UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY

AUDITING: ACC422/ACC308-309 AUD 1.2/RDB

1.2 The Risk-based Financial Statement Audit – Client Acceptance, Audit Planning, Supervision and Monitoring
1.2.1 Overview of the risk-based audit process
1.2.2 Pre-engagement procedures
1.2.3 Scope and purposes of audit planning
1.2.3.1 Essential planning requirements
1.2.3.1.1 Knowledge of the business
1.2.3.1.2 Preliminary analytical procedures
1.2.3.1.3 Materiality
1.2.3.1.4 Assessing and managing audit risks
1.2.3.1.5 Overall audit plan and audit program (experts, internal auditor, other independent
auditors)
1.2.4 Direction, supervision, and review

Overview of Risk-Based FS Audit Process

• Risk-based audit is one in which the auditor carefully analyzes the entity and its existing internal control, identify
areas that pose the highest risk of financial statement errors, and allocates a greater proportion of audit resources to
those areas.

PHASE I: CLIENT ACCEPTANCE/CONTINUANCE

 PRE-ENGAGEMENT ACTIVITIES

✓ The auditor should perform the following activities:

➢ Perform procedures regarding the acceptance (in the case of initial audit) or continuance (in the case of current
audit) of the client relationship and the specific audit engagement.
➢ On initial audit, communicate with the previous auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements.
➢ Evaluate compliance with ethical requirements, including independence.
➢ Establish an understanding of the terms of the engagement.

✓ 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.

PHASE II: PLANNING

 PLANNING

1. The auditor should plan the audit so that the engagement will be performed in an effective manner.

2. 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. The overall audit strategy sets the scope, timing and
direction of the audit, and guides the development of the more detailed audit plan. The audit plan is more detailed
than the overall audit strategy and includes the nature, timing and extent of audit procedures to be performed by
engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level.

3. Adequate planning helps to ensure:

a. that appropriate attention is devoted to important areas of the audit.

b. that potential problems are identified and resolved on a timely basis.
c. that the audit engagement is properly organized and managed in order to be performed in an effective and
efficient manner.
d. proper assignment of work, direction, supervision and review.
e. coordination of work done by auditors of components and experts.

2. (RISK ASSESSMENT) AS AN ESSENTIAL PART OF PLANNING, THE AUDITOR OBTAINS

UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT INCLUDING ITS INTERNAL CONTROL:

✓ in order to identify and assess the risks of material misstatement of the financial statements;
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UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY
AUDITING: ACC422/ACC308-309 AUD 1.2/RDB
✓ thereby providing a basis for designing and implementing responses to the assessed risks of material
misstatement.

3. The procedures used to obtain understanding of the entity and its environment including its internal control are
called risk assessment procedures. Risk assessment procedures include:

(a) Inquiries of management and others within the entity;

(b) Analytical procedures; and
(c) Observation and inspection.

4. The auditor’s understanding of the entity and its environment consists of an understanding of the following aspects:

a. Industry, regulatory, and other external factors, including the applicable financial reporting framework.
b. Nature of the entity, including the entity’s selection and application of accounting policies.
c. Objectives and strategies and the related business risks that may result in a material misstatement of the
financial statements.
d. Measurement and review of the entity’s financial performance.
e. Internal control.

5. Based on the understanding obtained, the auditor assesses the risks of material misstatement.
6. Based on the assessed risks of material misstatements, the auditor sets the level of materiality and determines
the nature, timing and extent of further audit procedures (tests of controls and substantive tests).

PHASE III: TESTING TO OBTAIN EVIDENCE

PERFORMING FURTHER AUDIT PROCEDURES IN RESPONSE TO THE ASSESSED RISKS

C. TESTS OF CONTROLS

1. Tests of control are tests performed to obtain audit evidence about the operating effectiveness of controls in
preventing, or detecting and correcting, material misstatements at the assertion level.

2. The auditor is required to perform tests of controls: (a) when the auditor’s risk assessment includes an expectation
of the operating effectiveness of controls or (b) when substantive procedures alone do not provide sufficient
appropriate audit evidence at the assertion level.

3. Tests of controls procedures include:

a. Inquiry
b. Observation
c. Inspection
d. Reperformance

D. SUBSTANTIVE PROCEDURES

1. Substantive procedures are audit procedures performed to detect material misstatements at the assertion level;
they include:

a. Tests of details of classes of transactions, account balances; and disclosures and

b. Substantive analytical procedures.

2. Irrespective of the assessed risk of material misstatement, the auditor should design and perform substantive
procedures for each material class of transactions, account balance, and disclosure.

E. COMPLETING THE AUDIT – Procedures to be performed near the end of fieldwork

✓ Search for unrecorded liabilities

✓ Review the minutes of meetings
✓ Perform final analytical procedures
✓ Perform procedures to identify loss contingencies
✓ Perform the review for subsequent events

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UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY
AUDITING: ACC422/ACC308-309 AUD 1.2/RDB
✓ Obtain the representation letter

PHASE IV: EVALUATION and REPORTING

F. EVALUATING THE SUFFICIENCY AND APPROPRIATENESS OF AUDIT EVIDENCE OBTAINED

1. Based on the audit procedures performed and the audit evidence obtained, the auditor should evaluate whether
the assessments of the risks of material misstatement at the assertion level remain appropriate.

2. The auditor should conclude whether sufficient appropriate audit evidence has been obtained to reduce to an
acceptably low level the risk of material misstatement in the financial statements. In developing an opinion, the
auditor considers all relevant audit evidence, regardless of whether it appears to corroborate or to contradict the
assertions in the financial statements.

3. The sufficiency and appropriateness of audit evidence to support the auditor’s conclusions throughout the audit
are a matter of professional judgment.

G. REPORTING
1. The auditor’s report should contain a clear expression of the auditor’s opinion on the financial statements.
2. As stated in PSA 200, the objective of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework.
3. The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an
opinion on the financial statements.

Client Acceptance

Audit Process Model:

PHASE I: Client Acceptance
PHASE II: Planning the Audit
PHASE III: Testing and Evidence
PHASE IV: Evaluation and Reporting

PHASE I: CLIENT ACCEPTANCE

Objective Determine both acceptance of a client and acceptance by a client.
Decide on acquiring a new client or continuation of relationship with an existing one and the type and
amount of staff required.
Procedures 1. Evaluate the client’s background and reason for the audit.
2. Determine whether the auditor is able to meet the ethical requirements regarding the client.
3. Determine need for other professionals.
4. Communicate with predecessor auditor.
5. Prepare client proposal.
6. Select staff to perform the audit.
7. Obtain an engagement letter.

 Pre-engagement activities

✓ The auditor should perform the following activities:

➢ Perform procedures regarding the acceptance (in the case of initial audit) or continuance (in the case of current
audit) of the client relationship and the specific audit engagement.
➢ On initial audit, communicate with the previous auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements.
➢ Evaluate compliance with ethical requirements, including independence.
➢ Establish an understanding of the terms of the engagement.

✓ 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.
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UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY
AUDITING: ACC422/ACC308-309 AUD 1.2/RDB

 Preconditions for an Audit

• In order to establish whether the preconditions for an audit are present, the auditor shall:
a. Determine whether the financial reporting framework to be applied in the preparation of the financial
statements is acceptable; and
b. Obtain the agreement of management that it acknowledges and understands its responsibility:
(i) For the preparation of the financial statements in accordance with the applicable financial reporting
framework, including where relevant their fair presentation;
(ii) For such internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with:
(a) Access to all information of which management is aware that is relevant to the preparation of the
financial statements such as records, documentation and other matters;
(b) Additional information that the auditor may request from management for the purpose of the audit;
and
(c) Unrestricted access to persons within the entity from whom the auditor determines it necessary to
obtain audit evidence.

PSA 300
PLANNING AN AUDIT OF FINANCIAL STATEMENTS

Audit Process Model:

PHASE I Client Acceptance
PHASE II: Planning the Audit
PHASE III: Testing and Evidence
PHASE IV: Evaluation and Reporting

PHASE II: PLANNING THE AUDIT

Objective Determine the amount and type of evidence and review required to give the auditor reasonable
assurance that there is no material misstatement of the financial statements (that is to reduce audit risk
to an acceptably low level).
Procedures 1. Perform audit procedures to understand the entity and its environment, including internal
control.
2. Assess the risks of material misstatements of the financial statements.
3. Determine materiality.
4. Prepare the planning memorandum (overall audit strategy) and an audit program(detailed audit
plan) containing the auditor’s response to identified and assessed risks

• Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan.

• Adequate planning benefits the audit of financial statements in several ways, including the following:
✓ Helping the auditor to devote appropriate attention to important areas of the audit.
✓ Helping the auditor identify and resolve potential problems on a timely basis.
✓ Helping the auditor properly organize and manage the audit engagement so that it is performed in an effective
and efficient manner.
✓ Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to
respond to anticipated risks, and the proper assignment of work to them.
✓ Facilitating the direction and supervision of engagement team members and the review of their work.
✓ Assisting, where applicable, in coordination of work done by auditors of components and experts.

• Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins
shortly after (or in connection with) the completion of the previous audit and continues until the completion of the
current audit. Planning includes the need to consider, prior to the auditor’s identification and assessment of the risks
of material misstatement, such matters as:

✓ The analytical procedures to be applied as risk assessment procedures.

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UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY
AUDITING: ACC422/ACC308-309 AUD 1.2/RDB
✓ Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the
entity is complying with that framework.
✓ The determination of materiality.
✓ The involvement of experts.
✓ The performance of other risk assessment procedures.

• Objective
✓ The objective of the auditor is to plan the audit so that it will be performed in an effective manner.

• Requirements
 Involvement of Key Engagement Team Members
✓ The engagement partner and other key members of the engagement team shall be involved in planning the
audit, including planning and participating in the discussion among engagement team members.
 Preliminary Engagement Activities
✓ The auditor shall undertake the following activities at the beginning of the current audit engagement:
(a) Performing procedures required by PSA 220 regarding the continuance of the client relationship and the
specific audit engagement;
(b) Evaluating compliance with relevant ethical requirements, including independence, in accordance with PSA
220, and
(c) Establishing an understanding of the terms of the engagement, as required by PSA 210.
 Planning Activities
✓ The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and
that guides the development of the audit plan.
✓ 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.
✓ 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
(Revised).
(b) The nature, timing and extent of planned further audit procedures at the assertion level, as determined
under PSA 330.
(c) Other planned audit procedures that are required to be carried out so that the engagement complies with
PSAs.
✓ The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course
of the audit.
✓ The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members
and the review of their work.
 Documentation
✓ The auditor shall include in the audit documentation:
(a) The overall audit strategy;
(b) The audit plan; and
(c) Any significant changes made during the audit engagement to the overall audit strategy or the audit plan,
and the reasons for such changes.
 Additional Considerations in Initial Audit Engagements
✓ 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.

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UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY
AUDITING: ACC422/ACC308-309 AUD 1.2/RDB

INSTRUCTION: ENCIRCLE THE LETTER OF YOUR ANSWER.

1. Which of the following factors would be most likely to cause a professional auditor in public practice to decline a new
engagement?
a. The prospective client has already completed its physical inventory count.
b. The auditor lacks understanding of the prospective client’s operations and industry.
c. The auditor is unable to review the predecessor auditor’s working papers.
d. The prospective client is unwilling to make all financial records available to the auditor.

2. In a financial statement audit, management is responsible for:

a. Providing staff to assist the auditor on the engagement.
b. Making all financial records and information available to the auditor.
c. Reporting to the audit committee.
d. Proposing adjusting journal entries based on the audit results.

3. Which of the following will an auditor most likely discuss with the former auditors of a potential client prior to
acceptance?
a. Integrity of management.
b. Reasons for changing audit firms.
c. Disagreements with management regarding accounting principles.
d. All of the above must be discussed.

4. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding:
a. Disagreements the predecessor auditor had with the client concerning auditing procedures and accounting
principles.
b. The predecessor’s evaluation of matters of continuing accounting significance.
c. Opinion on any subsequent events occurring since the predecessor auditor’s report was issued.
d. The predecessor’s assessments of inherent risk and judgments about materiality.

5. Which of the following matters is generally included in an auditor’s engagement letter?

a. Management’s liability for illegal acts.
b. The factors to be considered in setting judgments about audit risk.
c. Management’s responsibility for the entity’s financial statements.
d. Management’s responsibility to investigate internal control deficiencies.

6. In a typical audit, which of the following steps is performed first?

a. Interim audit work.
b. Perform subsequent event work.
c. Gain an understanding of the client’s strategies.
d. Consider audit risk.

7. The understanding with the client should include all of the following except:
a. The type of opinion, which will be issued.
b. Management’s responsibilities.
c. The objective of the engagement.
d. The limitations of the engagement.

8. Early appointment of the auditor enables preliminary work to be performed by the auditor, which benefits the client in
that it permits the examination to be performed in
a. A more efficient manner.
b. A more thorough manner.
c. Accordance with quality control standards.
d. Accordance with generally accepted auditing standards.

9. Engagement letters
a. mandated for audit engagements.
b. Are recommended for all professional engagements.

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c. Are signed by members of the audit committee.
d. Include an analysis of the results of the audit.

10. Engagement letters

a. Help to minimize misunderstandings between the client and the auditor.
b. Are required to be in writing.
c. Contain management’s representations concerning waived adjusting journal entries.
d. Are signed by the client’s legal counsel.

11. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor
auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstance leading to the termination.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures
to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the
confidential relationship between auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact.

12. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?
a. Analysis of balance sheet accounts.
b. Analysis of income statement accounts.
c. All matters of continuing accounting significance.
d. Facts that might bear on the integrity of management.

13. The purpose of the partner’s review of the audit documentation is to

a. Determine if the engagement was completed within the time budget.
b. Evaluate audit personnel for promotion.
c. Prepare for the next year’s audit.
d. Ascertain compliance with auditing standards.

14. Which of the following situations would most likely require special audit planning by the auditor?
a. Some items of factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client's tax return differ from those used on the books.
c. Assets costing less than P500 are expensed even though the expected life exceeds one year.
d. Inventory comprises precious stones.

17. With respect to the auditor's planning of a year-end examination, which of the following statements is true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should be told the specific audit procedures that will be performed.
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.

18. Which of the following types of audits are most similar?

a. Operational audits and compliance audits.
b. Independent financial statement audits and operational audits.
c. Compliance audits and independent financial statement audits.
d. Internal audits and independent financial statement audits.

19. The auditor conducts an audit with an attitude of

a. Professional responsiveness.
b. Subjective mistrust.
c. Professional skepticism.
d. Objective indifference.

20. Establishing overall audit strategy for the engagement and developing audit plan.
a. Planning
b. Directing
c. Supervision

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UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY
AUDITING: ACC422/ACC308-309 AUD 1.2/RDB
d. Controlling

21. The overall audit strategy and detailed audit plan are the responsibility of:
a. client’s management
b. auditor
c. audit committee
d. board of directors

22. It sets the scope, timing and direction of the audit, and guides the development of the more detailed plan.
a. Overall audit strategy
b. Audit plan
c. Audit program
d. Engagement plan

23. It converts the audit strategy into a more detailed plan and includes the nature, timing and extent of audit procedures
to be performed by engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit
risk to an acceptably low level.
a. Overall audit strategy
b. Audit plan or audit program
c. Audit risk
d. Engagement plan

24. The audit plan or audit program does not include description of

a. The nature, timing and extent of planned risk assessment procedures.

b. The nature, timing and extent of planned further audit procedures at the assertion level.
c. Other planned audit procedures that are required to be carried out so that the engagement complies with PSAs.
d. Characteristics of the engagement.

25. Which of the following is not a planning consideration by the auditor prior to the identification and assessment of the
risks of material misstatement?

a. The analytical procedures to be applied as risk assessment procedures and the performance of other risk
assessment procedures.
b. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the
entity is complying with that framework.
c. The determination of materiality.
d. The involvement of experts.
e. The performance of other further audit procedures.

26. Which of the following is a required documentation for an audit in accordance with PSA?

a. Overall audit strategy and audit plan.

b. Flowchart of internal control system.
c. Narrative description of the client’s accounting system.
d. All of the above.

27. The auditor performs preliminary engagement activities prior to performing the planning activities. Preliminary
engagement activities include the following, EXCEPT:

a. perform procedures regarding the continuance of the client relationship or acceptance of the engagement in initial
audit
b. evaluate compliance with ethical requirements, including independence
c. establish understanding of the terms of the engagement.
d. obtaining understanding the internal control structure

28. The element of the audit planning process most likely to be agreed upon with the client before implementation of the
audit strategy is the determination of the

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UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY
AUDITING: ACC422/ACC308-309 AUD 1.2/RDB
a. timing of inventory observation procedures to be performed
b. evidence to be gathered to provide a sufficient basis for the auditor’s opinion
c. procedures to be undertaken to discover litigation, claims, and assessments
d. pending legal matters to be included in the inquiry of the client’s attorney

29. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor
auditor. This is a necessary procedure because the predecessor may be able to provide the successor with
information that will assist the successor in determining

a. whether the predecessor’s work should be utilized.

b. whether the company follows the policy of rotating its auditors.
c. whether, in the predecessor’s opinion, internal control of the company has been satisfactory.
d. whether the engagement should be accepted.

30. Which of the following is not a component of audit planning?

a. observing the client’s annual physical inventory taking and making test counts of selected items
b. making arrangements with the client concerning the timing of audit field work and use of the client’s staff in
completing certain phases of the examination
c. obtaining an understanding of the business
d. developing audit programs

31. The element of the audit planning process most likely to be agreed upon with the client before implementation of the
audit strategy is the determination of the

a. methods of statistical sampling to be used in confirming accounts receivable.

b. pending legal matters to be included in the inquiry of the client’s attorney.
c. evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
d. schedules and analyses to be prepared by the client’s staff.

32. Why should the auditor plan more work on individual accounts as lower acceptable levels of both audit risk and
materiality are established?
a. to find smaller errors
b. to find larger errors
c. to increase the tolerable error in the accounts
d. to decrease the risk of overreliance

33. Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and
materiality?

a. the lower the inherent risk and control risk, the lower the aggregate materiality threshold
b. under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external
evidence and should reduce reliance on internal evidence
c. where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk
d. aggregate materiality thresholds should not change under conditions of changing risk levels

34. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor
auditor, the CPA should

a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstance leading to the termination with the understanding that all information disclosed will be kept
confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures
to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the
confidential relationship between auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact.

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UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY
AUDITING: ACC422/ACC308-309 AUD 1.2/RDB
35. In planning an audit engagement, which of the following affects the independent auditor's judgment as to the quantity,
type, and content of working papers?

a. The estimated occurrence rate of attributes.

b. The preliminary evaluations based on substantive testing.
c. The content of the client's representation letter.
d. The anticipated nature of the auditor's report.

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