FRAMEWORK OF FINANCIAL STATEMENT AUDIT

“Audit Planning, Supervision and Monitoring”

Scope and Purposes of Audit Planning (PSA 300) Mary Therese A. Alcozero
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.

Adequate planning helps to ensure that

- appropriate attention is devoted to important areas of the audit
- potential problems are identified
- work is completed expeditiously
Planning also assists in the
- proper assignment of assistants, and in the
- coordination of work done by other auditors and experts

The extent of planning will vary according to the size of the entity, the complexity of the audit, the
auditor’s experience with the entity and his knowledge of the business. The auditor should develop and
document an audit plan describing the expected scope and conduct of the audit.

Audit Planning Considerations

Matters that auditor should consider in developing an overall audit plan, include:
- knowledge of the business
- understanding the accounting and internal control system
- assessment of risk and materiality
- nature, timing, and extent of procedures (application of analytical procedures)
- coordination, direction, supervision, and review
- and other critical matters in engagement planning

Auditor’s Knowledge of the Business (PSA 310)

Knowledge of the business is the framework of reference within which an auditor exercises
professional judgement in assessing risks and audit evidence, in determining materiality level and its
appropriateness, in evaluating accounting estimates and management representations; in identifying
related parties, related party transactions and areas needing special audit considerations and skills; as well
as in recognizing conflicting information, unusual circumstances, unreasonable answers and in considering
appropriateness of accounting policies and financial statement disclosures.

Understanding the Accounting and Internal Control System (PSA 400)

The auditor should obtain an understanding of the accounting system sufficient to identify and
understand the major classes of transactions in the entity’s operations and how such transactions are
initiated; the significant accounting records, supporting documents and accounts; and the accounting and
reporting process from initiation of transactions to their inclusion in the financial statements. The auditor
obtains knowledge of the accounting and internal control systems of the entity and understands its
operations by performing a ‘walk through’ test.

Assessment of Risk and Materiality (PSA 320)

The auditor’s assessment of materiality related to specific account balances and classes of
transactions helps him decide which items to examine and whether to use sampling or analytical
procedures and to select audit procedures expected to reduce audit risk to an acceptably low level.
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.

Application of Analytical Procedures (PSA 520)

Analytical procedures mean the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant information or which
deviate from predicted amounts.
 Nature of Analytical Procedures. Analytical procedures include the consideration of comparisons
on financial information with comparable information for prior periods; or with anticipated results such as
budgets or forecasts and estimation of depreciation; or with similar industry information such as sales ratio
to receivables. Analytical procedures also include consideration of relationships among elements of
financial information.
Purpose of Analytical Procedures. Analytical Procedures are used to assist the auditor in planning
the nature, timing, and extent of other audit procedures; as substantive procedures when they are more
effective or efficient in reducing detection risk for specific financial statement assertions; and as an overall
review in the final stage of the financial statement audit.

Coordination, Direction, Supervision, and Review (PSA 220)

Coordination. The overall audit plan is the auditor’s responsibility but coordination will benefit the
work. The involvement of other auditors and experts are important in the audit components; such as
subsidiaries, branches, and division in a number of different locations.
Direction. This involves informing assistants to whom work is delegated of their responsibilities and
the objectives of the procedures they are to perform.
Supervision. This is closely related to direction and review and may involve elements of both.
Supervisory responsibilities during an audit include the functions of monitoring the progress of the audit,
considering that assistants have the necessary skills and competence to understand audit directions and
carry out their assigned tasks.
Review. This would ascertain that the work has been performed in accordance with the audit
program; that the audit procedures have been achieved; and that the conclusions expressed are consistent
with the results of the work performed.

Other Critical Matters in Engagement Planning

The other critical matters in engagement planning are the application of analytical procedures in
planning the audit; establishment of an audit engagement team; consideration of the work performed by
other auditors; assessment of the going concern assumption; identification of related parties; clients legal
obligations; completion of the initial audit program; preparation of a time budget; assignment of personnel
to the engagement and the scheduling of work.

o Assessment of going concern assumption (PSA 570)- in planning the audit, the auditor
should be alert to the evidence of events which may cast doubts on the company’s ability
to continue as a going concern

o Identification of related parties (PSA 550)- the auditor should obtain a written
representation from management concerning completeness of information provided
regarding the identification of related parties and he should also modify the audit report if
he is unable to obtain sufficient evidence concerning the related parties
o Clients legal obligations- the auditor should verify the client’s legal compliance with legal
obligations

Planning the Audit Work Renerose Alojamiento

The points discussed by the auditor and the client and the matters covered in the terms of
engagement are stated in an audit engagement memorandum becomes among the first parts of the
auditor’s file on the client. This audit engagement memorandum serves as a guide to the audit firm
personnel and as a start off to set the preparation for the audit engagement in motion.
The auditor should develop and document his plan for the audit work in each engagement. The
overall audit plan divides audit work basically into the pre-year-end work where the auditor normally
performs the evaluation of internal control and the year-end work. The audit plan should also include the
scheduling of audit procedures and the year-end substantive tests to be performed during the audit,
commonly referred to as an audit program.
The audit program is a procedural guide as well as a checklist on the progress of the audit. It is a
control mechanism outlining the phases of an audit, listing procedures, and providing evidence of work
done as each step is signed by whoever performed the audit work.
Planning a Repeat Engagement
In planning for a repeat engagement, the auditor refers to working papers of the prior year’s audit.
He goes over the client’s permanent file and inquires about any changes or amendments to the articles of
incorporations and by-laws; he scans the minutes of meetings and re-examines areas subject to risks or
uncertainties in the prior year’s audit. Normally, planning for a repeat engagement is easier than planning
an initial audit engagement.

Supervising and Monitoring the Engagement

The auditor and assistants with supervisory responsibilities perform their work with due care and
competence. Supervisory responsibilities during an audit include assessing the work done against the audit
program and the overall audit plan. It includes monitoring the progress of the audit and ascertaining that the
audit procedures indicated in the audit program are being carried out according to the overall plan.

Special Consideration in the Audit of Small Entities

A small entity is any entity in which there is concentration of ownership and management in a small
number of individuals, often a single proprietorship; with a few sources of income; or simple
unsophisticated record-keeping; and or limited internal control together with potential for management
override controls. Small entities have owners who are directly involved in running the entity on a day-to-day
basis or the owner may employ a manager to run the entity.
The accounting system of a small entity should be designed to provide reasonable assurance
 that all transactions and other information that should be recorded have been recorded;
 that assets and liabilities recorded do exist and are recorded in correct amounts; and
 that fraud and error in the processing of accounting information will be detected

Small entities have limited internal controls since there are few employees and segregation of
duties is not very practicable. However, for key areas, some degree of segregation of duties may be
implemented and some supervisory controls may be exercised by the owner manager because when the
owner-manager is not involved, there is a greater risk that employee fraud may occur and may not be
detected.
The impact of the owner-manager and the potential of management override of internal control on
the audit depend on the integrity, attitude, and motives of the owner-manager. The auditor of a small entity
should exercise professional scepticism; he should neither assume that the owner-manager is dishonest
nor should he assume unquestionable honesty.

Consideration of Environmental Matters in the Audit of Financial Statements (PAPS 1010)

Environmental matters are initiatives to prevent, abate, or remedy damage to the environment, or
to deal with conservation of renewable resources; such initiatives may be required by environmental laws
and regulations or by contract or undertaken voluntarily. Environmental matters also refer to consequences
of violating environmental laws and regulations, consequences of environmental damage done to others or
to natural resources, and of vicarious liability imposed by law.

Environmental matters affecting the financial statements include:

 introduction of environmental laws and regulations that may impair assets and consequently a
need to write down their carrying values;
 failure to comply with legal requirements such as emission or waste disposal which may require
accrual of remediation, compensation or legal costs;
 environmental obligation incurred by extraction industries and gas exploration, mining, or chemical
manufactures or waste management companies, as a direct by-product of their core businesses; •
constructive obligations from a voluntary initiative of an entity that may have identified
contamination of land, to remedy its reputation and long-term relationship with the community;
 disclosure in the notes of a contingent liability when expense relating to an environmental matter
cannot be reasonably estimated; and
 non-compliance with certain environmental laws and regulations, may affect, in extreme situations,
the continuance of an entity as a going concern, and consequently the disclosures and basis of the
preparation of the financial statements
 In obtaining knowledge of the entity, the auditor should consider the industry in which the entity
operates, indications of the possible existence of environmental liabilities and contingencies and the
potential exposure to significant environmental risks.
The auditor should consider environmental matters with respect to inherent risk assessment,
accounting and internal control systems, control environment and control procedures.
The auditor should perform substantive procedures to determine the entity’s proper recognition,
measurement, and disclosure of environmental matters. He obtains evidence through inquiry from
management and key officers responsible for environmental matters. He considers the risk of not detecting
a material misstatement in the financial statements including any material misstatement if the entity fails to
properly recognize measure or disclose the effects of environmental matters. He gathers corroborative
audit evidence for any environmental assertions from sources inside or outside the entity. He may consider
using the work of environmental experts. The auditor may wish to obtain a letter from management
regarding specific representations on environmental matters that may have a material impact on the
financial statements.

A RISK-BASED AUDIT APPROACH I

Learning Objectives Marconni B. Andres

L1. Understand the concept of risk-based audit approach.

Risk-based audit approach is an audit approach that begins with an assessment of the types and
likelihood of misstatements in account balance and then adjusts the amount and type of audit work, to the
likelihood of material misstatements. Under this approach, the auditor performs the following:
1. Identification of the client’s strategy and the processes for developing that strategy.
2. Examination of the core business process and resource management.
3. Identification for each of the key process (as well as sub-processes) the objectives, inputs, activities,
outputs, systems, and transactions.
4. Assessment of the risks that the processes will not meet the goals and controls related to those risks.

Risk-Based Audit vs. Account-Based Audit

In account-based auditing, auditors first obtain an understanding of control and assess control risk for
particular types of errors and frauds in specific accounts and cycle.
In risk-based audit, the audit team views all activities in the organization first in terms of risks to
strategies and objectives and then in terms of management’s plans and processes to mitigate the risk. The
auditors obtain an understanding of the client’s objectives. Then risks are identified and the auditors
determine how management plans to mitigate the risk and whether those plans are in place and operating
effectively.

L2. Know the nature of risk and the critical components of risk relevant to conducting an audit and their
interrelationships.

Nature of Risk
Risk is a concept used to express uncertainty about events and/or their outcomes that could have a
material effect to the organization.

The four critical components of risk that are relevant to conducting the audit are:
1. Audit Risk. The risk that an auditor may give an unqualified opinion on financial statements that is
materially misstated.
2. Engagement Risk. The economic risk that a CPA firm is exposed to simply because it is associated
with a particular client including loss of reputation, inability of the client to pay the auditor, or financial
loss because management is not honest and inhibits the audit process. Engagement risk is controlled
by careful selection and retention of client.
3. Financial Reporting Risk. That risk that relate directly to the recording of transactions and the
presentation of financial data in an organization’s financial statements.
4. Business Risk. Those risks that affect the operations and potential outcomes of organizational
activities.
Risk Elements Affecting an Audit

L3. What are the activities in a risk-based audit process?

The Risk-Based Audit Process

Although specific audit procedures vary from one engagement to the next, the following stages are
involved in every engagement.

Phase I. Risk Assessment

This phase involves the following activities:
A. Performance of preliminary engagement activities to decide whether to accept/continue an
audit engagement.
B. Planning the audit to develop an overall audit strategy and audit plan.
C. Performance of risk assessment procedures to identify/assess risk of material misstatement
through understanding the entity.

Phase II. Risk Response

This phase covers the following activities:
A. Designing overall responses and further audit procedures to develop appropriate responses to
the assessed risk of material misstatement.
B. Implementing responses to assessed risk of material misstatement to reduce audit risk to an
acceptably low level.

Phase III. Reporting

This phase involves the following activities:
A. Evaluating the audit evidence obtained to determine what additional audit work (if any) is
required.
B. Forming an opinion based on audit findings and preparing the auditor’s report.

L4. Understand what and how the auditor performs the preliminary engagement activities in relation to:
I. Client selection and retention
II. Planning the audit to develop an overall audit strategy and audit plan
III. Applying the concept of materiality to audit
IV. Preparing an audit plan

PHASE I-A. Performance of Preliminary Engagement Activities

I. Client Selection and Retention
At the beginning of the current audit engagement, the auditor should perform the following activities:
a. Perform procedures required by PSA 220 (Clarified), “Quality Control of an Audit of Financial
Statements” regarding the continuance of the client relationship and the specific audit
engagement.
b. Evaluate compliance with ethical requirements, including independence as required by PSA
220 (Clarified).
 c. Establish an understanding of the terms of engagement as required by PSA 210 (Clarified),
“Agreeing the Terms of Audit Engagements.”

The purpose of performing these preliminary engagement activities is to help ensure that the auditor
has considered any events or circumstances that may adversely affect the auditor’s ability to plan and
perform the audit engagement to reduce audit risk to an acceptably low level. Performing these preliminary
engagement activities helps to ensure that the auditor plans an audit engagement for which:
 The auditor maintains the 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.

Recurring Audits
The auditor shall assess whether circumstances require the terms of the audit engagement to be
revised and whether there is a need to remind the entity of the existing terms of the audit engagement. The
auditor shall not agree to the change in the terms of the audit engagement where there is no reasonable
justification for doing so.

If the terms of audit engagement are changed, auditor and management shall agree on and record the
new terms of the engagement in an engagement letter or other suitable form of written agreement. If the
auditor is unable to agree to a change in the terms of the audit engagement and is not permitted by
management to continue the original audit engagement, the auditor shall:
(a) Withdraw from the audit engagement where withdrawal is possible under applicable law or
regulation; and
(b) Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.

PHASE I-B. II. Planning the Audit to Develop an Overall Audit Strategy and Audit Plan
PSA 300 (Clarified), “Planning an Audit of Financial Statements” establishes standards and provides
guidance on the considerations and activities applicable to planning an audit of financial statements. It
states that the auditor should plan the audit so that the engagement will be performed in an effective
manner.

Nature and Scope of Audit Planning

Audit planning involves the establishment of the overall audit strategy for the engagement and
developing an audit plan, in order to reduce audit risk to an acceptably low level. Planning involves the
engagement partner and other key members of the engagement team to benefit from their experience and
insight and to enhance the effectiveness and efficiency of the planning process.

The nature and extent of planning activities will vary according to the size and complexity of the entity,
the auditor’s previous experience with the entity, and changes in circumstances that occur during the audit
engagement.

Benefits of Audit Planning

Audit planning generally involves the determination of the expected nature, timing and extent of the
audit. Among the benefits derived from audit planning are the following:
(a) It helps ensure that appropriate attention is devoted to important areas of the audit.
(b) It aids in identifying potential problems and resolving them on a timely basis.
(c) It helps ensure that the audit is properly organized, managed and performed in an effective and
efficient manner.
(d) It assists in the proper assignment and review of the work of the engagement team members.
(e) It helps coordinate the work to be done by auditors of components and other parties involved such as
experts, specialists, etc.

The Overall Audit Strategy

PSA 300 (Clarified) requires that the auditor establishes the overall strategy for the audit. This overall
audit strategy sets the scope, timing and direction of the audit and guides the development of the more
detailed audit plan. In developing the audit strategy, the auditor considers the results of the preliminary
activities. The process of establishing the audit strategy involves
a. Identifying the characteristics of the engagement that define its scope.
b. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the nature of
the communication required.
c. Considering the important factors that will determine the focus and direction of the engagement teams’
efforts.
d. Considering the results of preliminary engagement activities and, where applicable, whether knowledge
gained or other engagements performed by the engagement partner for the entity is relevant; and
e. Ascertaining the nature, timing and extent of resources necessary to perform the engagement.

Other Benefits of Developing the Audit Strategy

The process of establishing the overall audit strategy assists the auditor to determine, subject to the
completion of the auditor’s risk assessment procedures, such matters as:
 The resources to deploy for specific audit areas;
 The amount of resources to allocate to specific audit areas;
 When these resources are to be deployed; and
 How much resources are managed, directed and supervised.

A. Materiality
III. Application of the Concept of Materiality to Audit
PSA 320 (Clarified), “Materiality in Planning and Performing an Audit” establishes standards and deals
with the auditor’s responsibility to apply the concept of materiality in planning and performing an audit of
financial statements.

Materiality involves both quantitative and qualitative considerations. In assessing the quantitative
importance of a misstatement, it is necessary to relate the peso amount of the error to the financial
statements under examination. Qualitative considerations, on the other hand, relate to the causes of
misstatement. The assessment of what is material is a matter of professional judgment. In planning the
audit, materiality should be considered by the auditor when:
(a) Determining the nature, timing and extent of audit procedures;
(b) Identifying and assessing the risks of material misstatements; and
(c) Determining the nature, timing and extent of further audit.

Levels of Materiality

The auditor assesses materially at two levels:

 First is the overall materiality (or materiality level for the financial statements as a whole)
It is based on the auditor’s professional judgment as to the highest amount of misstatement(s) that could be
included in the financial statements without affecting the economic decisions taken by a financial statement
user.

 Second is the specific materiality (materiality level for particular classes of transactions, account
balances, or disclosures)
In some cases, there may be a need to identify misstatements of lesser amounts than overall materiality
that would affect the economic decisions of financial statement users. This could relate to sensitive areas,
compliance with legislation or certain terms in a contact, or transactions upon which bonuses are based.

Performance Materiality
PSA 320 likewise requires that performance materiality be set. Performance materiality is used by the
auditor to reduce the risk to an appropriate low level that the accumulation of uncorrected and unidentified
misstatements exceeds materiality for overall materiality or specific materiality. It is set at (a) lower
amount(s) than overall or specific materiality. The objective is to perform more audit work than would be
required by the overall or a specific materiality to:
 Ensure that misstatements less than overall or specific materiality are detected, so as to appropriately
reduce the probability that the aggregate of uncorrected errors and undetected misstatements exceed
materiality for the financial statements as a whole; and thus
 Provide a margin or buffer for possible undetected misstatements. This buffer is between detected and
uncorrected misstatements in the aggregate and the overall or specific materiality.

How to Determine Materiality

Auditors make a preliminary assessment of materiality of the financial statements as a whole by
determining the amount by which they believe the financial statements could be misstated without affecting
users’ decisions. This amount is called “preliminary judgment about materiality” or “planning materiality”
because it is a professional judgment and may change during the engagement if circumstances change.
The reason for the determination is to help the auditor plan the appropriate evidence to accumulate. In
establishing the so called amount, an auditor must also consider any potential effect a misstatement might
have which may be greater than the peso amount involved.

Rules of Thumb (For Use as a Starting Point)

Overall Specific Performance
Materiality is a matter of Establish a lower, specific No specific guidance is provided
professional judgment rather than materiality amount (based on in the PSAs. Percentages ranges
a mechanical existence. As a professional judgment) for the from 60% (of overall or specific
result, no specific guidance is audit of specific or sensitive materiality), where there is a
provided in the PSA. However, financial statement areas. higher risk of material
profit from continuing profit from misstatement, up to 85% where
continuing operations (3% to 7%) the assessed risk of material
is often used in practice as having misstatement is less.
the greatest significance to
financial statement users. If this is
not a useful measure (such as for
a not-for-profit entity or where
profit is not a stable base), then
consider other bases such as:
 Revenues or expenditures –
1% to 3%
 Assets – 1% to 3%
 Equity – 3% to 5%

Other Considerations
 When accepting new audit engagement, inquire about the overall materiality used by the previous
auditor. If available, this would help in determining whether further audit procedures may be required
on opening asset and liability balances.
 Ensure that any experts employed by the entity (to assist the entity in preparing the financial
statements) or used by the audit team are instructed to use on appropriate materiality level in relation
to the work they perform.

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. The auditor takes the inverse relationship between
materiality and audit risk into account when determining the nature, timing and extent of audit procedures.
The auditor would compensate for this by either:
(a) Reducing the assessed level of control risk, where this is possible, and supporting the reduced level by
carrying out extended or additional tests of control; or
(b) Reducing detection risk by modifying the nature, timing and extent of planned substantive procedures.

B. (IV) Audit Plan Flaviano Raphael F. Atienza

- It is the specific guideline to be followed when conducting an audit. It helps the auditor obtain sufficient
appropriate evidence for the circumstances, helps keep audit costs at a reasonable level, and helps
avoid misunderstandings with the client.

Components of a typical Audit Plan:

1) Description of the client company – its structure, nature of business and organization.
2) Audit objectives (i.e., if the audit Is for stockholders, creditors or it is a special-purpose audit)
3) Description of the nature and extent of other services such as tax returns preparations, etc.
4) Timetable of the audit work
5) Work to be done by the client’s employer
6) Assignment of audit staff
7) Target completion dates of the major segments of the engagement
8) Preliminary evaluation and judgment about materiality level for the engagement
9) Any special problems to be resolved during the engagement particularly those revealed by
analytical procedures
10) Conditions that may require changes in audit test

Normally, the audit plan is prepared before starting work at the client’s office. It may, however be modified
throughout the engagement as the auditor deems necessary depending on his consideration of internal
control or as special problems are encountered.

The audit plan 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 engagement complies
with PSAs.

The auditor shall document:

a) The overall audit strategy;
b) The audit plan;
c) Any significant changes made during the audit engagement to the overall audit strategy or the audit
plan, and the reasons for such changes.

The auditor shall undertake the following activities prior to starting an initial audit:
a) Performing procedures required by PSA 220 regarding the acceptance of the client relationship and the
specific audit engagement; and
b) Communicating with the predecessor auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements.

The nature and extent of planning activities will vary according to the size and complexity of the entity,
the key engagement team embers’ previous experience with the entity, and changes in circumstances that
occur during the audit engagement.

Direction, Supervision and Review

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

Changes to Planning Decisions during the Course of the Audit

The overall audit strategy and the audit plan should be updated and changed as necessary during the
course of the audit.

Consideration Specific to Smaller Entities

 An audit can be carried out entirely by the audit engagement partner (who may be a sole
practitioner). When particularly complex or unusual issues are involved, it may be desirable to plan to
consult with other suitably-experienced auditors or the auditor’s professional body.

Discussion of Other Critical Matters in Engagement Planning

1. Application of analytical Procedures in Planning the Audit – to assist in understanding the
business and in identifying areas of potential risk. It will help the auditor in planning the nature, time,
and extent of auditing procedures that will be used to obtain evidential matter for specific account
balances or classes of transactions.
2. Establishment of an Engagement or Audit Team – an audit team consists of people with different
levels of expertise and experience. The team usually is composed of an engagement partner, a
manager, at least one senior, and one or more staff auditors.
3. Consideration of Work Performed by Other Auditors/Parties
The following should be considered:
 The involvement of other auditors in the audit of components, for example, subsidiaries, branches
and divisions.
 The involvement of experts.
 The number of locations.
a. Predecessor Auditor – communication with the predecessor auditors can provide the successor
CPA with background information about the client.\
b. Other CPA – other auditor means an auditor, other than the principal auditor, with responsibility for
reporting on the financial information of a component which is included in the financial statement
audited by the principal auditor.

*Principal auditor means he auditor with responsibility for reporting on the financial
statements of an entity when those financial statements include financial information of one or
more components audited by another auditor.

c. Specialists – Brings unique knowledge and judgment in a field other than accounting and auditing.
d. Use of Client’s Staff – audit working papers can be prepared for the auditors by client’s staff, thus
reducing the cost of the audit and freeing the auditors from routine work.
e. Internal Auditors – they can enhance internal control, and the can affect an audit by assisting
independent auditors in performing specific audit procedures.

4. Assessment of Going Concern Assumption – PSA 570(Clarified) requires auditors to evaluate

whether substantial doubt exists about an entity’s ability to continue as a going concern, based on
procedures planned and performed to obtain evidence about the management assertions embodied in
the financial statements.
Examples:
 Financing: Net liability or net current liability position
 Operating: Loss of key management without replacement
 Other – Non-compliance with capital or other statutory requirements.
Note: These examples are not all-inclusive nor do the existence of one or more of the items always signify
that a material uncertainty exists.

5. Identification of Related Parties – transactions with related parties are important to auditors because
they will be disclosed in the financial statements if they are material.
6. Client’s Legal Obligations – Pertinent current-year information that auditors should review includes
(1) minutes of directors’ and stockholders’ meetings, (2) changes to articles of incorporation or by-laws,
and (3) any significant contracts executed during the year.
7. Completion of the Initial Audit Program – An audit program is a set of audit procedures specifically
designed for each audit. The program which includes both substantive tests and tests of controls will
enable the auditor to express an opinion on the financial statements taken as a whole.

On initial engagements, the audit program typically will develop in three stages:
(1) the broad phases of the program can be outlined at the time of engagement;
(2) other details of the program can be identified after the review of the internal control structure and
accounting procedures has begun; and
(3) procedures on specific phases of the audit can be further challenged and revised as the work
progresses.
8. Preparation of a Time Budget – a time budget is an estimate of the total hours an audit is expected to
take. It is based on the information obtained in the first major step in the audit, which is, obtaining an
understanding of the client. It takes into consideration such things as:
(a) The client’s size as indicated by its gross assets, sales, number of employees
(b) Location of client facilities
(c) The anticipated accounting and auditing problems
(d) The competence and experience of staff available
9. Assignment of Personnel to the Engagement – Staff must, therefore, be assigned with that standard
in mind. On larger engagements, there are likely to be one or more partners and staff at several
experience levels doing the audit. Specialists in such technical areas as statistical sampling and
computer auditing may also be assigned. On smaller audits there may be only one or two staff
members.
10. Scheduling of Work – Performance of other substantive tests is scheduled near at, and after year-
end. Consideration should be given to such factors as:
(a) Deadline for submitting final audit report and filing of income tax returns
(b) Ability of the client’s staff o submit required schedules
(c) Other audit clients

Documentation of Audit Plan/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.

Documentation of the planning process is done through the preparation of working papers showing:
(1) Audit Plans
(2) Audit Programs
(3) Time Budget

Planning a Repeat Engagement

The working papers in the previous year’s audit provide a wealth of information useful in planning the
recurring engagement. Of course, the auditor-in-charge of a repeat engagement would have a good
working knowledge of the client’s business. The auditor however should not merely duplicate last year’s
audit program but should modify his approach to the audit for any changes in the client’s operations,
internal control structure, or business environment.

References:
Cabrera, Ma. Elenita B., Public Accountancy Profession: Assurance Principles, Professional Ethics
and Good Governance. 2013-2014. Manila. GIC Enterprises & Co., Inc.
Galanza, Raquel M., Auditing: Assurance Principles, Professional Ethics, and Good Governance.
2015. Quezon City. Rex Printing Company, Inc.