National University

Manila

Integrated Auditing Review BLD

1st Trimester 2022-2023

Audit Planning
PSA 300, 310, 600, 610, 620

Definition:
Audit planning involves establishing the overall audit strategy for the engagement and developing an audit
plan, in or der to reduce audit risk to a n acceptably low level.

Nature of Planning:
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins
shortly after (or in connection with) the completion of the previous audit and continues until the
completion of the current audit engagement. In other words, planning is a continuous function that last
throughout the audit.
Planning is the time before fieldwork starts, when the auditor is gathering information about the client and
its environment and designing overall audit strategy and audit plan.

Who are involved in planning the audit: Engagement partner and other key members of the engagement
team (because of their experience and insight to enhance the effectiveness and efficiency of the planning
process)

Benefits/Importance of adequate audit planning:

Adequate planning of the audit work helps to ensure that:

1. Appropriate attention is devoted to important areas of the audit;

2. Potential problems are identified; and
3. The work is completed expeditiously.

Likewise, it assists in proper:

1. Assignment of work to assistants; and

2. Coordination of work done by other auditors and experts.

Matters to be considered by the auditor in audit planning

1. Knowledge of the Business

• General economic factors and industry conditions affecting the entity’s business.
• Important characteristics of the entity, its business, its financial performance and its reporting
requirements including changes since the date of the prior audit.
• The general level of competence of management.

2. Understanding the Accounting and Internal Control Systems

• The accounting policies adopted by the entity and changes in those policies.
• The effect of new accounting or auditing pronouncements.
• The auditor’s cumulative knowledge of the accounting and internal control systems and the relative
emphasis expected to be placed on tests of control and substantive procedures.

3. Risk and Materiality

• The expected assessments of inherent and control risks and the identification of significant audit areas.
• The setting of materiality levels for audit purposes.
• The possibility of material misstatement, including the experience of past periods, or fraud.
• The identification of complex accounting areas including those involving accounting estimates.

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4. Nature, Timing and Extent of Procedures

• Possible change of emphasis on specific audit areas.
• The effect of information technology on the audit.
• The work of internal auditing and its expected effect on external audit procedures.

5. Coordination, Direction, Supervision and Review

• The involvement of other auditors in the audit of components, for example, subsidiaries, branches and
divisions.
• The involvement of experts.
• The number of locations.
• Staffing requirements.

6. Other Matters
• The possibility that the going concern assumption may be subject to question.
• Conditions requiring special attention, such as the existence of related parties.
• The terms of the engagement and any statutory responsibilities.
• The nature and timing of reports or other communication with the entity that are expected under the
engagement.

Nature and extent of audit planning:

The nature and extent of planning activities will vary according to the following factors:
a. The size and complexity of the entity – big companies and companies with more complex
operations require more audit planning time
b. Changes in circumstances that occur during the audit engagement – for example, expansion of
operation because of diversification
c. The auditor’s previous experience with and understanding of the entity – more work is
required to obtain information regarding a new client than for a n existing client
• Initial audit requires more audit time because the auditor has no previous knowledge or is
unfamiliar with the client’s business, industry and internal control which need to be
carefully studied.
• Recurring audit requires lesser audit time because of auditor’s previous knowledge of the
entity and its industry.
d. The composition and size of the audit team

Effect of timing of appointment of auditor on audit planning:

• The earlier the auditor is appointed, the more efficient the audit plan and performance ca n be.
Thus, early appointment of the auditor allows the auditor to plan a more efficient audit.
• It is acceptable for an auditor to accept an audit engagement near or after year -end. However,
the auditor should consider whether late appointment will pose limitations on the audit that
may lea d to a qualified opinion or a disclaimer of opinion, and should discuss such concerns
with the client.

PLANNING ACTIVITIES FOR THE AUDIT ENGAGEMENT:

In order to reduce audit risk to an acceptably low level, the auditor shall:
1. Establish an overall audit strategy that sets the scope, timing and direction for the audit, and that guides
the development of the more detailed audit plan

Establishing the overall audit strategy involves:

a. Identifying the characteristics of the engagement that define its scope

b. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required
c. Considering the factors that are significant in directing the engagement team’s efforts
d. Considering the results of preliminary engagement activities and, where applicable, whether

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knowledge gained on other engagements performed by the engagement partner for the entity
is relevant.
e. Ascertaining the nature, timing and extent of resources necessary to perform the
engagement.

Benefits of developing the overall audit strategy:

Establishing the overall audit strategy assists the auditor in determining the following:
a. The resources to deploy for specific audit areas
For example:
• Use of experienced team members for high risk areas
• Involvement of experts on complex matters

b. The amount of resources to allocate to specific audit areas

For example:
• Number of team members assigned to observe the inventory count at material locations
• Extent of review of other auditors’ work in the case of group audits
• Audit budget in hours to allocate to high risk areas

c. When these resources are to be deployed

• Is it at a n interim audit stage or at key cut-off dates?

d. How such resources are managed, directed and supervised

• When to hold team briefing and debriefing meetings
• How engagement partner and manager reviews are expected to take place (for example, on-
site or off-site)
• Whether to complete engagement quality control reviews

2. Develop an audit plan that addresses the various matters identified in the overall audit strategy
Audit plan includes a description of:
a. The nature, timing and extent of planned risk assessment procedures
b. The nature, timing and extent of planned further audit procedures (at the assertion level) – to be
performed during testing stage
Further audit procedures include:
(1) Tests of controls – tests of the opera ting effectiveness of internal control
(2) Substantive tests/procedures – include tests of details and analytical procedures

c. Other planned audit procedures (that are required to be carried out to comply with PSAs)

Developing the audit program:

The auditor should prepare an audit program.
• An audit program is a listing of audit procedures (tests of controls and/or
substantive tests) that the auditor will perform to gather sufficient appropriate
evidence.
• It sets out in detail the nature, timing and extent of planned audit procedures
required to implement the overall audit plan.
• It is a set of instructions to assistants involved in the audit and as a means to
control and record the proper execution of work
• It provides a proof that the audit was adequately planned
• It is a basic tool used by the auditor to control the audit work and review the
progress of the audit.
• The form and content of audit program may vary for each particular engagement.
• The auditor may use standard audit programs or audit completion checklists
but should appropriately tailor to suit the circumstances on particular
engagement.
• An audit program at the beginning of the audit process is temporary because a

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complete audit program for an engagement generally should be developed

after evaluation of internal control.

Time budget – an estimate of time that will be spent in executing audit procedures listed
in the audit program that provides a basis for estimating audit fees and assists the auditor in
assessing the efficiency of the assistants

Other planning considerations:

a. Considering the work of an expert – An expert is a person or firm possessing special s kill, knowledge and
experience in a particular field or discipline other than accounting and auditing. Examples of work of
experts include:
Ø Valuation of certain assets (such as precious stones, works of arts, real estate, plant and
machinery)
Ø Valuation of financial instruments
Ø Actuarial valuation
Ø Determination of quantities or physical condition of assets such as minerals stored in
stockpiles, underground mineral and petroleum reserves, and the remaining useful life of
plant and machinery
Ø Measurement of % of completion on contracts in progress
Ø Legal opinions concerning interpretations of statute and regulations and contracts such as
legal documents or legal title to property
When determining the need for an expert, the auditor would consider:
a. The materiality of the financial statement item being considered
b. The risk of misstatement
c. The quality and quantity of other audit evidence available

b. Considering the work of other independent auditors – applicable when a component of the entity is to
be audited by other independent auditor.

c. Considering the work of internal auditors

• The external auditor should consider the work of internal auditing in order to minimize audit
costs.
• The auditor should obtain a sufficient understanding of the internal audit function because the
work performed by internal auditors ma y be a factor in determining the nature, timing, and
extent of external auditor’s procedures.
• Internal auditing ca n affect the scope of the external auditor’s audit of financial statements by
decreasing the auditor’s need to perform detailed tests.
• The tasks that could be delegated to the internal audit staff include preparation of schedules.
The auditor has sole responsibility for the audit opinion expressed, and that responsibility is not
reduced by any use made of internal auditing.
Considering the work of internal auditing involves two important phases:
1. Making a preliminary assessment of internal auditing – important criteria in assessment of
internal auditor’s:
a. Technical competence – personal qualifications and experience as internal auditors
b. Objectivity / organizational status – organizational level to which the internal auditor
report the results of his work
c. Due professional care – proper planning, supervision and documentation of internal
auditor’s work
d. Scope of function – nature and extent of internal auditing assignments performed
2. Evaluating and testing the work of internal auditing

Knowledge of Business

In performing an audit of financial statements, the auditor should have or obtain a knowledge of the business
sufficient to enable the auditor to identify and understand the events, transactions and practices that, in the
auditor’s judgment, may have a significant effect on the financial statements or on the examination or audit
report.

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Required Level of Knowledge

The auditor’s level of knowledge for an engagement would include:

• a general knowledge of the economy and the industry within which the entity operates, and
• a more particular knowledge of how the entity operates.

The level of knowledge required by the auditor would, however, ordinarily be less than that possessed by
management.

Obtaining the Knowledge

For first time engagements, the auditor would:
• gather information through a number of sources including going to the client’s premises.

For continuing engagements, the auditor would:

• update and reevaluate information gathered previously, including information in the prior year’s
working papers.
• also perform procedures designed to identify significant changes that have taken place since the last
audit.

The auditor can obtain knowledge of the industry and the entity from a number of sources such as:

• Previous experience with the entity and its industry.

• Discussion with people with the entity (for example, directors and senior operating personnel).
• Discussion with internal audit personnel and review of internal audit reports.
• 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 (for example, industry economists, industry
regulators, customers, suppliers, competitors).
• Publications related to the industry (for example, government statistics, surveys, texts, trade journals,
reports prepared by banks and securities dealers, financial newspapers).
• Legislation and regulations that significantly affect the entity.
• Visits to the entity’s premises and plant facilities.
• Documents produced by the entity (for example, minutes of meetings, material sent to shareholders or
filed with regulatory authorities, promotional literature, prior years’ annual and financial reports,
budgets, internal management reports, interim financial reports, management policy manual, manuals
of accounting and internal control systems, chart of accounts, job descriptions, marketing and sales
plans).

Using the Knowledge

A knowledge of the business is a frame of reference within which the auditor exercises professional judgment.
Understanding the business and using this information appropriately assists the auditor in:

• Assessing risks and identifying problems.

• Planning and performing the audit effectively and efficiently.
• Evaluating audit evidence.
• Providing better service to the client.

The auditor makes judgments about many matters throughout the course of the audit where knowledge of the
business is important. For example:

• Assessing inherent risk and control risk.

• Considering business risks and management’s response thereto.
• Developing the overall audit plan and the audit program.
• Determining a materiality level and assessing whether the materiality level chosen remains appropriate.

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• Assessing audit evidence to establish its appropriateness and the validity of the related financial
statement assertions.
• Evaluating accounting estimates and management representations.
• Identifying areas where special audit consideration and skills may be necessary.
• Identifying related parties and related party transactions.
• Recognizing conflicting information (for example, contradictory representations).
• Recognizing unusual circumstances (for example, fraud and noncompliance with laws and regulations,
unexpected relationships of statistical operating data with reported financial results).
• Making informed inquiries and assessing the reasonableness of answers.
• Considering the appropriateness of accounting policies and financial statement disclosures.

The auditor should ensure that assistants assigned to an audit engagement obtain sufficient knowledge of the
business to enable them to carry out the audit work delegated to them.

To make effective use of knowledge about the business, the auditor should consider how it affects the financial
statements taken as a whole and whether the assertions in the financial statements are consistent with the
auditor’s knowledge of the business.

Documentation
Documentation of the following serves as a record/evidence of the proper planning and performance
of the audit procedures:
a. The overall audit strategy – documentation or record of the key decisions
b. The audit plan (including the audit program) – documentation of the planned nature, timing and
extent of audit procedures
c. Record of:
• Any significant changes made to the overall audit strategy and the audit plan during the audit
• Resulting changes to the planned nature, timing and extent of audit procedures
• Final overall audit strategy and audit plan
• Appropriate response to the significant changes occurring during the audit

The following s hall also be documented:

a. Discussion among the engagement team
b. Key elements of the understanding of the entity, its environment, including internal control
c. The identified and assessed risks of material misstatements
d. The risks identified, and related controls about which the auditor has obtained an understanding

MULTIPLE CHOICE QUESTIONS

1. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important areas of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.

2. The development of a general strategy and a detailed approach for the expected nature, timing, and extent
of audit refers to :
a. Supervision b. Audit procedures c. Directing d. Planning

3. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor’s experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.

4. Which of the following is least likely considered by the auditor in audit planning?
a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major component of financial statements
d. The general level of competence of the principal auditor and audit assistants whether they can
perform the audit.

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5. Which of the following is not considered by the CPA when he makes an overall audit strategy?
a. Identification of the applicable accounting framework (PFRS).
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that are expected under the
engagement.

6. Audit plan should

A B C D

A. Precede action Yes No Yes No

B. Be fixed Yes No No Yes

C. Be cost beneficial Yes Yes Yes Yes

7. Which of the following least likely affect the form and content of the overall audit strategy?
a. Complexity of the audit engagement.
b. Methodology and technology used by the auditor.
c. The entity’s form of business organization.
d. The size of the entity.

8. Which of the following will most likely help the auditor to identify and understand the events, transactions
and practices of his audit client?
a. Obtaining a sufficient knowledge of the business of his client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.

9. The auditor should have or obtain a knowledge of the client’s business sufficient to:
a. Evaluate whether the financial statements are materially misstated.
b. Document material weaknesses in accounting and internal control systems.
c. Identify and understand events, transactions and practices that may have effect on financial
statements.
d. Have an overall evaluation of whether financial assertions are fairly presented in the financial
statements.

10. The auditor is not expected to have

a. A particular knowledge of the economy and the industry within which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that possessed by management.
d. A knowledge of business which is used in assessing inherent and control risk.

11. The auditor obtains knowledge of client’s business

A B C D

Prior to acceptance of engagement No No Yes Yes

Planning stage of the audit Yes Yes Yes No

Testing of transactions stage No Yes Yes Yes

12. Which of the following is the ultimate concern of the knowledge about the business?
a. Consideration of how it affects the financial statements taken as a whole.
b. Assists the auditor in enforcing quality control procedures.
c. To assure that sufficient audit evidence is obtained.
d. It assists in determining the type of audit report to be issued.

13. A knowledge of the business is a frame of reference within which the auditor exercises professional
judgment. This assists the auditor in carrying out the following objectives, except:
a. Assessing risks and identifying problems.
b. Evaluating audit evidence.
c. Determining the audit opinion to be expressed.
d. Planning and performing the audit effectively and efficiently.

14. Throughout the course of the audit, the auditors make judgment about many matters where knowledge
of the business is important. These procedures do not include:
a. Evaluating accounting estimates and management representations.
b. Identifying related parties and related party transactions.
c. Assessing inherent and control risks.
d. Assessing the appropriateness of using statistical sampling instead of judgmental sampling.

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15. Which of the following would a successor auditor normally perform after acceptance of an audit client?
a. Inquiry of predecessor auditor regarding the client.
b. Review the SEC filings of the client.
c. Inquiry of bankers regarding the client.
d. Review of predecessor auditor working papers.

16. To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely
would
a. Perform tests of details of transactions and balances.
b. Review prior-year working papers and the permanent file for the client.
c. Read specialized industry journals.
d. Reevaluate client’s internal control environment.

17. Which of the following procedures would an auditor most likely perform in planning a financial statement
audit?
a. Inquiring of the client’s legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of internal controls.
d. Searching for evidences that may aid in detecting fictitious assets.

18. Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidential matter.

19. Which of the following is an effective audit planning and control procedures that helps prevent
misunderstandings and inefficient use of audit personnel?
a. Make copies, for inclusion in the working papers, of those client supporting documents examined by the
auditor.
b. 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.

20. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Including in the audit program a column for estimated and actual time.
b. Performing audit work only after the client’s books of account have been closed for the period under
examination.
c. Writing a conclusion in individual working papers indicating how the results of the audit will affect the
auditor’s report.
d. Including in the engagement letter an estimate of the minimum and maximum audit fee.

“You have to train your mind to be stronger than your emotions or else you’ll lose yourself every
time”

-Anonymous

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