Auditing Theory: Audit Planning: An Overview

Auditing Theory
Audit Planning: An Overview

-Harries Francisco Andaya, CPA
Lucio
Audit Planning
The audit plans the audit so that it will be performed in an effective

manner, i.e., to gain reasonable assurance that the FSs are free from
material misstatement.
Audit planning involves
▪ Establishing the overall audit strategy (a general strategy) for the
engagement; and
▪ Developing an audit plan (a detailed approach for the expected
nature, timing and extent of the audit),
In order to reduce audit risk to an acceptably low level.
Audit Planning
The main outputs after planning the audit are:

▪ The overall audit strategy (a.k.a., audit planning memorandum)
▪ The audit plan (a.k.a., audit programs or audit completion checklists)
Benefits of Audit Planning
▪ Appropriate attention to important areas of the audit.

▪ Identify and resolve potential problems on a timely basis.
▪ Organize and manage the audit engagement so that it is performed
in an effective manner.
▪ Assist in the proper selection of engagement team members and the
assignment of work to them.
▪ Facilitate the direction and supervision of engagement team
members and the review of their work.
▪ Assist, where applicable, in coordination of work done by auditors of
components and experts.
Audit Planning and Risk Assessment
Activities
Planning is no a discrete phase of an audit, but rather a continual and

iterative process. Planning, however, includes consideration of the
timing of certain activities and audit procedures that need to be
completed prior to the performance of further audit procedures (i.e.
test of controls and substantive procedures).
Activities
The following are the activities and procedures performed in audit planning
and risk assessment:
▪ Determining of materiality;
▪ Performing risk audit procedures (RAP), including analytical procedures, to
understand the entity and its environment, including the entity’s internal
control;
▪ Identifying material classes of transactions, account balances and
disclosures;
▪ Identifying and assessing the risk of material misstatements of the financial
statements; and
▪ Finally, preparing the outputs of audit planning – overall audit strategy and
audit plan – containing the auditor’s responses to the identified risks.
Activities
The nature and extent of the above planning activities will vary
according to:
▪ The size and complexity of the entity;
▪ The key engagement team members’ previous experience with the
entity; and
▪ The changes in circumstances that occur during the audit
engagement.
Involvement of Key Engagement Team
Members
The engagement partner and other key members of the engagement

team shall be involved in planning the audit, including planning and
participating in the discussion among engagement team members, to
draw on their experience and insight, thereby enhancing the
effectiveness and efficiency of the planning process.
Result of Preliminary Engagement
Activities
Please refer to the last topic “0417AT” for the list of preliminary engagement
activities.
The results of preliminary engagement activities:
▪ Assist the auditor in identifying and evaluating events or circumstances
that may adversely affect the auditor’s ability to plan and perform the audit
engagement.
▪ Enables the auditor to plan an audit engagement for which, for example:
– The auditor maintains necessary independence and ability to perform the
engagement.
– There are no issues with management integrity that may affect the auditor’s
willingness to continue the engagement.
– There is no misunderstanding with the client as to the terms of the engagement.
Result of Preliminary Engagement
Activities
In an initial audit, the auditor may need to expand the planning activities
because the auditor does not ordinarily have the previous experience with the
entity than when planning recurring engagements. For an initial audit
engagement, additional matters the auditor may consider in establishing the
overall audit strategy and audit plan include the following:
▪ Arrangements to review the predecessor auditor’s working papers.
▪ Any major issues (including the application of accounting principles or of
auditing and reporting standards).
▪ The audit procedures necessary to obtain sufficient appropriate audit
evidence regarding opening balances.
▪ Other procedures required by the firm’s system of quality control for initial
audit engagements.
1. Overall Audit Strategy
Overall audit strategy sets the scope, timing, and direction of the audit, and guides
the development of the audit plan.
In establishing the overall audit strategy, the auditor is required to:
a) Identify the characteristics of the engagement that define its scope
b) Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required
c) Consider the factors that, in our professional judgment, are significant in
directing the engagement team’s efforts
d) Consider the results of preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the
engagement partner for the entity is relevant.
e) Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
A) Characteristics that define the Scope of Engagement

▪ The applicable FRF
▪ Industry-specific reporting requirements
▪ The expected audit coverage
▪ The work of internal auditors
▪ The entity’s use of service organizations
▪ The effect of information technology
▪ The availability of client personnel and data
B) Reporting Objectives, Timing of the Audit, and Nature of Communications

▪ The entity’s timetable for reporting
▪ Meetings with management and TCWG to discuss the nature, timing and
extent of the audit work.
▪ The discussion with management and TCWG regarding the expected type
and timing of reports to be issued and other communications, both written
and oral, including the auditor’s report, management letters and
communications to TCWG; and regarding the expected communications on
the status of audit work throughout the engagement.
▪ Communication with auditors of components.
▪ Communications among engagement team members, including the nature
and timing of team meetings and timing of the review of work performed.
▪ Any other expected communications with third parties, including any
statutory or contractual reporting responsibilities arising from the audit.
C) Significant Factors, Preliminary Engagement Activities, and Knowledge

Gained on Other Engagements
▪ The determination of materiality and identification of material classes of
transactions, account balances and disclosures
▪ Preliminary identification of risk areas
▪ The impact of the assessed ROMM at the FSs level
▪ Exercise of professional skepticism
▪ Internal control of the entity
▪ Significant business developments and the industry
▪ Legal and regulatory development and framework
E) Nature,Timing and Extent of Necessary Resources

▪ The selection of the engagement team (including, where necessary,
the engagement quality control reviewer) and the assignment of
audit.
▪ Engagement budgeting and timetable.
The auditor shall document the overall audit strategy commonly in the
form of a memorandum.
2) Audit Plan
Audit plan is more detailed than the overall audit strategy in that it
includes the nature, timing and extent of audit procedures to be
performed by engagement team members required to implement the
overall audit strategy into a comprehensive description of the work to
be performed.
The auditor shall develop an audit plan that shall include a description
of:
a) The nature, timing and extent of planned risk assessment
procedures (RAP)
b) The nature, timing, and extent of planned further audit procedures
(FAP), which include test of controls and substantive procedures, at
the assertion level
c) Other planned audit procedures that are required to be carried out
Audit Program
Audit program is a list of procedures used to gather sufficient appropriate

audit evidence. It serves as a set of instructions to staff involved in the audit
and as a means to control and record the proper execution of the work.
The two types of audit programs pertaining to further audit procedures (FAP)
are:
a) Compliance test audit programs – this is prepared when performing test
of controls on those controls the auditor plans to rely on that were
deemed to be preliminarily effective.
b) Substantive test audit program – this is prepared when the auditor will
perform substantive procedures for each material class of transactions,
account balance, and disclosure.
Audit Program
Thus, the timing of preparing audit programs for FAP depends on the
following circumstances:
▪ Initial Audit – prepared until the completion of review and
documentation of the entity’s internal control.
▪ Continuing Audit – can be prepared in advance of testing, since the
auditor has prior knowledge of the entity’s internal control and
previous risks assessment.
Changes to Planning Decisions during the
Course of the Audit
The auditor shall update and change the overall audit strategy and the
audit plan as necessary during the course of the audit.
The establishment of the overall audit strategy and the detailed audit
plan are not necessarily discrete or sequential processes, but are closely
inter-related since changes in one may result in consequential changes
to the other.
Other Planning Considerations
Other Planning considerations made by the auditor include the

following:
▪ Seeking assistance from the entity
▪ Considering the work perform by others
▪ Ensuring direction, supervision and review throughout the audit
Entity Assistance to the Auditor

The auditor may decide to discuss elements of planning with the
entity’s management to facilitate the conduct and management of the
audit engagement (for example, to coordinate some of the planned
audit procedures with the work of the entity’s personnel), but not so
detailed to compromise the effectiveness of the audit or making the
audit procedures too predictable.
Consideration of the Work Performed by Others

Considering the work of others in an audit involved the following:
▪ Relevance of the work of internal auditors
▪ Need for the work of experts (specialist)
▪ Work of component auditors in a group financial statements audit
Work of Internal Auditors

Internal auditing is an appraisal activity established within an entity as a
service to the entity. The work of internal auditors assists the external
auditor in planning and performing an effective audit.
Considering the work of internal auditors involve the following two
phases:
▪ Preliminary assessment of client’s internal auditing function
▪ Evaluation and testing the work of internal auditing function
Preliminary assessment of internal auditing function includes

determining whether or not internal audit function appears relevant to
specific areas of financial statements audit. When the internal audit
function appears relevant, external auditors shall consider the internal
auditor’s:
▪ Competence – professional qualifications and experience
▪ Objectivity (organizational status) – line of reporting results of
internal audit normally directly to BOS’s audit committee
▪ Due professional care – planning, supervision and documentation of
work
▪ Scope of function – nature and extent of work
The table below summarizes the external auditor’s responses

depending in the result of the said assessment:
Result Responses
Rely on the work of internal Evaluate and test the internal
auditor auditor’s work to confirm its
adequacy for external audit
Not relying on the work of internal Need not evaluate and test the
auditor internal auditor’s work
The external auditor may request assistance from internal auditors in

performing routine or mechanical audit procedures provided the
external auditors supervises and reviews internal auditors work
The use of internal auditor’s work does not change the external
auditor’s responsibility for audit opinion; thus, no reference is made in
audit report.
Work of Experts (Specialist)

Expert or specialist refers to a person or firm possessing special skill,
knowledge and experience in a particular field other than accounting
and auditing.
An expert may be
▪ Engage by the entity;
▪ Engage by the auditor;
▪ Employed by the entity; or
▪ Employed by the auditor
The auditor considers the following when using the work (assistance) of an
expert:
▪ Materiality of an item being considered
▪ Risk of misstatement (nature and complexity)
▪ Quality and quantity of other audit evidence available
When using the work of an expert, the auditor should assess and evaluate the
expert’s
▪ Professional competence – Professional qualification, experience and
reputation
▪ Objectivity – expert’s relationship to the entity
▪ Scope of work – objective and source of data (inputs) , methods, models
and assumptions used by the expert
After the above assessment and evaluation of the expert, the external
auditor shall test whether or not the result of work of expert is
consistent with auditor’s knowledge. The external auditor may rely on
the work of the expert if deemed consistent. Otherwise, the
inconsistency must be resolved first before reliance can be made.
Work of Component Auditors

Key definitions
▪ Group financial statements – financial statements that include the financial information
of more than one component.
▪ Component – an entity or business activity for which group or component management
prepares financial information that should be included in the group financial
statements.
▪ Group engagement team – Partners, including the group engagement partner, and
staff who establish the overall group audit strategy, communicate with component
auditors, and evaluate the conclusions drawn from the audit evidence as the basis for
forming an opinion on the group financial statements.
▪ Group engagement partner – the partner or other person in the firm who is responsible
for the group audit engagement and its performance, and for the auditor’s report on
the group financial statements that is issued on behalf of the firm.
▪ Component auditor – an auditor who, at the request of the group engagement team,
performs work on financial information related to a component for the group audit.
Direction, Supervision and Review

The auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their
work.

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Auditing Theory

Audit Planning: An Overview

The audit plans the audit so that it will be performed in an effective

The main outputs after planning the audit are:

▪ Appropriate attention to important areas of the audit.

Planning is no a discrete phase of an audit, but rather a continual and

The engagement partner and other key members of the engagement

A) Characteristics that define the Scope of Engagement

B) Reporting Objectives, Timing of the Audit, and Nature of Communications

C) Significant Factors, Preliminary Engagement Activities, and Knowledge

E) Nature,Timing and Extent of Necessary Resources

Audit program is a list of procedures used to gather sufficient appropriate

Other Planning considerations made by the auditor include the

Entity Assistance to the Auditor

Consideration of the Work Performed by Others

Work of Internal Auditors

Preliminary assessment of internal auditing function includes

The table below summarizes the external auditor’s responses

The external auditor may request assistance from internal auditors in

Work of Experts (Specialist)

Work of Component Auditors

Direction, Supervision and Review

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