Major Audit Planning Activities

In establishing the overall audit strategy, the auditor shall:

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 the auditor's 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; and
E. Ascertain the nature, timing and extent of resources necessary to perform the engagement.

Based on the above, the following are the major audit planning activities:
1. Obtaining an understanding of the client and its environment
2. Assessing the possibility of non compliance
3. Establishing materiality and assessing risk
4. Identifying related parties
5. Performing preliminary analytical procedure
6. Determining the need for experts
7. Development of overall audit strategy and detailed audit plan
8. Preparation of preliminary audit program

Obtain An Understanding of the Client and Its Environment

PSA 300 (Redrafted) states that:

● The auditor shall develop an audit plan that shall include a description of:
a. The nature, timing and extent of planned risk assessment procedures, as determined under PSA
315, "Identifying and Assessing the Risks of Material Misstatement Through Understanding the
Entity and Its Environment.
b. The nature, timing and extent of planned further audit procedures at the assertion level, as
determined under PSA 330, "The Auditor's Responses to Assessed Risks."
c. Other planned audit procedures that are required to be carried out so that the engagement
complies with PSAs.

The objective of the auditor is to:

● identify and assess the risks of material misstatement, whether due to fraud or error, at the financial
statement and assertion levels, through understanding the entity and its environment, including the entity's
internal control, thereby providing a basis for designing and implementing responses to the assessed risks
of material misstatement
○ Such understanding enables the auditor to identify and understand the events, transactions and
practices that, in the auditor's judgment, may have a significant effect on the financial statements,
the engagement, or the audit report.

The auditor should obtain knowledge about:

● the general economic factors and industry conditions affecting the entity's business;
● important characteristics of the entity, its business, its financial performance and its reporting requirements
including changes since the date of the prior audit; and
● the general level of competence of management.
Sources of Understanding of the Entity and the Environment
1. Previous experience with the entity and its industry.
2. Discussion with people with the entity (for example, directors and senior operating personnel).
3. Discussion with internal audit personnel and review of internal audit reports,
4. Discussion with other auditors and with legal and other advisors who have provided services to the entity or
within the industry.
5. Discussion with knowledgeable people outside the entity (for example, industry economists, industry
regulators, customers, suppliers, competitors).
6. Publications related to the industry (for example, government statistics, surveys, texts, trade journals,
reports prepared by banks and securities, dealers, financial newspapers).
7. Legislation and regulations that significantly affect the entity.
8. Visits to the entity's premises and plant facilities.
9. Documents produced by the entity
● minutes of meetings,
● material sent to shareholders or filed with regulatory authorities,
● promotional literature,
● prior years' annual and financial reports,
● budgets,
● internal management reports,
● interim financial reports,
● management policy manual, manuals of accounting and internal control systems,
● chart of accounts,
● job descriptions,
● marketing and sales plans

Understanding the entity and its environment and using this information appropriately assists the auditor in
assessing risk and identifying problems and in planning and performing the audit effectively and efficiently.

The Required Understanding of the Entity and its Environment

The auditor's understanding of the entity and its environment consists of an understanding of the following:
1. Industry, regulatory, and other external factors, including the applicable financial reporting framework
● The industry in which the entity operates may give rise to specific risks of material misstatement
arising from the nature of the business or the degree of regulation.
● Legislative and regulatory requirements often determine the applicable financial reporting
framework to be used by management in preparing the entity's financial statements.
● In most cases, the applicable financial reporting framework will be that of the jurisdiction in which
the entity is registered or operates and the auditor is based, and the auditor and the entity will have
a common understanding of that framework.
● In some cases there may be no local financial reporting framework, in which case the entity's
choice will be governed by local practice, industry practice, user needs, or other factors.

2. Nature of the entity

● An understanding of the nature of an entity enables the auditor to understand the classes of
transactions, account balances, and disclosures to be expected in the financial statements.
● The nature of the entity includes:
○ Its operations;
○ Its ownership and governance structures
○ The types of investments that the entity is making and plans to make
○ The way that the entity is structured and how it is financed, to enable the auditor to
understand the classes of transactions, account balances, and disclosures to be expected
in the financial statements
3. The entity's selection and application of accounting policies, including the reasons for changes thereto
● The auditor should obtain an understanding of the entity's selection and application of accounting
policies and consider whether they are appropriate for its business and consistent with the
applicable financial reporting framework and accounting policies used in the relevant industry.

● The understanding encompasses:

○ the methods the entity uses to account for significant and unusual transactions;
○ the effect of significant accounting policies in controversial or emerging areas for which
there is a lack of authoritative guidance or consensus; and
○ changes in the entity's accounting policies.

4. Objectives and strategies and the related business risks that may result in risks of material misstatement
● To respond to industry, regulatory and other internal and external business factors, entity
management and those charged with governance define objectives.
● Strategies are the operational approaches by which management intends to achieve its
objectives.
● Business risks result from significant conditions, events, circumstances, actions or inactions
that could adversely affect the entity's ability to achieve its objectives and execute its strategies, or
through the setting of inappropriate objectives and strategies.
○ Business risk is broader than the risk of material misstatement of the financial statements,
though it includes the latter.
○ Business risk particularly may arise from change or complexity, though a failure to
recognize the need for change may also give rise to risk.
● Change may arise, for example, from the development of new products that may fail from an
inadequate market, even if successfully developed; or from flaws that may result in liabilities and
reputational risk.
● An understanding of business risks increases the likelihood of identifying risks of material
misstatement. However, the auditor does not have a responsibility to identify or assess all business
risks.

● Most business risks will eventually have financial consequences and, therefore, an effect on the
financial statements. However, not all business risks give rise to risks of material misstatement.
● A business risk may have an immediate consequence for the risk of misstatement of the financial
statements, and a longer-term consequence (for example, an effect on the going concern
assumption).

5. Measurement and review of the entity's financial performance.

● Performance measures and their review indicate to the auditor aspects of the entity's performance
that management and others consider to be of importance.
● Performance measures, whether external or internal, create pressures on the entity that, in turn,
may motivate management to take action to improve the business performance or to misstate the
financial statements.
● Obtaining an understanding of the entity's performance measures assists the auditor in considering
whether such pressures result in management actions that may have increased the risks of
material misstatement.

6. Internal control
● This refers to the process designed and effected by those charged with governance, management,
and other personnel to provide reasonable assurance about the achievement of the entity's
objectives with regard to reliability of financial reporting, effectiveness and efficiency of
operations and compliance with applicable laws and regulations.
 Related Parties (page 273)

Related Parties
● The auditor needs to have a sufficient understanding of the entity and its environment to enable identification
of the events, transactions and practices that may result in a risk of material misstatement regarding related
parties and transactions with such parties.
● A related party transaction is transfer of resources, services or obligations between related parties,
regardless of whether a price is charged.

Related Parties Include

A party is related to an entity if
1. Directly, or indirectly through one or more intermediaries, the party:
● Controls, is controlled by, or is under common control with, the entity (this includes parents,
subsidiaries and fellow subsidiaries)
● Has an interest in the entity that gives it significant influence over the entity; or
● Has joint control over the entity;
2. The party is an associate of the entity;
3. The party is a joint venture in which the entity is a venturer;
4. The party is a member of the key management personnel of the entity or its parent;
5. The party is a close member of the family of any individual referred to in 1 or 4;
6. The party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant
voting power in such entity resides with, directly or indirectly, any individual referred to in 4 or 5; or
7. The party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is
a related party of the entity.

While the existence of related parties and transactions between such parties are considered ordinary features of
business, the auditor needs to be aware of them because:
1. The applicable financial reporting framework may require disclosure in the financial statements of
certain related party relationships and transactions, such as those required by PAS 24;
2. The existence of related parties or related party transactions affect the financial statements.
● For example, the entity's tax liability and expense may be affected by the tax laws in various
jurisdictions which require special consideration when related parties exist;
3. The source of audit evidence affects the auditor's assessment of its reliability. Generally a greater degree
of reliance may be placed on audit evidence that is obtained from or created by unrelated third parties; and
4. A related party transaction may be motivated by other than ordinary business considerations, for example,
profit sharing or even fraud.

Related parties may be identified by:

● inquiries of management and predecessor auditors and by reviews of stockholder listings, and
material investment transactions.

Perform Analytical Review Procedures (Page 275)

Perform Analytical Review Procedures (Page 275)

● Analytical procedures refer to evaluations of financial information made by a study of plausible relationships
among both financial and non-financial data.
● Analytical procedures encompass the investigation of identified fluctuations and relationships that are
inconsistent with other relevant information or deviate significantly from predicted amounts.
● These procedures are required to be performed in the planning and in the final review stages of the audit,
but not as substantive test procedures in gathering audit evidence.
Analytical Procedures During the Planning Stage
● The primary objective in performing analytical procedures in the planning stage of the audit, is to enhance
the auditor's understanding of the client, its business and the industry in which the client operates and to
identify areas of potential risk.

Examples of Analytical Procedures at the Planning Stage

1. Study of the changes in a given account balance, item, or element over prior accounting periods with
expectations for the current year;
2. Comparison of financial information with anticipated results (for example, budgets and forecasts);
3. Study of the relationships between account balances over time or among firms in a given industry;
4. Comparison of simple computations or series of computations that develop an estimate for a given account
balance, item, or element (for example, proof-in-total or reasonableness tests);
5. Study of the relationship of financial information with non-financial information.

● The basic premise underlying the application of analytical procedure is that relationships among
data may reasonably be expected to exist and to continue to exist in the absence of known
conditions to the contrary.
● Particular conditions that can cause variations in these relationships include, for example, specific
unusual transactions or events, accounting changes, business changes, random fluctuations or
misstatements.
● Analytical procedures may be helpful in identifying the existence of unusual transactions or events,
and amounts, ratios, and trends that might indicate matters that have financial statement and audit
implications.
● In performing analytical procedures as risk assessment procedures, the auditor develops
expectations about plausible relationships that are reasonably expected to exist.

● When comparison of those expectations with recorded amounts or ratios developed from recorded
amounts yields unusual or unexpected relationships, the auditor considers those results in
identifying risks or material misstatement.
● However, when such analytical procedures use data aggregated at a high level (which is often the
situation), the results of those analytical procedures only provide a broad initial indication about
whether a material misstatement may exist.
● Accordingly, the auditor considers the results of such analytical procedures along with other
information gathered in identifying the risks of material misstatement.

Audit strategy, Detailed audit plan, Audit program, and Timing of Audit Work

Development of Audit Strategy (Page 277)

● Establishing the audit strategy involves designing optimized audit approaches that seek to achieve the
necessary audit assurance at the lowest cost within the constraints of the information available.
● Audit procedures should be relevant to the important assertions, and as cost-effective as possible to
perform.

● The overall audit strategy sets the scope, timing and direction of the audit, and guides the development of
the more detailed audit plan.
● The establishment of the overall audit strategy involves:
1. Determining the characteristics of the engagement that define its scope;
2. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required; and
3. Considering the important factors that will determine the focus or direction of the engagement
team's efforts.
 ● Many audits of small entities involve the audit engagement partner working with one engagement team
member.
● With a smaller team, coordination and communication between team members are easier.
● Establishing the overall audit strategy for the audit of a small entity need not be a complex or
time-consuming exercise.
● A brief memorandum prepared at the completion of the previous audit, based on a review of the working
papers and highlighting issues identified the audit just completed, updated and changed in the current period
based on discussions with the owner-manager, can serve as the basis for working for planning the current
audit engagement.

Development of the Detailed Audit Plan (Page 280)

● A detailed audit plan — addresses the various matters identified in the overall audit strategy, taking into
account the need to achieve the audit objectives through the efficient use of the auditor’s resources.
● Although the auditor ordinarily establishes the overall audit strategy before developing the detailed audit
plan, the two planning activities are not necessarily discrete or sequential processes but are closely
interrelated since changes in one may result in consequential changes to the other.
● The audit plan includes
○ a description of the nature, timing and extent of risk assessment procedures, further audit
procedures (tests of controls and substantive tests) and other audit procedures required to be
carried out for the engagement in order to comply with PSAs.
● Documentation of the audit plan also serves as a record of the proper planning and performance that can be
reviewed and approved prior to the performance of further audit procedures.
● Planning takes place over the course of the audit as the audit plan for the engagement develops.
○ For example, planning of the auditor's risk assessment procedures ordinarily occurs early in the
audit process. However, planning of the nature, timing and extent of specific further audit
procedures depends on the outcome of those risk assessment procedures.
● In addition, the auditor may begin the execution of further audit procedures for some classes of transactions,
account balances and disclosures before completing the more detailed audit plan of all remaining further
audit procedures.

Preparation of the Preliminary Audit Programs (Page 281)

● The most important control mechanism in an audit is the audit program.
● The audit program is a list of procedures (tests of controls or substantive tests) used to gather sufficient
appropriate audit evidence.
● For initial engagements, preliminary audit programs are not usually prepared until the client's control
structure has been reviewed and documented, since the auditor has no prior information about the client's
internal control structure.
● In continuing engagements, preliminary audit programs can be drafted in advance of fieldwork, based on the
auditor's prior knowledge of the client's control structure and the results of previous assessments of control
risk.

● In most accounting firms,audit programs are already pre-printed.

● Auditors would normally modify these printed programs to suit the client's conditions, situations and
peculiarities. There are two types of audit programs:
1. Tests of controls audit program (compliance test audit program) — prepared when the auditor has
identified controls which he/she plans to rely on (reliance approach).
2. Substantive test audit program — prepared regardless of the approach taken by the auditor
(reliance or no reliance).

Timing of Audit Work (Page 283)

● Efficient scheduling of audit work is the key to maximizing the effectiveness and monetary return of an
accounting firm. This fact becomes clear when considering the economics of a public accounting practice.
● Not all audit procedures must be performed after the end of the period being audited, and most accounting
firms strive to perform as much work at an interim date as possible.
○ This practice allows the accounting firm to reduce staff requirements and the clients to issue
financial statements and annual reports at an earlier date.
● The timing of significant phases of the audit and tentative deadline dates for completion should be
determined, agreed upon with the client and documented in an engagement timetable.

Significant Dates - Audit Engagements

1. Physical inventory count
2. Confirmation of receivables
3. Commencement of field work
4. Submission of required schedules and analyses
5. Work-papers and data for consolidation to arrive from other locations
6. Closing conference
7. Submission of auditor's report and management letter
8. Issuance of special report, if any
9. Availability of financial statements for Board of Directors' meeting
10. Filing of financial statements/returns with BIR, SEC and other agencies