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AUDIT PLANNING establish overall strategy that sets the stage, direction of audit and develop audit plan

n to reduce audit risk to an acceptable level Complexity and form of business Environment

Main Outputs Overall audit strategy Overall audit plan Draft audit programs

- How it is structure and financed c. Selection and application of accounting policies and reasons for changes appropriate with business and consistent with framework - Methods to account unusual transactions - Significant accounting policy where there is lack of authoritative guidance or consensus - Changes in policy d. Objectives, strategies and related business risk - Objectives overall plans for the entity - Strategy operational approaches to achieve objectives - Business risk events that affect the ability to achieve objectives and strategy -understanding of business risk increase likelihood of identifying material misstatement -need not assess ALL business risk e. Measurement and review of financial performance - Performance measures create pressure to entity f. Internal control

Audit Planning Activities a. Understand client and its environment - Assessing risks (of material misstatement), identifying problems b. Assessing possibility of non compliance - Act of omission or commission, intentional or not, which are contrary to law and regulations c. Establish materiality and assessing risk d. Identifying related parties e. Performing preliminary analytical procedures f. Determining the need for experts g. Development of overall audit strategy and detailed audit plan h. Preparation of preliminary audit programs

Non Compliance - Understand legal and regulatory framework Risk Assessment procedures a. Inquiries Charged with governance environment Internal audit personnel internal control Employees involved in complex or unusual transaction accounting policies In-house legal counsel Marketing/sales personnel customers Establish materiality -Materiality for FS as a whole Performance materiality reduce to an appropriate low level the probability that aggregate of uncorrected misstatements in FS exceeds the materiality of FS as a whole Steps b. Observation and inspection Required Understanding a. Industry, regulatory and external factors, framework nature of business or degree of regulation b. Nature of entity understand transactions, account balances and disclosures - Operations - Ownership and governance structure - Investments During planning -establish preliminary judgment -determine tolerable misstatement At audit completion -estimate likely misstatements and compare totals to preliminary judgment Preliminary judgment maximum amount by which FS could be misstated and still not cause the auditor

to believe that decisions of reasonable users would be affected Bases -percentage effect on net income before taxes - less than 5% immaterial - more than 10% material -percentage effect on total revenues -percentage effect on total assets *result is planning materiality Tolerable misstatement planning materiality assigned to class of transactions The lower the tolerable misstatement, the more extensive the required audit procedures Assess Risk Assessment of inherent risk use judgment in understanding entity and its environment a. Management b. Nature of business c. Factors affecting industry Assessment of Control Risk understanding of internal control -identify major transaction cycles and controls to reduce the risk of material misstatement The more reliable internal, the less substantive test to be performed Significant risk Non-routine transactions The higher the amount of combined inherent and control risk, the lesser the acceptable detection risk The lower the acceptable detection risk, the greater the amount of audit procedures to be performed to reduce the chances of not detecting material misstatements Audit risk and materiality has inverse relationship Identifying related parties Related party transaction transfer of resources, services or obligations between related parties

Perform Analytical Review Procedures Analytical Procedure evaluation of financial information made by study of plausible relationships among both financial and non financial data. During Planning understand client and its environment and identify potential risk -identify existence of unusual transaction Determining the need for expert