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1609





AUDITING THEORY R. M. VALDEZ/L. R. CABARLES
AT.1609-Audit Planning: An Overview MAY 2014

LECTURE NOTES

Audit Planning

The auditor plans the audit so that it will be performed in an effective manner, i.e.,
to gain reasonable assurance that the FSs are free from material misstatement.

Audit planning involves:
establishing the overall audit strategy (a general strategy) for the
engagement; and
developing an audit plan (a detailed approach for the expected nature, timing
and extent of the audit),
in order to reduce audit risk (i.e., the chance that audit opinion is inappropriate) to
an acceptably low level.

The main outputs after planning the audit are:
The overall audit strategy (a.k.a., audit planning memorandum)
The audit plan (a.k.a., audit programs or audit completion checklists)

Benefits of Audit Planning

Appropriate attention to important areas of the audit.
Identify and resolve potential problems on a timely basis.
Organize and manage the audit engagement so that it is performed in an
effective and efficient manner.
Assist in the proper selection of engagement team members and the
assignment of work to them.
Facilitate the direction and supervision of engagement team members and
the review of their work.
Assist, where applicable, in coordination of work done by auditors of
components and experts.

Audit Planning and Risks Assessment Activities

Planning is not a discrete phase of an audit, but rather a continual and iterative
process. Planning, however, includes consideration of the timing of certain
activities and audit procedures that need to be completed prior to the performance
of further audit procedures (i.e., tests of controls and substantive procedures).

The following are the activities and procedures performed in audit planning and
risks assessment:
Determining of materiality;
Performing risks audit procedures (RAP), including analytical procedures, to
understand the entity and its environment, including the entitys internal
control;
Identifying material classes of transactions, account balances and
disclosures;
Identifying and assessing the risks of material misstatements of the financial
statements; and
Finally, preparing the outputs of audit planning overall audit strategy and
audit plan containing the auditors responses to the identified risks.

The nature and extent of the above planning activities will vary according to:
the size and complexity of the entity;
the key engagement team members previous experience with the entity; and
the changes in circumstances that occur during the audit engagement.

Involvement of Key Engagement Team Members

The engagement partner and other key members of the engagement team shall
be involved in planning the audit, including planning and participating in the
discussion among engagement team members, to draw on their experience and
insight, thereby enhancing the effectiveness and efficiency of the planning
process.

Results of Preliminary Engagement Activities

Please refer to the last topic AT.1608 for the list of preliminary engagement
activities.

The results of preliminary engagement activities:
assist the auditor in identifying and evaluating events or circumstances that
may adversely affect the auditors ability to plan and perform the audit
engagement.
enables the auditor to plan an audit engagement for which, for example:
o The auditor maintains the necessary independence and ability to
perform the engagement.
o There are no issues with management integrity that may affect the
auditors willingness to continue the engagement.
o There is no misunderstanding with the client as to the terms of the
engagement.

In an initial audit, the auditor may need to expand the planning activities because
the auditor does not ordinarily have the previous experience with the entity than
when planning recurring engagements. For an initial audit engagement, additional
matters the auditor may consider in establishing the overall audit strategy and
audit plan include the following:
Arrangements to review the predecessor auditors working papers.
Any major issues (including the application of accounting principles or of
auditing and reporting standards).
The audit procedures necessary to obtain sufficient appropriate audit
evidence regarding opening balances.
Other procedures required by the firms system of quality control for initial
audit engagements.

Overall Audit Strategy

Overall audit strategy sets the scope, timing, and direction of the audit, and guides
the development of the audit plan.

In establishing the overall audit strategy, the auditor is required to:
a. Identify the characteristics of the engagement that define its scope
b. Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required
c. Consider the factors that, in our professional judgment, are significant in
directing the engagement teams efforts
d. 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
Since 1977
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e. Ascertain the nature, timing and extent of resources necessary to perform
the engagement.

Characteristics that define the Scope of Engagement
The applicable FRF
Industry-specific reporting requirements
The expected audit coverage
The work of internal auditors
The entitys use of service organizations
The effect of information technology
The availability of client personnel and data.

Reporting Objectives, Timing of the Audit, and Nature of Communications
The entitys timetable for reporting
Meetings with management and TCWG to discuss the nature, timing and
extent of the audit work.
The discussion with management and TCWG regarding the expected type
and timing of reports to be issued and other communications, both written
and oral, including the auditors report, management letters and
communications to TCWG; and regarding the expected communications on
the status of audit work throughout the engagement.
Communication with auditors of components.
Communications among engagement team members, including the nature
and timing of team meetings and timing of the review of work performed.
Any other expected communications with third parties, including any
statutory or contractual reporting responsibilities arising from the audit.

Significant Factors, Preliminary Engagement Activities, and Knowledge Gained on
Other Engagements
The determination of materiality and identification of material classes of
transactions, account balances and disclosures
Preliminary identification of risk areas
The impact of the assessed ROMM at the FSs level
Exercise of professional skepticism
Internal control of the entity
Significant business developments and the industry
Legal and regulatory development and framework

Nature, Timing and Extent of Necessary Resources
The selection of the engagement team (including, where necessary, the
engagement quality control reviewer) and the assignment of audit.
Engagement budgeting and timetable.

The auditor shall document the overall audit strategy commonly in the form of a
memorandum.

Audit Plan

Audit plan is more detailed than the overall audit strategy in that it includes the
nature, timing and extent of audit procedures to be performed by engagement
team members required to implement the overall audit strategy into a
comprehensive description of the work to be performed.

The auditor shall develop an audit plan that shall include a description of:
a. The nature, timing, and extent of planned risk assessment procedures (RAP)
b. The nature, timing, and extent of planned further audit procedures (FAP),
which include tests of controls and substantive procedures, at the assertion
level
c. Other planned audit procedures that are required to be carried out

The auditor shall document audit plan recording the planned nature, timing and
extent of risk assessment procedures and further audit procedures (tests of
controls and substantive procedures) at the assertion level in response to the
assessed risks. The auditor may use standard (pre-printed) audit programs,
tailored as needed.

Audit program

Audit program is a list of procedures used to gather sufficient appropriate audit
evidence. It serves as a set of instructions to staff involved in the audit and as a
means to control and record the proper execution of the work.

The two types of audit programs pertaining to further audit procedures (RAP) are:
a. Compliance test audit programs this is prepared when performing tests of
controls on those controls the auditor plans to rely on that were deemed to
be preliminarily effective.
b. Substantive test audit program this is prepared when the auditor will
perform substantive procedures for each material class of transactions,
account balance, and disclosure.

Thus, the timing of preparing audit programs depend on the following
circumstances:
Initial audit prepared until the completion of review and documentation of
the entitys internal control.
Continuing audit can be prepared in advance of testing, since the auditor
has prior knowledge of the entitys internal control and previous risks
assessment.

Changes to Planning Decisions during the Course of the Audit

The auditor shall update and change the overall audit strategy and the audit plan
as necessary during the course of the audit.

The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential processes, but are closely inter-related since
changes in one may result in consequential changes to the other.

Other Planning Considerations

Other planning considerations made by the auditor include the following:
Seeking assistance from the entity
Considering the work perform by others
Ensuring direction, supervision and review throughout the audit.

Entity Assistance to the Auditor

The auditor may decide to discuss elements of planning with the entitys
management to facilitate the conduct and management of the audit engagement
(for example, to coordinate some of the planned audit procedures with the work of
the entity's personnel), but not so detailed to compromise the effectiveness of the
audit or making the audit procedures too predictable.

Consideration of the Work Performed by Others

Considering work of others in an audit involved the following:
Relevance of the work of internal auditors
Need for the work of experts (specialist)
Work of component auditors in a group financial statements audit

Work of Internal Auditors

Internal auditing is an appraisal activity established within an entity as a service to
the entity. The work of internal auditors assists the external auditor in planning and
performing an effective audit.

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Considering the work of internal auditors involve the following two phases:
Preliminary assessment of clients internal auditing function
Evaluation and testing the work of internal auditing function

Preliminary assessment of internal auditing function includes determining whether
or not internal audit function appears relevant to specific areas of financial
statements audit. When the internal audit function appears relevant, external
auditors shall consider the internal auditors:
Competence professional qualifications and experience
Objectivity (organizational status) line of reporting results of internal audit
normally directly to BODs audit committee
Due professional care planning, supervision and documentation of work
Scope of function nature and extent of work

The table below summarizes the external auditors responses depending in the
result of the said assessment:
Result Response
Rely on the work of internal
auditor
Evaluate and test the internal auditors work
to confirm its adequacy for external audit
Not relying on the work of
internal auditor
Need not evaluate and test the internal
auditors work

The external auditor may request assistance from internal auditors in performing
routine or mechanical audit procedures provided the external auditor supervises
and reviews internal auditors work

The use of internal auditors work does not change the external auditors
responsibility for audit opinion; thus, no reference is made in audit report

Work of Experts (Specialist)

Expert or specialist refers to a person or firm possessing special skill, knowledge
and experience in a particular field other than accounting and auditing.

An expert may be
Engaged by the entity;
Engaged by the auditor;
Employed by the entity; or
Employed by the auditor.

The auditor considers the following when using the work (assistance) of an expert:
Materiality of an item being considered
Risk of misstatement (nature and complexity)
Quality and quantity of other audit evidence available

When using the work of an expert, the auditor should assess and evaluate the
experts
Professional competence Professional qualification, experience and
reputation
Objectivity experts relationship to the entity
Scope of work objective and source of data (inputs), methods, models and
assumptions used by the expert

After the above assessment and evaluation of the expert, the external auditor shall
test whether or not the result of work of expert is consistent with auditors
knowledge. The external auditor may rely on the work of the expert if deemed
consistent. Otherwise, the inconsistency must be resolved first before reliance can
be made.

Work of Component Auditors

Key definitions
Group financial statements Financial statements that include the financial
information of more than one component.
Component An entity or business activity for which group or component
management prepares financial information that should be included in the
group financial statements.
Group engagement team Partners, including the group engagement
partner, and staff who establish the overall group audit strategy,
communicate with component auditors, perform work on the consolidation
process, and evaluate the conclusions drawn from the audit evidence as the
basis for forming an opinion on the group financial statements.
Group engagement partner The partner or other person in the firm who is
responsible for the group audit engagement and its performance, and for the
auditors report on the group financial statements that is issued on behalf of
the firm.
Component auditor An auditor who, at the request of the group
engagement team, performs work on financial information related to a
component for the group audit.

Direction, Supervision and Review

The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and the review of their work.

- done -

MULTIPLE CHOICE

Audit Planning
1. This 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.
a. Audit procedures c. Audit program
b. Audit planning d. Audit working papers

2. The overall audit strategy sets the scope, timing and direction of the audit,
and guides the development of the more detailed audit plan.

The audit plan is more detailed than the overall audit strategy and includes
the nature, timing and extent of audit procedures to be performed by
engagement team members in order to obtain sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level.
a. True, True c. False, False
b. True, False d. False, True

3. The overall audit strategy should be updated and changed as necessary
during the course of the audit.

The overall audit plan should be updated and changed as necessary during
the course of the audit.
a. True, True c. False, False
b. False, True d. True, False

4. The nature and extent of planning will vary according the following, except
a. Size of the auditing firm
b. Complexity of the entity
c. Auditors experience with the entity
d. Changes in circumstances that occur during the audit engagement

Benefit of Audit Planning
5. Adequate audit planning helps ensure that appropriate attention is devoted:
a. b. c. d.
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To important areas of the audit Yes Yes Yes Yes
So that potential problems are promptly
identified and resolved


Yes


Yes


No


No
So that the work is performed in an
effective and efficient manner


No


Yes


No


Yes

6. Which of the following is not one of the three main reasons why the auditor
should properly plan engagements?
a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient appropriate evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.

7. Overall audit plan should
a b c d
Precede action Yes No Yes No
Be flexible Yes No Yes Yes
Be cost beneficial Yes Yes No Yes

Overall Audit Strategy
8. The following are the matters to be considered by the auditor in establishing
the overall audit strategy, except
a. Defining the scope of the examination
b. Assess risk and materiality
c. Computation of audit fees
d. Ascertaining the reporting objectives of the engagement

9. In developing the overall audit strategy for a new client, factor not be
considered is:
a. The terms of the engagement and any statutory responsibilities.
b. The clients business, including the structure of the organization and
accounting system used.
c. The specific procedures to be performed to gather audit evidence.
d. The audit risk, and procedures to be performed to achieve audit
objectives.

Audit Plan
10. The audit plan includes:
a. a description of the nature, timing and extent of planned risk
assessment procedures sufficient to assess the risk of material
misstatement
b. a description of the nature, timing and extent of planned further audit
procedures at the assertion level for each material class of
transactions, account balances and disclosures
c. Other planned audit procedures that are required to be carried out so
that the engagement complies with our audit approach
d. All of the above

11. Audit program is basically a listing of all the things the auditor will do to
gather sufficient, competent evidence. Which item would not be contained in
an audit program?
a. Staff assigned to the audit.
b. List of specific procedures (tasks) to be performed and the objectives to
be met that relate primarily to financial statements assertions.
c. Documentation of system being reviewed.
d. Estimated time required to perform each task.

12. An audit should design the written audit program so that
a. all material transactions will be selected for substantive testing.
b. substantive tests prior to the balance sheet date will be minimized.
c. the audit procedures selected will achieve specific objectives.
d. each account balance will be tested under either tests of controls or
tests of transactions.

13. The audit program usually cannot be finalized until the
a. consideration of the entitys internal control structure has been
completed.
b. engagement letter has been signed by the auditor and the client.
c. reportable conditions have been communicated to the audit committee
of the board of directors.
d. search for unrecorded liabilities has been performed and documented.

Audit Planning Activities
14. Which of the following parties would normally attend a planning meeting held
before the beginning of an audit engagement to discuss relevant client
information and the audit approach to be taken in performing the
engagement?
a. Engagement partner and the clients chief financial officer
b. Engagement partner and audit manager
c. Engagement partner, audit manager, and senior auditor
d. Engagement partner, audit manager, senior auditor, and junior audit
staff members

15. In planning an examination, the auditor would consider all of the following
matters, except
a. Anticipated reliance on internal controls.
b. Preliminary judgment about materiality levels for audit purposes.
c. Financial statement items likely to require adjustment.
d. The kind of opinion (unqualified, qualified, disclaimer, or adverse), likely to
be given.

16. An initial audit requires more audit time to complete than a recurring audit.
One of the reasons for this is that
a. new auditors are usually assigned to an initial audit.
b. predecessor auditors need to be consumed.
c. the client's business, industry and internal control are unfamiliar to the
auditor and need to be carefully studied.
d. a larger proportion of customer accounts receivable need to be
confirmed on an initial audit.

Other Planning Considerations
Entity Assistance to the Auditor
17. Which of the following is an effective audit planning procedure that helps
prevent misunderstandings and inefficient use of audit personnel?
a. Arrange to make copies, for inclusion in the audit files, of those client
supporting documents examined by the auditor.
b. Arrange to provide the client with copies of the audit programs to be
used during the audit.
c. Arrange a preliminary conference with the client to discuss audit
objectives, fees, timing, and other information.
d. Arrange to have the auditor prepare and post any necessary adjusting
or reclassification entries prior to final closing.

Work of Internal Auditor
18. Which of the following is most correct regarding external auditors use of
internal auditors directly on the audit engagement?
a. Discourage c. Encourage
b. Prohibit d. Permit

19. The scope and objectives of internal auditing vary widely and depend on the
size and structure of the entity and the requirements of its management
(engagement objectives). Ordinarily, internal auditing activities include one or
more of the following, except
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a. Review of the economy, efficiency and effectiveness of operations
including non-financial controls of an entity.
b. Review of compliance with laws, regulations and other external
requirements and with management policies and directives and other
internal requirements.
c. Examination of financial and operating information including review of
the means to identify, measure, classify and report such information
and specific inquiry into individual items including detailed testing of
transactions and recommending improvements thereto.
d. Establishment of adequate accounting and internal control systems.

20. The independent auditor should acquire an understanding of a clients
internal audit function to determine whether the work of internal auditors will
be a factor in determining the nature, timing and extent of the independent
auditors procedures. The work performed by internal auditors might be such
a factor when the internal auditors work includes
a. Verification of the mathematical accuracy of invoices
b. Review of administrative practices to improve efficiency and achieve
management objectives
c. Study and evaluation of internal accounting control
d. Preparation of internal financial reports for management purposes

21. The work of internal auditors may affect the independents auditors
I. Procedures performed in obtaining an understanding of internal control
II. Procedures performed in assessing the risk of material misstatement
III. Substantive procedures performed in gathering direct evidence
a. I and III only
b. I and II only
c. II and III only
d. I, II and III

22. To assess the objectivity of the internal auditors, an independent auditor
would most likely
a. Consider the professional qualifications and experience of the internal
auditors.
b. Consider the proper planning, supervision and documentation of
internal auditors work.
c. Consider the nature and extent of the internal auditors assignment.
d. Consider the organizational level to which the internal auditors report
the results of their work.

23. Which of the following in relation to the relationship between internal auditing
and the external auditor is false?
a. All judgments relating to the audit of the financial statements are those
of the external auditor.
b. Internal auditors should exercise the same degree of independence as
required of the external auditor.
c. The role of internal auditing is determined by management and its
objectives differ from those of the external auditor who is appointed to
report independently on the financial statements.
d. The external auditor has the sole responsibility for the audit opinion
expressed and that responsibility is not reduced by any use mane of
internal auditing.

24. For which of the following judgments may an independent auditor share
responsibility with an entitys internal auditor who is assessed to be both
competent and objective?
a. b. c. d.
Materiality of misstatements
Yes

No

No

Yes
Evaluation of accounting estimates
No Yes No Yes

Work of Expert
25. Which statement is incorrect regarding the auditors use of the work of an
expert?
a. Expert means a person or firm possessing special skill, knowledge
and experience in a particular field other than accounting and auditing.
b. When using the work performed by an expert, the auditor should obtain
sufficient appropriate audit evidence that such work is adequate for the
purposes of the audit.
c. The auditor's education and experience enable the auditor to be
knowledgeable about business matters in general, but the auditor is not
expected to have the expertise of a person trained for or qualified to
engage in the practice of another profession or occupation.
d. When the auditor uses the work of an expert employed by the auditor,
that work is used in the employee's capacity as an assistant on the
audit.

26. When planning to use the work of an expert, the auditor should assess the
objectivity of the expert. This will involve considering the expert's:
I. Professional certification or licensing by, or membership in, an
appropriate professional body.
II. Experience and reputation in the field in which the auditor is seeking
audit evidence.
III. Relationship to the entity.
a. I, II, III c. I and III
b. I and II d. III only

27. The risk that an experts objectivity will be impaired increases when the
expert is related in some other manner to the entity (e.g., by being financially
dependent upon or having an investment in the entity) and the expert is
a. Engaged by the entity
b. Employed by the entity
c. Engaged by the auditor
d. Employed by the auditor

28. Each of the following procedures requires the assistance of an expert, except
a. Determining the physical condition or quantity of underground mineral.
b. Determining the value of works of art.
c. Determining the adequacy of disclosure in the notes to the financial
statements.
d. Interpreting major contracts.

29. When determining the need to use the work of an expert, the auditor would
consider the following, except
a. The professional certification or licensing by, or membership in, an
appropriate professional body.
b. The quantity and quality of other audit evidence available.
c. The materiality of the financial statement item being considered.
d. The risk of misstatement based on the nature and complexity of the
matter being considered.

Work of Component Auditors
30. An auditor who, at the request of the group engagement team, performs
work on financial information related to a component for the group audit is a
a. Group Auditor
b. Component Auditor
c. Group Engagement Team
d. Component Engagement Team

- now do the DIY drill -

DO-IT-YOURSELF (DIY) DRILL
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1. When planning an examination, an auditor should
a. Consider whether the extent of substantive tests may be reduced
based on the results of the internal control questionnaire.
b. Make preliminary judgments about materiality levels for audit purposes.
c. Conclude whether changes in compliance with prescribed control
procedures justifies reliance on them
d. Prepare a preliminary draft of the management representation letter.

2. Which of the following statements is incorrect about audit planning
documentation?
a. Although the precise form and content of the overall audit plan (overall
audit strategy) may vary, it should sufficiently detailed to guide the
development of an audit program.
b. The audit plan and related audit program are not connected and should
no longer be changed once the audit has started.
c. The audit program should set out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan.
d. In preparing audit program, the auditor should consider the specific
assessments of inherent and control risks and the required level of
assurance to be provided by substantive tests.

3. Which of the following procedures would an auditor least likely perform in
planning a financial statement audit?
a. Selecting a sample of vendors invoices for comparison to receiving
reports
b. Reading the current years interim financial statements
c. Coordinating the assistance of the entity personnel in data preparation
d. Discussing matters that may affect the audit with firm personnel
responsible for non-audit services to the entity

4. Early appointment of the independent auditor will enable:
a. a more thorough examination to be performed.
b. a proper study and evaluation of internal control to be performed.
c. sufficient competent evidential matter to be obtained.
d. a more efficient examination to be planned.

5. You have been asked to assess the organizational independence of an
internal audit activity. You should consider all of the following factors except
a. functional reporting to the board and administrative reporting to the
chief executive officer.
b. the criteria of education and experience considered necessary when
filling vacant positions on the internal audit staff.
c. the degree to which internal auditors assume operational
responsibilities.
d. a limitation on the scope of objectives for the engagements included in
the review.

6. Which of the following is not an expert upon whose work an auditor may rely
on?
a. Internal auditor
b. Appraiser
c. Engineer
d. Actuary

7. Which of the following least likely requires the services of an expert?
a. Valuations of certain types of assets like land and buildings.
b. Legal opinions concerning interpretations of engagements, statutes and
regulations.
c. Determination of amounts using specialized techniques.
d. Application of accounting methods in computing inventory balances.

8. The preparation of audit program and audit planning memo is the
responsibility of the clients
a. Management
b. Independent auditor
c. Internal auditor
d. Expert

9. Avoiding misunderstandings with the client is important for:
Good client relations Facilitating high-quality work at a
reasonable cost
a. Yes Yes
b. No No
c. Yes No
d. No Yes

10. Sue is conducting an external audit of ABC Companys financial statements.
Joel is an internal auditor working for ABC. Which of the following should
Sue consider when deciding whether she can rely on Joels findings in her
audit?
a. Whether Joel has ever worked as an external auditor of financial
statements
b. Whether Joel owns any shares in the company that he works for
c. Joels level of education and the number of years of experience Joel
has as an internal auditor
d. Whether or not Joel will agree to let Sue have access to his working
papers

- end of AT.1609 -