Audit Planning & Consideration of Internal Control PDF
Audit Planning & Consideration of Internal Control PDF
& Consideration of
Internal Controls
Learning Objectives
• Explain audit planning.
• Identify and explain the major audit planning activities.
• Identify considerations in establishing audit strategy.
• Describe the difference of audit strategy, audit plan and audit program.
• Identify the activities in risk assessment.
• Describe the audit risk and its components and how will it affect the audit procedures.
• Describe the internal control system
• Components of effective internal control system
• Consideration of internal controls in auditing
OVERVIEW OF THE AUDIT PROCESS
Accepting Performing
Completing
an Substantive
the Audit
Test
Engagement
Considering Issuing a
Audit
Internal
Planning
Control Report
STAGE 1: Pre-engagement
• Requires a decision from the auditor whether or not to accept
a new client or continue relationship with an existing one.
Audit Process • The auditor prepares and issues audit report which describes the scope
of the audit and states the auditor’s conclusion regarding the fairness
of the financial statements.
IMPORTANCE OF PLANNING:
Appropriate attention is devoted to important areas of the
audit
Potential problems are identified and resolved on a timely
basis
The audit is completed expeditiously
The audit engagement is properly organized, staffed and
managed
The audit is performed in an effective and efficient manner
AUDIT PLANNING
EXTENT OF PLANNING:
a. The size and complexity of the entity
b. Complexity of the operations and organizational structure of
client/entity
c. The auditor’s previous experience with and understanding of the
entity
d. Materiality
e. Extent of other documentation
NOTE: The purpose and objective of planning the audit are the same
whether the audit is an initial or recurring engagement
OVER-ALL AUDIT STRATEGY (OAS)
• The auditor in establishing the overall audit strategy shall:
• Identify the characteristics of the engagements that define its scopes;
• 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;
• Consider the results of the preliminary engagement activities and, where
practicable, whether knowledge gained on other engagements performed by
the engagement partner for the entity is relevant;
• Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
THE OVERALL AUDIT PLAN
1. Planning stage
• To identify and assess risks of material misstatements
• To determine the nature, timing and extent of further audit
procedures
2. Testing stage (materiality levels set during audit planning
are simply updated/revised if necessary)
3. Completion stage
• To evaluate the effect of uncorrected misstatements, if any, on
the financial statements and in forming the opinion in the
auditor’s report
Materiality Levels
Audit Implication
• Compare the aggregate amount of uncorrected misstatements
with the overall materiality
• If management refuses to adjust the financial statement upon
identification of misstatement and the results of the extended
audit procedures leads the auditor to conclude that the
aggregate of uncorrected misstatement is material, then a
modification of the auditor’s report may be done as appropriate
• It is the risk that the auditor gives an
AUDIT RISK inappropriate audit opinion when the financial
statements are materially misstated.
COMPONENTS of Audit Risk
Detection
Inherent Risk Control Risk
Risk
1. Set the desired level of Audit Risk
2. Assess the level of Inherent Risk (such as low,
Steps in using medium, or high)
3. Assess the level of Control Risk (such as low,
the Audit Risk medium, or high)
Model 4. Determine the acceptable level of detection
risk
5. Design audit substantive tests
INHERENT RISK
AUDIT RISK
HIGH LOW
CR TC DR ST TC DR ST
Effective
Further tests, to
No need to Enough, if
High reduce, if sustain the
reduce any
Materiality
Futher reduce,
High, More
Low when possible & Add more
lower it effective
appropriate
Internal Controls
Manageme
nt & those
Policies & Reasonable
charged Objectives
with Procedures Assurance
Governance
COMPONENTS OF INTERNAL CONTROL (C.R.I.M.E.)
Control Activities
Risk Assessment
Information and Communication System
Monitoring
Environment of Control (C.H.A.M.P.I.O.N.)
• Commitment to competence
• Human Resources
• Assignment of Responsibility
• Management Philosophy and Operating Style
• Participation of BOD & Audit Committee
• Integrity & ethical values
• Organizational Structure
CONSIDERATION OF INTERNAL CONTROLS