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Unit 5: Audit Planning

Introduction Notes

This unit gives an introduction to audit planning, including: purpose and methodology of audit
planning; client acceptance and continuance; obtain knowledge of client’s industry and business;
assess client business risk and analytical procedures.

5.1 Purpose and Methodology of Audit Planning

There are three main benefits from planning audits: 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. ISA 300 Planning an Audit of Financial Statements
requires that, “the planning stage of the audit should be used to establish an overall strategy for
the audit, develop an audit plan, and reduce audit risk to an acceptably low level”. The standard
also requires that: Auditors should plan the audit work so that the engagement is performed in
an effective manner. It is important to clarify what are meant by the terms “overall audit
strategy” and “audit plan” as per ISA 300. The overall “audit strategy” describes in general
terms how the audit is to be carried out and the “audit plan” details the specific procedures to be
carried out to implement the strategy and complete the audit. It is also important for students to
understand the precise meaning of the risk terms: “audit risk” and “inherent risk” as both risks
influence how the audit is carried out and the costs involved. The auditor will spend quite a bit
of time at the early planning stages obtaining information to assess these risks so that “the
engagement is performed in an effective manner”. “Audit risk” is the risk that an auditor may
give an inappropriate audit opinion on financial statements that are materially misstated. To
reduce the audit risk to an acceptably low level means the auditor needs to be more than certain
that the financial statements are not materially misstated. This is reiterated by ISA 200, which
states, “The auditor should plan and perform the audit to reduce audit risk to an acceptably low level that
is consistent with the objective of an audit.” “Inherent Risk” as per ISA 400 is “the susceptibility of an
account balance or class of transactions to misstatements that could be material, individually or when
aggregated with misstatements in other balances or classes, assuming that there are no related internal
controls”.
Assessing audit risk and inherent risk is an essential part of audit planning because it determines
the quantity and quality of evidence that will need to be gathered and the staff that need to be
assigned to the particular audit. If for example there were valuation issues with property inherent
risk would then be assessed as high, therefore meaning more evidence would have to be gathered
and staff that are more experienced assigned to perform testing on this account.

Notes ISA 300 Planning an Audit of Financial Statements requires that the planning stage
of the audit should be used to establish an overall strategy for the audit, develop an audit
plan, and reduce audit risk to an acceptably low level.

5.2 Accept Client and Perform Initial Audit Planning

ISA 300 states that the auditor should:
1. Perform procedures regarding the continuance of the client relationship and the specific
audit engagement;
2. Evaluate compliance with ethical requirements, including independence (also refer to ISA
220 Quality Control); and

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