Process of Assurance: Planning the

assignment

Mohammad Salahuddin Chowdhury, FCA

Planning

Case Study
Planning

Art Mayers realized too late the importance

of proper audit planning.
Planning

• Audit Strategy
sets the scope, timing and direction of the audit and guides the
development of the audit plan.

• Audit Plan
sets out the nature, timing and extent of audit procedures
to be performed to obtain audit evidence.
Planning

Benefits of Audit Planning

• Ensure appropriate attention is devoted to important areas
• Identify potential problems and resolve them on a timely
basis.
• Ensure the audit is properly organized and managed.
• Assign work to engagement team members properly.
• Facilitate direction and supervision
• Facilitate review of work.
Planning

Approach to Planning
Step 1: ethical requirements continue to be met

Step 2: the terms of the engagement are understood

Step 3: Establishing the overall audit strategy

Step 4: Developing an audit plan

Planning

Key Contents of an Overall Audit strategy

• Understanding the Entity’s Environment

– General economic factors and industry conditions.

– Important characteristics of the client:

(a) business,
(b) principal business strategies,
(c) financial performance,
(d) reporting requirements

– competence of management.
Planning

Key Contents of an Overall Audit strategy

• Understanding the accounting and internal control systems

– accounting policies of the entity
– new accounting or auditing pronouncements.
– auditor’s knowledge of the accounting and internal control
systems
Planning

Key Contents of an Overall Audit strategy

• Risk and Materiality

– assessment of risks of fraud or error and identification of
significant audit areas.
– setting of materiality
– possibility of material misstatements
– identification of complex accounting areas including those
involving estimates.
Planning

Key Contents of an Overall Audit strategy

• Consequent nature, timing and extent of procedures

– Possible change of emphasis on specific audit areas.

– The effect of information technology on the audit.

Planning

Key Contents of an Overall Audit strategy

• Co-ordination, direction, supervision and review

– number of locations.
– Staffing requirements.
– Need to attend client premises for inventory count or other
year-end procedures.
Planning

Key Contents of an Overall Audit strategy

• Other Matters
– possibility that the going concern basis may be subject to
question.
– Conditions requiring special attention.
– terms of the engagement and any statutory responsibilities.
– nature and timing of reports or other communication with the
entity
Planning

Understanding the Entity and its Environment

Why?
– To identify and assess the risks of material misstatement
– To enable the auditor to design and perform further audit
procedures.
– To provide a frame of reference for exercising audit judgment
e.g. when setting materiality.
Planning

Understanding the Entity and its Environment

What?
– Industry, regulatory and other external factors,
including the reporting framework
– Nature of the entity, including selection and application
of accounting policies
– Objectives and strategies and relating business risks
– Measurement and review of the entity’s financial
performance
– Internal control
Planning

Understanding the Entity and its Environment

How?
– Enquiries
– Analytical procedures
– Observation and inspection
– Prior year knowledge (in case of recurring audit)
– Discussion among the engagement team.
Planning

Professional Skepticism
Professional Skepticism indicates an attitude of auditor. Every
auditor should have Professional Skepticism

It includes being alert to:

– Audit evidence that contradicts other audit evidence
obtained.
– Information that brings into question the reliability of
documents and responses to inquiries
– Conditions that may indicate possible fraud.
Planning

Professional skepticism is necessary to reduce the risks of:

– Overlooking unusual transactions.
– Over generalizing when drawing conclusions
– Using inappropriate assumptions in determining the
nature, timing and extent of the audit procedures and
evaluating the results thereof.
Planning

Analytical Procedures

Analytical procedures mean evaluations of financial

information made by a study of plausible relationships
among both financial and non-financial data.
Planning

The BSA 520 states that analytical procedures include:

• The consideration of comparison with:

– Comparable information for prior periods

– Anticipated results of the entity

– Similar industry information

Planning

• Consideration of relationships between:

– Elements of financial information that would be
expected to conform to a predictable pattern

– Financial information and relevant non-financial

information
Planning

Materiality
A matter is material if its omission or
misstatement would reasonably influence the
economic decisions of users taken on the basis of
the financial statements. Materiality depends on
the size of the error in the context of its omission
or misstatement.
Planning

Materiality

BSA 320 states that the materiality should be

considered by the auditor when:
– Determining the nature, timing and extent of audit
procedures; and
– Evaluating the effect of misstatements.
Planning

Materiality
Materiality considerations during audit planning are
extremely important. Materiality assessment will help the
auditors to decide:
– How many and what items to examine
– Whether to use sampling techniques
– What level of error is likely to lead to an auditor to say the financial
statements do not give a true and fair view.
Planning

Materiality

The Relationship between Materiality and Audit Risk

There is an inverse relationship between materiality and
the level of audit risk,

that is the higher the materiality level, the lower the audit
risk and vice versa.
Planning

Continuous Risk Assessment

The auditors usually adopt a risk based approach to
auditing and focused on his testing on the riskiest balances
and classes of transactions.
Planning

Audit Risk
The risk that the auditors give an inappropriate opinion on
the financial statements.

Risk of Material Misstatements in the Financial Statements

• Inherent Risk
The susceptibility of an account balance or class of
transactions to misstatement that could be material
individually or when aggregated with misstatements in
other balances or classes, assuming there were no related
internal controls.
Planning

Risk of Material Misstatements in the Financial Statements

Example of issues that might increase inherent risk is:

• Balance is or includes an estimate
• Balance is important in the account
• Financial statements are liable to misstatement because:
– Company is in trouble
– Company is seeking to raise finance
– Other motivation for directors to misstate the figures
(such as profit targets or profit related bonuses)
• Financial statements contain balances with complex
financial accounting requirements or a choice of treatment.
Planning

Risk of Material Misstatements in the Financial Statements

• Control Risk
The risk that a material misstatement would not be
prevented, detected or corrected by the accounting and
internal control systems.
Planning

• Detection Risk
The risk that the auditors’ procedures will not detect a
misstatement that exists in an account balance or class of
transactions that could be material, either individually or
when aggregated with misstatements in other balances or
classes.
Planning

Identifying and Assessing the Risk

BSA 315 says that the auditor shall identify and assess the
risks of material misstatement at:
– The financial statement level; and
– The assertion level for classes of transactions, account
balances and disclosures.
Planning

Identifying and Assessing the Risk

The auditor is required to take the following steps:
• Step 1: Identify risks throughout the process of obtaining an
understanding of the entity and its environment.
• Step 2: Relate the risks to what can go wrong at the
assertion level.
• Step 3: Consider whether the risks are of a magnitude that
could result in a material misstatement.
• Step 4: Consider the likelihood of the risks causing a
material misstatement.
Planning

Significant Risks

BSA 315 sets out the following factors which indicate that a
risk might be a significant risk:
– Risk of fraud
– Related to recent significant economic, accounting or
other development
– The complexity of transactions
– It is a significant transaction with a related party
– The degree of subjectivity in the financial information
– It is an unusual transaction
Any Questions ?