AUDITING &

ASSURANCE SERVICE
B. B. mgt. Accountancy (Special) Degree
Year II Semester I
AUDIT PLANNING
PLANNING AN AUDIT OF
FINANCIAL STATEMENTS
SLAuS 300
AUDIT MATERIALITY
SLAuS 320

Planning an audit involves
Establishing the overall audit
strategy for the engagement and
Developing an audit plan in order to
reduce audit risk to an acceptably
low level
Adequate planning helps to
ensure that
appropriate attention is devoted to
important areas of the audit
potential problems are identified and
resolved on a timely basis and
the audit engagement is properly
organized and managed in order to be
performed in an effective and efficient
manner
Importance of Audit
Planning
Adequate planning also assists in
the proper assignment of work to
engagement team members,
facilitates the direction and supervision of
engagement team members and the
review of their work, and
assists, where applicable, in coordination
of work done by auditors of components
and experts.
Preliminary Engagement
Activities
Perform procedures regarding the
continuance of the client relationship and
the specific audit engagement (SLAuS
220, Quality Control)
Evaluate compliance with ethical
requirements, including independence
(SLAuS 220)
Establish an understanding of the terms
of the engagement (SLAuS 210)
Audit Strategy V Audit Plan
The overall audit strategy
The auditor should establish the overall
audit strategy for the audit.

The overall audit strategy sets the scope,
timing and direction of the audit, and
guides the development of the more
detailed audit plan.
Scope Timing
Direction
Overall Audit Strategy
The establishment of the
overall audit strategy involves
Scope
Determining the characteristics of the
engagement that define its scope,
Timing
Ascertaining the reporting objectives of the
engagement to plan the timing of the audit and
the nature of the communications required
Direction
Considering the important factors that will
determine the focus of the engagement teams
efforts
The overall audit strategy sets
out clearly
The resources to deploy for specific audit
areas
The amount of resources to allocate to
specific audit areas
When these resources are deployed
How such resources are managed,
directed and supervised

The auditor should develop an audit plan for
the audit in order to reduce audit risk to an
acceptably low level
The audit plan includes
1. A description of the nature, timing and extent of
planned risk assessment procedures sufficient to
assess the risks of material misstatement
2. A description of the nature, timing and extent of
planned further audit procedures at the assertion
level for each material class of transactions, account
balance, and disclosure
3. Such other audit procedures required to be carried
out for the engagement in order to comply with SLAuSs
Nature, timing &
extent of
planned future
audit procedures
Audit Plan
Nature, Timing & extent
of Planned Risk
Assessment Procedures
Audit Strategy
Scope, Direction and Timing
Risk Assessment Procedures
(RAP)
The audit procedures performed to
obtain an understanding of the entity
and its environment, including the
entitys internal control, to identify and
assess the risk of material
misstatement, whether due to fraud or
error, at the financial statement and
assertion levels.
RAP and FAP at what stage..?
Planning of the auditors 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.


Auditors Requirement
The auditor should consider
materiality and its relationship
with audit risk when conducting
an audit.
Materiality means
Framework for the Preparation and
Presentation of Financial Statements
defines the materiality as
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.
The assessment of what is material is a
matter of professional judgment
I designing the audit plan, the auditor
establishes an acceptable materiality
level so as to detect quantitatively
material misstatements.
However, both the amount (quantity) and
nature (quality) of misstatements need to
be considered.
Examples of Qualitative
Misstatements
The inadequate or improper description of
an accounting policy when it is likely that a
user of the financial statements would be
misled
When it is likely that the consequent
imposition of regulatory restrictions will
significantly impair operating capability
The auditor needs to consider the possibility of
misstatements of relatively small amounts that,
cumulatively, could have a material effect on
FSs.
The auditor considers materiality
at both
the overall financial statement level and
in relation to classes of transactions,
account balances, 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
When planning the audit, the auditor considers
what would make the financial statements
materially misstated.
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.
For example..
If, after planning for specific audit procedures, the
auditor determines that the acceptable materiality
level is lower, audit risk is increased.
The auditor would compensate for this
by either:
(a) Reducing the assessed risk of material
misstatement,
(b) Reducing detection risk by modifying the
nature, timing and extent of planned
substantive procedures.
Evaluating the Effect of
Misstatements
In evaluating whether the financial
statements are prepared, in all material
respects, in accordance with an applicable
financial reporting framework, 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 auditors best estimate of other
misstatements which cannot be
specifically identified (i.e., projected
errors).
The auditor needs to consider whether
the aggregate of uncorrected
misstatements is material.
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 auditors
report in accordance with SLAuS 700
Calculation of Materiality Level
In practice to set the materiality level the
auditors need to decide the level of error,
which would distort the view given by the
financial statements.
Materiality level is often expressed as a
percentage of profit since the users of
financial statements are primarily
interested in the profitability of the
company.
Rule of Thumb
Determining the materiality involves the
exercise of professional judgment.
A percentage is often applied to a chosen
benchmark as a starting point in
determining materiality for the financial
statements.

Factors that may affect the
identification of an appropriate
benchmark
The elements of financial statements
Whether there are items on which the attention
of the users of the particular entitys financial
statements tends to be focused
The nature of the entity, where the entity is in
its life cycle, and the industry and economic
environment in which the entity operates
Entitys ownership structure and the way it is
financed
The relative volatility of the benchmark
Base Range Applicability
Profit Before
Tax
5% to
10%
When the business is profit driven/
key business decisions are made
based on the profitability
E.g. Manufacturing / Service
Revenue 0.5% to
1%
When the business is revenue
driven / key business decisions are
made based on the revenue
E.g. Buying & Selling company
Net Assets
Total Assets
2% to 5%
1% to 2%
Entities where net assets provides
the basis for most of stake holders
decisions.
E.g. Unit trust
In calculating materiality level for Not for Profit organization auditor may
use funds received / expenditure in calculating the materiality level.