AUDIT PLANNING
AUDIT PLANNING
Planning an audit involves establishing the
overall audit strategy for the engagement
and developing an audit plan, In order to
reduce audit risk to an acceptably low level.
Planning involves the engagement partner
and other key members of the engagement
team to benefit from their experience and
insight and to enhance the effectiveness and
efficiency of the planning process.
OUTPUTS OF AUDIT PLANNING
the overall audit strategy;
the overall audit plan; and
the draft audit programs detailing the work
to be performed
IN ESTABLISHING THE OVERALL AUDIT
STRATEGY, THE AUDITOR SHALL:
Identify the characteristics of the
engagement that define its scope;
Ascertain the reporting objectives of the
engagement to plan the timing of the audit
and the nature of the communications
required;
Consider the factors that, in the auditor's
professional judgment, are significant in
directing the engagement team's efforts;
IN ESTABLISHING THE OVERALL AUDIT
STRATEGY, THE AUDITOR SHALL:
Consider the results of preliminary
engagement activities and, where
applicable, whether knowledge gained on
other engagements performed by the
engagement partner for the entity is
relevant; and
Ascertain the nature, timing and extent of
resources necessary to perform the
engagement.
MAJOR AUDIT PLANNING
ACTIVITIES:
Obtaining an understanding of the client and
its environment.
Assessing the possibility of non-compliance.
Establishing materiality and assessing risk.
Identifying related parties.
Performing preliminary analytical procedures.
MAJOR AUDIT PLANNING
ACTIVITIES:
Determining the need for experts.
Development of the overall audit strategy
and detailed audit plan.
Preparation of preliminary audit programs.
PSA 300 (REDRAFTED) STATES
THAT:
The auditor shall develop an audit plan that shall include a
description of:
(a) The nature, timing and extent of planned risk
assessment procedures, as determined under PSA 315,
"Identifying and Understanding the Entity and Its
Environment."
(b) The nature, timing and extent of planned further audit
procedures at the assertion level, as determined under PSA
330, "The Auditor's Responses to Assessed Risks."
(c) Other planned audit procedures that are required to be
carried out so that the engagement complies with PSAs3.
OBTAIN AN UNDERSTANDING OF
THE CLIENT AND ITS ENVIRONMENT
Sources of Understanding of the Entity and the
Environment:
Previous experience with the entity and its
industry.
Discussion with people with the entity
Discussion with internal audit personnel and
review of internal audit reports.
SOURCES OF UNDERSTANDING OF THE
ENTITY AND THE ENVIRONMENT:
Discussion with other auditors and with legal and other
advisors who have provided services to the entity or
within the industry.
Discussion with knowledgeable people outside the
entity
Legislation and regulations that significantly affect the
entity.
Visits to the entity's premises and plant facilities.
Documents produced by the entity.
RISK ASSESSMENT PROCEDURES
The audit procedures performed to obtain an
understanding of the entity and its
environment, including the entity's internal
control, to identify and assess the risks of
material misstatement, whether due to fraud
or error, at the financial statement and
assertion levels, are known as risk
assessment procedures.
RISK ASSESSMENT PROCEDURES
Inquiries of management and others within
the entity who in the auditor's judgment may
have information that is likely to assist in
identifying risks of material misstatement
due to fraud or error;
Analytical procedures; and
Observation and inspection
PARTIES TO WHOM INQUIRIES
CAN BE DIRECTED TO
those charged with governance
internal audit personnel
employees who are involved in initiating,
processing or recording complex or unusual
transactions
in-house legal counsel
marketing or sales personnel
OBSERVATION AND INSPECTION AS
RISK ASSESSMENT PROCEDURES
Observation of entity activities and operations
Inspection of documents (such as business
plans and strategies), records, and internal
control manuals
Reading reports prepared by management
(such as quarterly management reports and
interim financial statements) and those
charged with governance (such as minutes of
board of directors' meetings)
OBSERVATION AND INSPECTION AS
RISK ASSESSMENT PROCEDURES
Visits to the entity's premises and plant
facilities
Tracing transactions through the information
system relevant to financial reporting (or
walkthroughs)
THE REQUIRED UNDERSTANDING OF
THE ENTITY AND ITS ENVIRONMENTS
The auditor's understanding of the entity and
its environment consists of an understanding of
the following:
Industry, regulatory, and other external
factors, including the applicable financial
reporting framework
NATURE OF THE ENTITY
An understanding of the nature of an entity enables the
auditor to understand the classes of transactions,
account balances, and disclosures to be expected in the
financial statements. The nature of the entity includes:
Its operations;
Its ownership and governance structures
The types of investments that the entity is making and
plans to make
The way that the entity is structured and how it is
financed, to enable the auditor to understand the
classes of transactions, account balances, and
disclosures to be expected in the financial statements
THE ENTITY'S SELECTION AND
APPLICATION OF ACCOUNTING
POLICIES, INCLUDING THE REASONS FOR
CHANGES THERETO
The understanding encompasses:
the methods the entity uses to account for
significant and unusual transactions;
effect of significant accounting policies in
controversial or emerging areas for which there is
a lack of authoritative guidance or consensus; and
changes in the entity's accounting policies.
OBJECTIVES AND STRATEGIES AND THE
RELATED BUSINESS RISKS THAT MAY
RESULT IN RISKS OF MATERIAL
MISSTATEMENT
Strategies are the operational approaches by
which management intends to achieve its
objectives.
Business risks result from significant
conditions, events, circumstances, actions or
inactions that could adversely affect the
entity's ability to achieve its objectives and
execute its strategies, or through the setting
of inappropriate objectives and strategies.
MEASUREMENT AND REVIEW OF THE
ENTITY'S FINANCIAL PERFORMANCE.
Performance measures and their review
indicate to the auditor aspects of the entity's
performance that management and others
consider to be of importance. Performance
measures, whether external or internal,
create pressures on the entity that, in turn,
may motivate management to take action to
improve the business performance or to
misstate the financial statements.
INTERNAL CONTROL
This refers to the process designed and
effected by those charged with governance,
management, and other personnel to provide
reasonable assurance about the achievement
of the entity's objectives with regard to
reliability of financial reporting,
effectiveness and efficiency of operations
and compliance with applicable laws and
regulations.
ASSESSING THE POSSIBILITY OF
NON-COMPLIANCE
Procedures for Obtaining a General Understanding of the
Legal and Regulatory Framework
Use the existing understanding of the entity's industry,
regulatory and other external factors;
Inquire of management concerning the entity's policies
and procedures regarding compliance with laws and
regulations;
Inquire of management as to the laws or regulations
that may be expected to have a fundamental effect on
the operations of the entity;
ASSESSING THE POSSIBILITY OF
NON-COMPLIANCE
Discuss with management the policies or
procedures adopted for identifying,
evaluating and accounting for litigation
claims and assessments; and
Discuss the legal and regulatory framework
with auditors of subsidiaries in other
countries.
ESTABLISHING MATERIALITY
AND ASSESSING RISK
When establishing the overall audit strategy,
the auditor shall determine materiality for
the financial statements as a whole.
Performance materiality is set to reduce to
an appropriately low level the probability
that the aggregate of uncorrected and
undetected misstatements in the financial
statements exceeds materiality for the
financial statements as a whole
STEPS IN APPLYING
MATERIALITY
During Planning
1.Establish a preliminary judgment about
materiality
2.Determine tolerable misstatement
At Audit Completion
3.Estimate likely misstatements and compare
the totals to the preliminary judgment about
materiality.
PRELIMINARY JUDGMENT
ABOUT MATERIALITY
The preliminary judgment or estimate about
materiality represents the maximum amount
by which a set of financial statement could
be misstated and still not cause the auditor
to believe that the decisions of reasonable
users would be affected.
AASC-issued standards do not require that
the preliminary judgment be quantified;
however, it is common to document at least
a range in actual practice.
In quantifying materiality, the auditor
usually establishes a base (or bases) that,
when multiplied by a percentage factor,
determines the preliminary judgment about
materiality. The materiality criteria
often used by selected practicing auditors
are:
percentage effect on net income before
taxes
percentage effect on total revenues
percentage effect on total assets
PLANNING MATERIALITY
December 31, 2017 Audit - Year-end balances
Planning Working TB
PM TE SAD
Summary Preliminary Assessed
Basis of PM (PM) Equity 648,794,173.38 608,729,610.00
Planning Materiality (TE) 1% of Equity 6,487,941.73 6,087,296.10
Tolerable Error 50% of PM 3,243,970.87 3,043,648.05
SAD Nominal Amount 5% of PM 324,397.09 304,364.81
Uncorrected Misstatements Threshold (UMT) PM less TE 3,243,970.87 3,043,648.05
SAD Consultation Limit Lower-end basis of PM (i.e., 1% of Equity) 324,397.09 304,364.81
TOLERABLE MISSTATEMENT
Tolerable misstatement is the amount of
planning materiality that is allocated to an
account balance or class of transactions. The
process of allocation may be done
judgmentally or using formal quantitative
approaches.
THE EFFECT OF MATERIALITY
ON AUDIT PROCEDURES
The amount of tolerable misstatement
assigned to an account balance or class of
transactions affects the extent of audit
procedures performed for the said account or
class of transaction. The lower the tolerable
misstatement, the more extensive the
required audit procedures.
THE AGGREGATE OF UNCORRECTED
MISSTATEMENTS (ALSO KNOWN AS
LIKELY MISSTATEMENTS) COMPRISES:
Specific misstatements identified by the
auditor including the net effect of
uncorrected misstatements identified during
the audit of previous periods;
The auditor's best estimate of other
misstatements which cannot be specifically
identified (i.e., projected errors).
ASSESSING THE RISKS OF
MATERIAL MISSTATEMENT
. Identify risks by considering the understanding
of the entity and its environment, (including
relevant controls), and by considering the
classes of transactions, account balances, and
disclosures in the financial statements.
Relate the identified risks to what can go wrong
at the assertion level; and
Consider whether the risks are of a magnitude
that could result in a material misstatement of
the financial statements12.
ASSESSMENT OF INHERENT RISK
Factors Considered in Assessing Inherent
Risk - Financial Statement Level
The integrity of management
Management experience and knowledge and
changes in management during the period.
Unusual pressures on management
The nature of the entity's business
Factors affecting the industry in which the
entity operates,
FACTORS CONSIDERED IN ASSESSING
INHERENT RISK - ACCOUNT BALANCES
AND CLASS OF TRANSACTIONS LEVEL
Financial statement accounts likely to be susceptible to
misstatement, such as those which required adjustment in the
prior period or which involve a high degree of estimation.
Complexity of underlying transactions and other events which
might require using the work of an expert.
Degree of judgment involved in determining account balances
Susceptibility of assets to loss or misappropriation.
Completion of unusual and complex transactions, particularly at
or near period-end.
Transactions not subjected to ordinary processing.
SIGNIFICANT RISKS
Whether the risk is a risk of fraud.
Whether the risk is related to recent significant
economic, accounting or other developments and,
therefore, requires specific attention.
The complexity of transactions.
Whether the risk involves significant transactions with
related parties.
The degree of subjectivity in the measurement of
financial information related to the risk especially those
involving a wide range of measurement uncertainty.
Whether the risk involves significant transactions that
are outside the normal course of business for the entity,
or that otherwise appear to be unusual.
THE EFFECT OF AUDIT RISK ON
AUDIT PROCEDURES
The higher the combined assessments of
inherent and control risks, the lower the
amount of detection risk that can be
accepted.
The lower the acceptable detection risk, the
greater the amount of audit procedures to be
performed in order to reduce the chances of
not detecting misstatements.
THE RELATIONSHIP BETWEEN
AUDIT RISK AND MATERIALITY
There is an inverse relationship between
materiality and the level of audit risk, that
is, the higher the audit risk, the lower the
materiality level and vice versa. The auditor
takes the inverse relationship between
materiality and audit risk into account when
determining the nature, timing and extent of
audit procedures.
