• Expert/Specialist – special technical skills not

Audit Planning related to accounting or audit field that affect the

• determine focus areas and data procedures FS
• Examples:
FACTORS THAT AFFECT AUDIT PLANNING 1. Actuary – pension expenses/liability
1. Size of Business & Complexity of Transactions 2. Engineers – percentage of completion
2. Previous Experience of Auditor w/ Client 3. Appraisers – FV of asset
- know what to avoid • Qualities of Experts:
3. Knowledge about Industry & Nature of Client 1. Objectivity
- know material accounts 2. Independence
3. Competence
END PRODUCT OF AUDIT PLANNING
1. Audit Program (list of procedures) Can auditors question or challenge the methodology of
2. Audit Timetable (3-4 mos normally) experts?
3. Engagement Letter (expectations of both parties) à No, but can only check the reasonableness of
amounts or processes done.
ADVANTAGES OF GOOD AUDIT PLANNING à Auditors must check whether the information from
1. Efficient & Timely Audit mgmt. matches the actual output of experts.
2. Identification of Significant Audit Areas
3. Proper Utilization of Audit/Engagement Team Are assumptions made by the expert the responsibility of
- especially assistant the auditor?
- put right people to do the right job to maximize à No. These assumptions are responsibility of experts.
time à However, when the auditor has performed audit
4. Proper coordination w/ Client procedures, the audit then becomes the responsibility of
- request docu beforehand to proceed to the responsible party or mgmt.
investigation (audit procedures)
- client assistance What can an auditor control?
à examination of evidence à Info by the client, if said info is reasonable.
à interview/availability of client personnel
Should the auditor mention when they have relied to a
DISADVANTAGES OF AUDIT POORLY PLANNED work of expert when it is an unqualified opinion?
1. not conducted w/ audit & quality standards (PSA) à Don’t write anymore when auditor referred to the work
2. Potential Loss of Client of expert.
3. Potential Legal Involvement
4. Reputational Risk When should the auditor refer to the work of expert?
à When there is a misstatement by auditor caused by
Can auditors specifically say the audit procedures that the said misstatement. When there it is a
they will do? qualified/adverse opinion.
à No. The clients might know what to avoid or watch à Auditor may take word from expert and provide basis
out. They might do fictitious papers. why.
à Nawawala unpredictability.
III. Using Works of Internal Auditors
When does audit planning start? • External auditors do not certify the effectiveness of
à After acceptance. Required to do competence and internal audit, but rely
independence check first. Efficiency & Effectiveness
STEPS OF AUDIT PLANNING
I. Understanding the Client’s Business & Industry Internal Auditing
• docus needed: prior year FS (to know what is
material), prior year working papers of past audit
team, integrity (newspapers, journals, magazines), Internal Controls
BOD, management, annual reports, policies
• sets the tone
• know the complexity of transactions as to diff - financial reporting - administrative
revenue recognition principles (IFRS 15 or __) controls controls (hiring &
• find the reasonableness of mgmt. assertions or - external auditor firing)
estimates & accounting policies focuses here
• know competence of audit team required for the Independent Audit Internal Audit
engagement (eg. for specialized industries) 1. Who performs? CPA Employee
2. Intended Users Stakeholders, mgmt. Mgmt.
II. Using the Work of Experts other than 3. Scope of Audit Accounting controls Acct. & admin
Accounting/Audit controls
4. Purpose of Audit Nature, timing & Provide A. Risk Assessment
extent of audit recommendation - PESTDG (Political, Environmental, Social,
procedures to improve Technological, Economic, Demographic, Gov’t)
5. Work Division By FS Accounts By function B. Control Activities
6. Work Objective To express an To assist in the - procedures
opinion as to fairness improvement of
- to respond to identified riks
of FS operations
C. Internal Control
- inform through memos, emails, SDP, manuals,
Should external auditors refer to works of internal
board meetings
auditor?
D. Monitoring
à No.
- to evolve policies to adapt through changing
times
Can external auditors delegate functions?
- continuous improvement
à Yes. Ex: routine documentations (Test of Controls,
Substantive Testing)
Should auditors express opinion?
à To determine the NTE of Y-End audit procedures.
FACTORS TO DETERMINE THE RELIABILITY OF
à More effective IC, less audit procedures. IC may help
INTERNAL AUDITOR
in audit work.
1. Objectivity
2. Independence (departmentally independent)
Should auditors express opinion on ineffectiveness of
BOD audit committee
IC?
Internal Auditor à No.
management also for
independent auditors VI. Preliminary Analytical Procedures
ANALYTICAL PROCEDURES
3. Competence (through certificates, qualifications,
diploma) • ex: ratio analysis, horizontal & vertical analysis,
4. Scope of Work forecasts, budgeting, Year1 & Year2 changes
• establish plausible (reasonable, valid) relationships
IV. Identify Related Parties between financial data
Ø mgmt., employees, directors, officers • identify significant or unusual relationship, trends
Ø subsidiaries (control) and transactions
Ø associates/affiliates (significant influence) • help identify significant audit areas
Ø immediate family members of officers/directors PROCEDURES FOR ANALYTICAL PROCEDURES
• Since finished FS are not done at arm’s length of 1) Develop expectations – read prior year FS, read
auditors, related parties may have influence industry averages, study industry
• may be cause of irregularity 2) Compare company data w expectations – check if
• may not have correct substance unusual
3) Investigate signs or unusual fluctuation
• must put additional audit attention
SOURCES OF FLUCTUATION
• other sources: annual report, FS, SEC reports,
a. Unusual/material transactions
magazines, inquiries
b. Business or economic changes
1. Nature of RP transactions – description
c. Errors/irregularities in the FS
2. Amts due to/from related parties – may not be
subs/form
VII. Determine the Preliminary Materiality Level
Interim Phase – to not plan on year-ends
PLANNING MATERIALITY LEVEL (PM)
• everything beyond PM = material
V. Understand Client’s Internal Control Structure
INTERNAL CONTROL • % Total Assets or % Net Income or % Total Rev.
• Policies by entity • Risk of ↓ PM – too much audit procedures,
inefficient
• role: to achieve objectives (goals) of the company,
to safeguard assets • Risk of too ↑ PM – effectiveness
ex: properly supported transactions (document first TOLERABLE ERROR (TE)
before disbursement), inventory in a properly • range acceptable level that does not alter the
ventilated location, body frisking on warehouse opinion
• lowest of PM
ELEMENTS OF INTERNAL CONTROL • 80%-90% of PM
Control Environment PM
X
- Board of Directors Tolerable
Error “buffer”
misstatements

control
Risk Control Info. & Monitoring
Assessment Activities Comm.
 VIII. Compute for Acceptable Audit Risk Who determines how many info predecessor auditor
ALPHA may give?
• risk to express modified opinion on fairly presented à CLIENT
• How to adjust? Perform additional procedures Can current auditor demand what info to get?
• Issue of efficiency (time & resources wasted) à No.
BETA Who determines the extent & nature of info?
• risk to express unqualified opinion on materially à PREDECESSOR AUDITOR
misstatements Who owns the working paper?
• How to adjust? Do not do anything à PREDECESSOR AUDITOR
• Issue of effectiveness Will auditor state previous audit?
Which between the two is considered more? à No. Only state the audit and opinion presented by
à BETA. This must be minimized current auditor.
beta
At FS Level X. Formulation of Audit Program
- significant areas in the FS, • end product of audit procedures
where misstatement occurs • detailed list of procedures to be performed from
AUDIT RISK
ASSESSMENT start to end (Planning, TOC, Substantive Tests,
At Assertion Level Post-Audit responsibilities)
- susceptibility of the • not expected to be final since TOCs is done to
account to be misstated check if reliable or not. If not rely on TOC, change
audit program.
AR = Inherent Risk x CR x Detection Risk • complete, but not final
- controllable • final only after evaluation of IC
- assessed; ROMM
Preliminary – after understanding
↓ ↑ ↓ both business and IC
↓ ↓ ↑ complete Final – after evaluation of IC (TOCs)
LOW (good
If ROMM is: HIGH (low efficiency)
efficiency, good IC) ENGAGEMENT LETTER
1. Acceptable
Level of DR?
↓ Slightly higher • agreement on terms & conditions of engagement;
Yes, basis for already bonded by the responsibility of each other
2. Perform TOCs No
reliance of controls • scope of engagement
3. Effect of • conditions agreed
Substantive Tests
Test of details of • protection of services
balances (confirmation) Test of details • expectation or reference on content/form of report
Nature & of transactions +
(receipts & Analytical procedures
disbursements)
Is it necessary to change engagement letter every year?
Interim + Year-End à In cases of recurring audits, not required, but they
Year-End (saying oras
Timing (lessened, material may.
sa interim)
only)
Larger sample size (not CONTENTS OF ENGAGEMENT LETTER
Extent 100%; there’s more to Smaller sample size
discover and examine) 1) Applicable PFRS Framework
2) Key Audit Matters
Can TOCs be eliminated? - issues
à Yes. Especially when ROMM is assessed to be high. 3) Audit Fees
Can Substantive Tests be eliminated? Types of Audit Fees:
à No, cannot not be performed. a. Fixed or Flat Fee
b. Cost Reimbursement: how much spent to do audit
IX. Communications w/ Predecessor Auditor + labor cost
If predecessor auditor is from the same company but c. Cost Plus: cost + mark-up
different audit teams = no predecessor d. Per Diem: per hour basis
If different company = predecessor present 4) Cannot state the type of opinion that will be given
Role of Predecessor Auditor – provides info abt client
1) Must state why there is a change of auditor. It could WHEN REQUIRED TO CHANGE ENGG. LETTER
be due to an issue or a problem w/ integrity. 1) Misunderstanding as to Scope & Objective
• Current auditor cannot talk directly 2) Revised or Additional Terms on Engagement
• Must respect mgmt. confidentiality - ex: new audit fees
3) Change in BOD, Senior Management or Major
2) Ask permission from client if allowed to talk
Stockholder
• allowed à mgmt. informs predecessor
- might have a new agreement
• about: idea and info about client
- the client may not have the same integrity
• not allowed à cast a doubt about integrity 4) Change in Significant Ownership
5) Significant Change in Nature & Size
6) Change in Legal or Regulatory Requirements
7) Change in Framework Followed
- PFRS for SMEs, U.S. GAAP

SITUATIONAL
A. Mgmt requests auditor to change engagement from
audit (reasonable level of assurance) to a review (limited
level of assurance). Should auditor agree?
à Depends, must first know why.
Accept = not as to scope & limitation
1. Reason: cannot finish inventory count as it is too late
- Disclaim
2. Reason: Bank says a review is sufficient
- Accept change
3. Client rejects the auditor’s rejection in the middle of
inventory count. Thus, the client stops giving evidences.
- Disclaim, withdraw or seek legal advice.
4. Client accepts the auditor’s rejection.
- Continue with old EL
B. The client is accused of theft.
à Change from audit to compliance.

If there is a new engagement letter, should auditor write

the previous EL?
à No. It must be treated as if there was no previous EL.

AUDIT PLANNING PRESENTATION

• ↓ Materiality Level – analytical procedures can do;
no need for many to audit since it won’t be efficient
anymore
• ↓ Materiality Level – first year audit

Benchmarks for Preliminary Materiality Level

1. Net Income (except for when Net Loss)
2. Operating Income (excluding Finance Cost & Income Tax)
3. Total Assets
4. Total SHE

Analytical Procedures
1. Why decline? ↓ in customers
2. Why ↓ Sales? ↓ in major customers
3. Why ↓ ForEx? Loss in major client who pays $US
4. Why ↓ Income Tax? Audit starts October so they
don’t know how much to pay yet
• Procedures: Test of Details
I. Transactions (Sales)
II. Balances (AR, Cash) – check/confirm end bal.

Accounts to Audit
1. Revenue Cycle = Sales + AR + Cash
Procedures: TOD Transac & Balances
2. Conversion Cycle = COS + Inventory
TOD Balances (Inv)
3. Expenditure Cycle = OpEx + Payables
4. PPE – TOD Transac
5. Related parties – TOD Transac
6. Compensation Cycle = Salary + Net Benefit Obli
7. Equity – TOD Transac
8. Cash & Inventory (↑ inherent risk, ez theft)