Chapter 1: Audit Planning
Cut-off: the transactions are
and Misstatements in FS recorded in the correct
Audit accounting period
Auditing Accuracy: there have been no
1) Systematic process of errors while preparing
2) Objectively obtaining and documents or in posting
evaluating evidence regarding transactions to ledger
selected
3) Assertions about economic Classification: transactions
actions and events to recorded in the appropriate
4) Ascertain the degree of accounts / Presentation:
correspondence between those descriptions and disclosures of
assertions and established transactions are relevant and
criteria and easy to understand:
5) Communicating the results to • Aggregation: adding
interested parties together of individual
items
PSA 200 (Overall Objectives of the • Disaggregation:
Independent Auditor) separation of an item, or
• Systematic process an aggregated group of
• Objectively obtaining and items, into component
evaluating evidence parts (Notes to FS often
• Audit assertions used)
• Degree of correspondence
between assertions and Note: Materiality needs to
established criteria be considered
• Communication results to
interested users Account Balances Assertions
Rights and obligations: entity
Transaction Assertions (Significant has a legal title or controls the
Classes Of Transactions) rights to an asset or has an
Completeness: transactions that obligation to repay a liability
should have been recorded and
disclosed have not been omitted Completeness: no omissions and
(supporting document -> general assets and liabilities that should
ledger) be recorded and disclosed have
been
Occurrence: transactions
recorded or disclosed actually Classification: assets, liabilities,
happened and relate to the and equity interests are
entity (general ledger -> recorded in the proper amounts;
supporting document) and Presentation and
Disclosure: descriptions and Assertions
disclosures of assets and
liabilities are relevant and easy
to understand
Existence: assets and liabilities
really do exist and there has
been no overstatement
Valuation, Accuracy and Overall Objective (PERaOR)
Allocation: amounts at which
assets, liabilities and equity
interest are valued, recorded
and disclosed are all appropriate
____________________________________
Overall Objectives of Audit
1. To obtain reasonable assurance
about whether the FS as a whole are
free from material misstatements,
whether due to fraud or error,
thereby enable the auditor to
express an opinion on whether the
FS are prepared, in all material
respects, in accordance with an
applicable financial reporting
framework
The inverse relationship of Reasonable
2. To report on the FS, and Assurance (means the auditor has
communicate as required by the gathered enough evidence to be highly
PSAs, in accordance with auditor’s confident that the FS are free from
findings material errors) and Audit Risk (the
chance that an auditor gives the wrong
Audit Overview opinion on the financial statements)
• The lower the audit risk, the
higher the reasonable assurance
• The higher the audit risk, the
lower the reasonable assurance
____________________________________
Audit Risk Model If the company’s risks are high, the
auditor must perform more thorough
audit procedures to reduce Detection
Risk and keep overall Audit Risk low
Risk of Material Misstatement
The chance that the company’s FS
already contain a significant error
before the auditor starts auditing
RoMM has 2 parts:
1. Inherent Risk (IR)
The possibility that an account
naturally has a higher chance of
containing errors even if there
are no internal controls
Nature of the business or
transaction
2. Control Risk (CR)
The chance that the company’s
internal controls fail to prevent
or detect mistakes
RoMM = IR + CR
Detection Risk
This is the auditor’s risk
It is the chance that the auditor’s
procedures fail to detect a
material mistake
Audit Risk = IR x CR x DR
Risk-Based Audit Process • An audit begins by identifying risks
(Risk Assessment: where could
errors happen),
• Continues by performing
procedures to address those risks
(Risk Response: how do I check
those areas; perform audit
procedures and gather evidence),
• And ends with evaluating the
evidence and issuing an audit
report (Conclusions & Reporting:
what do the results show; form an
opinion and issue the audit report)
Risk Assessment Risk Response Conclusion and Reporting
Preliminary Engagement Responding to Completing the Audit and
Activities Assessed Risks Considering Post-Audit
Planning the Audit Determining the Responsibilities
Extent of Testing
Determining Materiality Consider Fraud,
Error and NOCLAR Forming the Auditor’s
Understanding the Entity Considering Work of Opinion and Report Content
and its Environment Other Practitioners
Understanding the Consider Accounting
Entity’s Internal Control Estimates, Related Performing and Reporting on
Understanding and Parties, Litigation Specialized Audit
Assessing Risks of and Claims, Segment Engagements
Material Misstatement Information, and
Going Concern
Professional Judgement and Professional Skepticism
Audit Evidence and Documentation
Audit Quality
• Consider significant factors to
Pre-Engagement Procedures direct team effort
Before Audit • Consider preliminary
• Independence assessment engagement activities and
• Pre-engagement assessment knowledge from other
• Communications with engagements
predecessor auditor • Ascertain nature, timing and
extent (NTE) of resources
Once complete, Engagement Letter is
issued The auditor shall develop an audit
plan that shall include a
Audit Planning and Risk Assessment description of:
• Broad view of the client as a whole a. The NTE of planned risk
and the industry in which it assessment procedures (PSA
operates 315: identifying and Assessing
• Understanding the business (UTB), the RoMM through UTBIE)
internal control, IT environment, b. The NTE of planned further
corporate governance environment, audit procedures at the
and closing procedures to know assertion level (PSA 330: The
where to focus the most attention Auditor’s Responses to Assessed
• Identify going related parties, Risks)
factors affecting going concern and
significant accounts and classes of PSA 315 (UTB), 240 (Fraud Response),
transactions to gauge RoMM 570 (Going Concern)
To provide basis for identification and
PSA 300 (Planning an Audit of FS) assessment of risks of material
Auditor plan their audit to reduce audit misstatement (RoMM) at FS and
risk to an acceptably low level assertion levels
• Planning (UTB, Risk
Identification, Risk and Procedures include (IApOI)
Materiality Assessment) • Inquiries
• Performing (Execution) • Analytical Procedures
• Reporting (Conclusion and • Observation and Inspection
Reporting)
Planning Activities Understanding the Entity/Business
Overall audit strategy that sets the and its Environment, including
scope, timing and direction of audit, Internal Control
and that guides the development of the Relevant industry, regulatory, and
audit plan other external factors including the
• Identify the characteristics of applicable financial reporting
the engagement framework
• Ascertain the reporting
objectives for timing of audit
Nature of the Entity Identification and Assessment of
• Operations Significant Risks and Risks of Material
• Ownership and governance Misstatements
structures • Whether risk is related to recent
• Types of investment that entity significant economic, accounting or
is making and plans to make other developments
• Way entity is structured and • Complexity of transactions
financed, to understand the • Whether risk involves significant
classes of transactions, account transaction with related parties
balances, and disclosure in FS • Degree of subjectivity in
• Entity’s selection and measurement
application of accounting • Whether the risk is outside normal
policies business or unusual
• Entity’s objectives and
strategies, and business risks
affecting RoMM
• Measurement and review of
entity’s financial performance
Matrix of Acceptable Level of Detection Risk (DR)
Matrix Assessment of Control Risk (Cr)
HIGH MEDIUM LOW
Assessment of HIGH Lowest Lower Medium
Inherent Risk (IR) MEDIUM Lower Medium Higher
LOW Medium Higher Highest
FS (AP: the method or rule a
Misstatements and its Effects in FS company chooses to prepare its FS)
Audit • Adjustments of CA of assets or
• Can arise from fraud and error, liability that results from
intentional (fraudulent financial assessment of present status or
reporting / misappropriation of expected future benefits (CAE: a
assets) or unintentional change in the estimated amount of
• Responsibility for prevention and an asset or liability because new
detection of fraud is with TCWG information becomes available;
and Management there’s a better guess)
• Omissions from and misstatement
Accounting Policies, Change in in FS for one or more prior periods
Accounting Estimates, and Prior arising from failure to use or misuse
Period Errors of reliable information (PPE:
• Specific principles, bases, mistakes made in previous FS
conventions, rules and practices because reliable information was
applied in preparing and presenting ignored, forgotten, or used
incorrectly)
Counterbalancing / Non-Counterbalancing Errors
Effect on:
Type of Adjustment / Error Income – Income –
Current Year Next Year
Ending inventory overstated (COGS is Over Under
lower)
Ending inventory understated (COGS is Under Over
higher)
Failure to accrue expenses at year end Over Under
Overstatement of accrued expense at Under Over
year end
Failure to accrue earned revenue at year Under Over
end
Overstatement of accrued revenue at Over Under
year end
Failure to expense prepaid expense at Over Under
year end (Prepaid asset that should have
been expensed remained as an asset)
Understatement of year end prepaid Under Over
expenses (Too little prepaid asset is
recorded, meaning too much expense is
recognized)
Understatement of year end liability for Over Under
revenue received in advance (Too little
unearned revenue is recorded, so too
much revenue is recorded this year or
immediately recognizing UR as revenue)
Overstatement of year end liability for Under Over
revenue received in advance