CPA REVIEW SCHOOL OF THE PHILIPPINESM a n i l a AUDITING THEORY AUDIT PLANNING Show
Related PSAs: PSA 300, 310, 320, 520 and 570 Appointment of the Independent Auditor Early appointment of the independent auditor has many advantages to both the auditor and his client. Early appointment enables the auditor to plan his work so that it may be done expeditiously and to determine the extent to which it can be done before the balance sheet date. Although early appointment is preferable, an independent auditor may accept an engagement near or after the close of the fiscal year. In such instances, before accepting the engagement, he should ascertain whether circumstances are likely to permit an adequate audit and expression of an unqualified opinion and, if they will not, he should discuss with the client the possible necessity for a qualified opinion or disclaimer of opinion. PSA 300 - Planning The first standard of fieldwork (performance standards) states that: ”The work is to be adequately planned and assistants, if any, are to be properly supervised.” The auditor should plan the audit work so that the audit will be performed in an effective manner. “Planning” means developing a general strategy and a detailed approach for the expected nature, timing and extent of the audit. The auditor plans to perform the audit in an efficient and timely manner. Importance of Adequate Planning Adequate planning of the audit work helps to ensure that: 1) Appropriate attention is devoted to important areas of the audit; 2) Potential problems are identified; and 3) The work is completed expeditiously. Planning also assists in proper: 1) Assignment of work to assistants; and 2) Coordination of work done by other auditors and experts. Extent of Planning The extent of planning will vary according to the following: 1) Size of the entity; 2) Complexity of the audit; and 3) Auditor’s experience with the entity and knowledge of the business. The Overall Audit Plan The auditor should develop and document an overall audit plan describing the expected scope and conduct of the audit. While the record of the overall audit plan will need to be sufficiently detailed to guide the development of the audit program, its precise form and content will vary depending on the following: 1) Size of the entity; 2) Complexity of the audit; and 3) Specific methodology and technology used by the auditor. Matters to be considered by the auditor in developing the overall audit plan include: Knowledge of the Business
Understanding the Accounting and Internal Control Systems
Risk and Materiality
Nature, Timing and Extent of Procedures
Coordination, Direction, Supervision and Review
Other Matters
The Audit Program The auditor should develop and document an audit program setting out the nature, timing and extent of planned audit procedures required to implement the overall audit plan. The audit program serves as a: 1) Set of instructions to assistants involved in the audit; and 2) Means to control and record the proper execution of the work. The audit program also contains: 1) The audit objectives for each area; and 2) A time budget in which hours are budgeted for the various audit areas or procedures. In preparing the audit program, the auditor would consider the following: 1) Specific assessments of inherent and control risks and the required level of assurance to be provided by substantive procedures; 2) Timing of tests of controls and substantive procedures; 3) Coordination of any assistance expected from the entity, the availability of assistants and the involvement of other auditors or experts; and 4) Other matters considered by the auditor in developing the overall audit plan need to be considered in more detail during the development of the audit program. Changes to the Overall Audit Plan and Audit Program The overall audit plan and the audit program should be revised as necessary during the course of the audit. Planning is continuous throughout the engagement because of changes in conditions or unexpected results of audit procedures. The reasons for significant changes would be recorded. The auditor makes judgments about many matters throughout the course of the audit where knowledge of the business is important. For example:
The auditor should ensure that assistants assigned to an audit engagement obtain sufficient knowledge of the business to enable them to carry out the audit work delegated to them. To make effective use of knowledge about the business, the auditor should consider how it affects the financial statements taken as a whole and whether the assertions in the financial statements are consistent with the auditor’s knowledge of the business. PSA 320 – Audit Materiality The auditor should consider materiality and its relationship with audit risk when conducting an audit. “Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.” The auditor considers materiality at both the overall financial statement level and in relation to individual account balances, classes of transactions and disclosures. Materiality should be considered by the auditor when: (a) determining the nature, timing and extent of audit procedures; and (b) evaluating the effect of misstatements. 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. Materiality and Audit Risk in Evaluating Audit Evidence The auditor's assessment of materiality and audit risk may be different at the time of initially planning the engagement from at the time of evaluating the results of audit procedures. This could be because of: - a change in circumstances; or - because of a change in the auditor's knowledge as a result of the audit. Evaluating the Effect of Misstatements In evaluating the fair presentation of the financial statements the auditor should assess whether the aggregate of uncorrected misstatements that have been identified during the audit is material. The aggregate of uncorrected misstatements comprises: (a) specific misstatements identified by the auditor including the net effect of uncorrected misstatements identified during the audit of previous periods; and (b) the auditor's best estimate of other misstatements which cannot be specifically identified (i., projected errors). If the auditor concludes that the misstatements may be material the auditor needs to: - consider reducing audit risk by extending audit procedures; or - requesting management to adjust the financial statements. If management refuses to adjust the financial statements and the results of extended audit procedures do not enable the auditor to conclude that the aggregate of uncorrected misstatements is not material, the auditor should consider the appropriate modification to the auditor’s report in accordance with PSA 700 “The Auditor’s Report on Financial Statements.” MULTIPLE CHOICE QUESTIONS
QUIZZERS PSA 300 - Planning
PSA 310 - Knowledge of Business
b. Document material weaknesses in accounting and internal control systems. c. Identify and understand events, transactions and practices that may have effect on financial statements. d. Have an overall evaluation of whether financial assertions are fairly presented in the financial statements.
PSA 570 – Going Concern
Which of the following procedures would an auditor most likely perform to verify a management assertion of completeness?Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? - Observing the entity's distribution of payroll checks.
Which of the following procedures would an auditor most likely to perform?The correct answer is (A.) Make a preliminary judgment about materiality. An auditor is most likely to plan about the materiality of auditing in the planning stage. They are making a preliminary judgment about the company's earnings for a specified time.
Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies?Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies? Obtaining a letter of audit inquiry from the client's lawyer.
Which of the following procedures would an auditor most likely perform during an audit engagement?Answer and Explanation: Option (c) is the correct answer. An auditor most likely inquires about the entity's legal counsel concerning litigation, claims, and assessments arising after year-end because it may arise after year-end but before issuance of financial statements for the period.
|