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Audit Planning & Consideration of Internal Control PDF

The document discusses audit planning and the audit process. It describes the 7 stages of an audit: 1) accepting an engagement, 2) planning, 3) considering internal controls, 4) performing substantive tests, 5) completing the audit, 6) issuing an audit report, and 7) post-audit responsibilities. Audit planning involves developing an overall strategy, audit plan, and audit program. It also involves understanding the client, assessing risks and materiality, and determining the nature, timing and extent of audit procedures. The audit program contains audit objectives and time budgets for audit areas and procedures.

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0% found this document useful (0 votes)
90 views33 pages

Audit Planning & Consideration of Internal Control PDF

The document discusses audit planning and the audit process. It describes the 7 stages of an audit: 1) accepting an engagement, 2) planning, 3) considering internal controls, 4) performing substantive tests, 5) completing the audit, 6) issuing an audit report, and 7) post-audit responsibilities. Audit planning involves developing an overall strategy, audit plan, and audit program. It also involves understanding the client, assessing risks and materiality, and determining the nature, timing and extent of audit procedures. The audit program contains audit objectives and time budgets for audit areas and procedures.

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© © All Rights Reserved
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Audit Planning

& 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.

• The main objective is to minimize the likelihood of being


associated to a client whose management lacks integrity.

STAGE 2: Audit Planning


• Involves the development of an overall audit strategy, audit

Audit Process plan and audit program.

• The auditor usually obtained more detailed knowledge about


the client’s business and industry in order to understand the
transactions and events affecting the financial statements.

• Preliminary assessment of risk and materiality is usually done


under this phase.

• The main objective is to assess the different risks associated


with the audit to determine the Nature, Timing and Extent of
further audit procedures necessary to be performed.
STAGE 3: Internal Control Consideration
• Entity’s internal control directly affects the reliability of the
financial statements, so it is appropriate to study and evaluate
its effectiveness.

• The main objective is to establish a basis for reliance on


internal controls, in determining the nature, timing and
extent of further audit procedures to be performed.

STAGE 4: Performing Substantive Procedures


Audit Process • The auditor performs substantive test to determine whether
the entity’s financial statements are presented fairly in
accordance with applicable financial reporting framework.

• It could either be analytical procedures or tests of details of


transactions and balances.

• The main objective is to ascertain the degree of


correspondence between the financial statements prepared
by client’s management and the financial reporting
framework.
STAGE 5: Completing the Audit
• Wrapping-up procedures are performed.

• Conclusions reached are reviewed and the overall opinion is formed


during this stage.

• The main objective is to assist the auditor in assessing conclusion


reached is consistent with evidence gathered.

STAGE 6: Issuance of Audit Report

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.

• The main objective is to communicate the conclusions reached to


various intended users.

STAGE 7: Post-Audit Responsibilities


• The auditor performs procedures that will enable them to identify
areas for improvement in the current and future engagements.

• The main objective is to assess and evaluate the quality of services


delivered by the engagement team.
AUDIT PLANNING

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

After the overall audit strategy has


been established, an audit plan can
It is more DETAILED than the overall
be developed to address the various
audit strategy in that it includes the
matters identified in the overall audit
Nature, Timing, and Extent of audit
strategy, taking into account the need
procedures to be performed by
to achieve the audit objectives
engagement team members.
through the efficient use of the
auditor’s resources.
In developing the overall audit plan, it is important to keep in
mind the following:
a. Obtaining an understanding of the client and
its environment
• General economic factors and industry conditions
affecting the client’s business
• Peculiar characteristics of the client’s business,
Developing the financial performance and reporting requirements
b. Understanding the Accounting and Internal
overall audit Control Systems
c. Risk and materiality
plan • Inherent and control risk assessment
• Identification of critical audit areas
• Setting of materiality levels
• Possibility of material misstatements, including
past experiences of fraud
• Identification of complex areas, including the use
of estimates
d. Nature, timing, and extent of procedures
• Possible change of emphasis based on
information that may be known to the auditor in
the course of audit
• Effect of information technology on the audit
• Work of internal auditor and its effect on the
external audit procedures
Developing the e. Coordination, direction, supervision and
review
overall audit • Involvement of other auditors as in the audit of
components
• Involvement of experts
plan • Number of locations
f. Others
• Doubt of going concern ability of the client
company
• Existence of related party transactions
• Terms of engagement and any legal duties
• Nature and timing of reports to be delivered
DOCUMENTING THE AUDIT PLAN

The auditor should document:


a. The overall audit strategy and the audit plan
b. Any significant changes made during the audit engagement,
together with reasons for change
c. The key decisions considered necessary to:
• Properly plan the audit
• Communicate significant matters to the engagement team
d. The planned nature, timing and extent of risk assessment
procedures, and further audit procedures at the assertion level for:
• Each material class of transaction
• Each material account balance
• Disclosure in response to the assessed risks
• The audit program shall serve as a:
• Set of instructions to assistants involved in
the audits; and
• Means to control and record the proper
execution of the work.
AUDIT
• The audit program contains:
PROGRAM • Audit objectives for each area; and
• Time budget in which are budgeted for the
various audit areas or procedures.
PREPARING THE AUDIT PROGRAM

In preparing the audit program, the following items need to


be thought of:
 Specific assessments of inherent and control risks with
required degree of substantive tests
 Timing of tests of controls and substantive procedures
 Coordination of any assistance from the client’s staff
 Availability of assistants
 Involvement of other auditors or experts
 The matters considered in drafting the overall audit plan
These are audit procedures performed to:
1. Obtain an understanding of the entity and its
environment, including the entity’s internal control,

RISK 2. To IDENTIFY the RISKS of Material Misstatement,


whether due to fraud or error, at the financial
statement and assertion levels.
ASSESSMENT 3. To assess risks of material misstatement
PROCEDURES 4. To provide a basis for the identification and
assessment of risks of material misstatements
5. To provide a basis for designing and implementing
responses to the assessed risks of material
misstatement
• It shall include the following:
• Inquiries of management and of others
RISK within the entity who in the auditor’s
judgment may have information that is
ASSESSMENT likely to assist in identifying risks of
material misstatement due to fraud or
PROCEDURES error;
• Analytical procedures; and
• Observation and inspection
• The auditor must make judgments about
materiality and audit risk in determining the
Nature, Timing, and Extent of procedures to
ASSESSMENT apply and in evaluating the results.
OF AUDIT RISK • Materiality, which is a necessary consideration
in determining the nature, timing and extent of
AND audit procedures, leads to the reduction of
audit risk to an acceptable low level.
MATERIALITY • The HIGHER the materiality, the LOWER the
audit risk. (Hence, these two are inversely
related)
It is said that the information is MATERIAL if its omission
or misstatement could influence the economic decisions
of users taken on the basis of the financial statements.

It is dependent on the size of the item or error judged in


the particular circumstances of its omission or
misstatement.
What is
MATERIALITY? The audit should consider materiality and its
relationship with audit risk when conducting an audit.

The auditor shall determine materiality using


professional judgment at (a) Financial Statement Level
or (b) Assertion Level
Considering materiality throughout the audit:

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

1. Overall Materiality – financial statement level


• it is the smallest aggregate level that could misstate/distort any
of the financial statements
• Also known as materiality threshold or planning materiality
• Overall materiality is usually expressed as a proportion of a
chosen benchmark:
• profit before tax
• total revenues
• gross profit
• total expenses
• total equity or net asset value
• Total Assets
Materiality Levels

2. Materiality at assertion level


• materiality level for individual or particular class of transactions,
account balance, or disclosure where appropriate;
• this is also known as tolerable misstatement
• Allocation may be based on the (1) relative size of the account
(2) variability of the account, or (3) professional judgement of the
auditor
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

Risk of Risk of NOT


Material Detecting the
Misstatement Misstatement

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

• It is the susceptibility of an account balance or


class of transactions to misstatement that could
be material, individually or when aggregated
with misstatements on other balances or classes,
assuming that there were NO related controls.
Risk of Material
CONTROL RISK
Misstatement
• It is the risk that a misstatement, that could
occur in an account balance or class of
transactions that could be material, individually
or when aggregated with misstatements in other
balances or classes, will NOT be prevented or
detected and corrected on a timely basis by the
accounting and internal control systems.
DETECTION RISK

• It is the risk that the auditor’s substantive


procedures will not detect a misstatement
Risk of Not that exists in an account balance or class
of transactions that could be material,
Detecting the individually, or when aggregated with
misstatements in other balances or classes
Material
HOW to REDUCE the Risk?
Misstatement
• The procedures to be performed shall be
(a) more effective procedures (b) closer or
nearer to year-end; and (c) larger sample
size.
ASSESSMENT OF AUDIT RISK AND MATERIALITY

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

possible by low overall


audit risk

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

1. Obtain understanding of the Internal Control System


2. Document the understanding of accounting and
internal control systems
3. Assess the level of control risks
4. Document the assessed level of control risks
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