the audit files, including
the engagement’s objectives, the responsibility of the auditor
& management, and the engagement’s limitations
 Engagement Letter (refer pp. 199)
 An agreement between the CA firm and the client for the
conduct of the audit and related services
 Contents:
Specify job performed by the auditor (audit, review,
compilation, tax return, etc.)
Restriction to be imposed on the auditor’s work
Deadlines for completing the audit
Assistance to be provided by clients
Schedules of audit to be performed by auditor
Audit fees
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12. 4. Select Staff for Engagement
 MIA By-Laws stated
 A member should carry out his work with a proper
regard for the technical & professional standards
expected of him as a member and should not
undertake or continue professional work which he is
not himself competent to perform unless he obtains
such advice and assistance as will enable him
competently to carry out his work
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13. STAGES OF AUDIT PLANNING
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14. Understand The Client’s
Business & Industry
 Factors that increased the importance of understanding
the client’s business & industry:
 IT connects client companies with major customers &
suppliers
 Clients have expanded operations globally
 IT affects internal client process, improving the quality
& timeliness of accounting information
 The increased importance of human capital & other
intangible assets has increased accounting complexity
and the importance of management judgments and
estimates
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15. Cont…
 Auditors need to understand client’s business & industry
to provide additional value-added services to clients.
 Tools to understand the client's business & industry:
Strategic Systems Approach
1. Industry & External Environment
2. Business Operations & Processes
3. Management & Governance
4. Objectives & Strategies
5. Measurement & Performance
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16. 1. Industry & External Environment
 Reasons for understanding the client’s business &
industry:
 There are risk associated with specific industry
 There are inherent risk that are typically common to all
clients in certain industry
 Many industries have unique accounting requirement
that the auditor must understand before start to audit
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17. 2. Business Operations & Processes
 Factors to understand:
 Sources of revenues
 Key customers & suppliers
 Sources of financing
 Information about related parties that may indicate areas
of increased client business risk
 According to FRS 124, require to disclose transactions
with related parties in the financial statements if they are
materials
 Related party: “Parties are considered to be related if one party
has the ability to control the other party or exercise significant
influence over the other party in making financial decisions”
 A Related transaction: any transaction between the client and
related party
 E.g. sales or purchase transactions between a parents company &
its subsidiary, exchanges of equipment between 2 companiesAUD390 2014

18. 3. Management & Governance
 Areas that require auditor to understand
 Management’s philosophy & operating style
Memorandum & Article of Association
Minutes of Meeting
 Ability to identify & respond to risk
 Significant impact the risk of material misstatement in
the financial statements
E.g. significant annual increase in sales and earnings
reported by the company was ultimately determined to
be based on various improper accounting technique
encouraged by the CEO
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19. 4. Objectives & Strategies
 Auditors should understand client objectives related to:
 Reliability of financial reporting
 Effectiveness & efficiency of operations
 Compliance with laws and regulations
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20. 5. Measurement & Performance
 Performance measurement systems: the key
performance indicators that management uses to
measure progress towards objectives
 E.g. market share & sales per employee, unit sales
growth, unique visitors to a Web site, sales per square
foot for a retailer, ratio analysis, benchmarking against
key competitors
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21. STAGES OF AUDIT
PLANNING
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22. Assess Client Business Risk
 Audit Risk :
 Risk that the auditor gives an inappropriate opinion when
the FS are materially misstated
 Risk that the auditor delivers an incorrect audit opinion –
an opinion which states that the account presents a true
& fair view while in reality they do not
 Measure of how willing the auditor is to accept that the
FS may be materially misstated after the audit is
completed & unqualified audit opinion has been issued
 Factors result in uncertainty in audit performance
 Nature of audit test
 Inherent limitations of an audit
 Inherent limitations of the effectiveness of client’s internal
control systemAUD390 2014

23. Cont…
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Inherent Risk
Risk that the accounts may contain
misstatements
Detection
Risk
Control Risk

24.  Risk related to the characteristics of the business that may
cause material FS
 Factors used in assessing inherent risks
 Nature of client’s business
 Integrity of management
 Client motivation
 Client’s knowledge of accounting standards
 Results of previous audit
 Susceptibility of defalcation
 Nature of client’s inventory & technological development
 For example external factors such as technological
development might make a particular product obsolete
 IR is high if no internal control system & IR is low of
internal control existAUD390 2014
Inherent Risk (IR)

25. Control Risk (CR)
 Risk that the client’s internal control will not prevent or
detect material errors or misstatements in the account
balance
 Control risk exist due to the inherent limitation of internal
control system & inadequacy of the segregation of duties
such as human error, faulty judgment
 CR high if internal control system is not effective & CR low
if internal controls system is effective
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26. Detection Risk (Dr)
 Risk that any remaining material misstatements after
assessing IR & CR will not be detected by auditor
 Risk that the auditor’s substantive procedures & review FS
will not detect material errors misstatements
 DR high if the auditors are not competent & due care & DR
low if the auditors are competent & exercise due care
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27. STAGES OF AUDIT PLANNING
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28. Perform
Preliminary Analytical
Procedures
 Definition: a study of relationship between elements of
financial information expected to conform to a predictable
pattern based on the auditor’s knowledge of the business
relationship between financial and non financial information
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Types of data, ratios, etc Comparison with
Financial Data (Account
balances, budgets, etc)
Corresponding period, budget &
forecasts
Non Financial Data (Production,
employment statistics)
Entries in accounting records, other
financial data
Ratios & Percentage Preceding period, budget &
forecast, industry statistics

29. Cont…
 Types of analytical procedures:
1. Compare client data & industry data
2. Compare client data with similar prior-period data
3. Compare client data client-determined expected
results
4. Compare client data & auditor-determined expected
results
5. Compare client data with expected results, using
non financial data
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30.  Common financial ratios
1. Short-term Debt-Paying Ability
 E.g. Cash ratio, quick ratio & current ratio
2. Liquidity Activity Ratios
 E.g. Accounts receivable turnover, Days to collect
receivables, Inventory turnover, Days to sell
inventory
3. Ability to meet Long-term Debt Obligations
 E.g. Debt to equity, Times interest earned
4. Profitability Ratios
 E.g. Earnings per share, Gross profit margin, Profit
margin, Return on assets, Return on common equity
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Cont…

31. Cont…
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STAGES PLANNING DETAILED TEST REVIEW FS
TIMING Before the FS are
available
Start after client had
submitted FS with
supporting schedules
Carry out overall
review of FS when
most of audit testing
are completed
PURPOSES 1.To understand
the client’s industry
& business
2.To assess going
concern
3.To indicate
possible
misstatement
4.To reduced
detailed tests
1. To ensure
completeness,
accuracy & validity of
information contain in
the FS
2.To obtain sufficient
audit evidence by
reducing the work
done through
substantive tests
1.To update auditor’s
knowledge of client’s
business
2.To ensure the FS
are not materially
misstated
3.To corroborate
conclusions form
during the audit
SOURCES OF
INFORMATION
S
Interim FS,
Management
reports, Budget &
forecasts, Internal
audit report
Annual FS,
Accounting & other
records, Management
reports, Internal audit
reports
Drafted audited FS
EXAMPLES Calculate key
ratios for client and
compare against
Reasonable test on
EPF contribution
account
Recalculate
ratios/figures noted in
the audit findings

32. STAGES OF AUDIT
PLANNING
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33. Set Materiality And Assess AAR
& IR
 MATERIALITY
 Definition: A misstatement or omission of financial
information that may influence or affect the decision
made by the user of financial statements
 Factors effecting preliminary judgment about materiality
 Materiality is a relative rather than an absolute
concept
 Bases is needed for evaluating materiality
 Qualitative factors will affect materiality decisions
 Expected dissemination (various types of users) of
FS
 The level of acceptable audit riskAUD390 2014

34. Cont…
 Assessment of audit risk & materiality
 The assessment of audit risk & materiality is a matter
of the auditor’s professional judgment
 Factors that auditor consider to decide whether an item
is material or not:
 Its absolute size
 Its nature
 Its relative size
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35. STAGES OF AUDIT
PLANNING
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36. Understand IC & Assess CR
 Refer topic on Internal Control System & Control Risk
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37. STAGES OF AUDIT PLANNING
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38. Gather Information
To Assess Fraud Risk
 Definition : Intentional misstatement of the FS
 Types of fraud:
 Misappropriation of assets, often called as defalcation or
employee fraud
 E.g. a clerk taking case at the time a sale is made
 Fraudulent financial reporting, often called as
management fraud
 E.g. intentional overstatement of sales near the balance
sheet date to increase reported earnings
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39. STAGES OF AUDIT PLANNING
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40. Types Of Audit Tests
1. Procedure to obtain an understanding of internal
control
2. Tests of controls
3. Substantive tests of transactions
4. Analytical procedures
5. Tests of detailed of balances
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41. Audit Program
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 It is the list of audit procedures for an audit area
 It normally includes a list of the audit procedures,
audit sample sizes, items to select & the timing
for tests
 Refer Table 13-4 (pp. 397)

42. TUTORIAL QUESTIONS
1. What are the purposes of an engagement letter?
2. What are the contents of an engagement letter?
3. Preliminary engagement activities are undertaken at the
beginning stage of an audit process. List and explain 3
activities to be performed by external auditor during the
preliminary engagement.
4. State 2 benefits of audit planning.
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