 In this presentation we will discuss the planning stage of the audit. In prior presentations we broke down the audit process support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need then can be done on a youtube page we also include added resources such as excel practice problems pdf files and more like quickbooks backup files when applicable so once again click the link below for a free month membership to our website and all the content on it into a series of stages those stages including client acceptance and continuance preliminary engagement activities plan the audit consider and audit internal controls audit business processes and related accounts complete the audit and then evaluate results and issue the audit report here we of course are on planning of the audit we'll start off with audit strategy the overall audit strategy will help the auditor to determine what resources are needed to complete the engagement as we think of each audit remember that each audit is going to be substantially different so we want to have know what the audit strategy will be we want to make sure within the planning phase we do a good job because that's going to set the groundwork to make sure that the resources that we need are there and that we apply them efficiently and go through the process of the audit as quickly and efficiently as possible audit plan an audit plan is then developed in more detail than the strategy so first of course we're going to think of the overarching strategy you could think of us trying to put this framework together first we're thinking about the overarching strategy then we're starting to frame this thing we're actually putting together the plan the plan being more concrete the plan being closer to a blueprint that we can then follow in a step-by-step mapped out type process as opposed to the strategy not quite at the blueprint type level not quite listing out exactly what's going to be happening however getting to that point so the audit plan and audit plan is then developed in more detail than the strategy should plan how to conduct the engagement in an effective and efficient matter and of course that's always going to be what we want to do in the planning phase we want to set it up in such a way that we have the steps followed out we know what to expect we believe we know what to expect and we're going to set up a strategy to go through those noting any types of areas that are going to be more time consuming than others making sure that we have them aligned in such a way that we can complete them as efficiently as possible possibly putting together different types of tests that can test different things at the same time and lining up more time frame that will be needed for those areas that we know will be more difficult and more time consuming the planning steps include assess the business risk so we're going to say what is the business risk established materiality levels we'll discuss more about what the establishment of materiality levels are but note we're always going to have to be thinking that we're not going to have the 100 percent assurance there's always going to be some risk there's going to be some risk and therefore we need to calculate what the materiality risk would be which is a little strange because we're actually calculating what would be acceptable amount of degree of risk or amount of error in terms of materiality in order to plan the audit so we'll discuss a little bit more of how to do that consider the need for specialists do we need specialists of course we are the auditors we're specialized in accounting there's going to be specialists possibly that will be needed in terms of database specialists how do they put things together how are they formatting things from an IT perspective possibly specialists in order to value different types of assets such as real estate such as different types of inventory or something like that we need to make sure that we have those specialists that will be needed for those particular areas identify any related parties so are there related parties to this entity we know that if there are related parties then they have transactions between the related parties we can't rely on the market forces to be guiding what we expect from those transactions and therefore we need to know who the related parties are what type of transactions you have with them and then how you're recorded those transactions are they're recorded in accordance with generally accepted accounting principles as they apply to related parties evaluate additional value added services and document overall audit strategy audit plan and prepare audit program so once we have all this of course then we're going to put together and document the strategy we're putting together the plan we're putting together we want to do that for a couple different reasons one we want to make sure the plan is put together so that we can then follow it we can delegate out to the rest of the people that will be involved in the audit what that plan will be and then execute and then of course we also want to know this because it's part of the documentation for the audit if we were to have some review of the audit or to look at our process that we have done either ourselves or by some review body we want to be able to show hey this is our strategy this is our plan here's the documentation for it and here's us moving forward with it assess business risk to understand the entity and its environment so we want to assess the business risk and we want to understand the entity and the environment now as we get into risk note what we're doing we're looking at the planning process here we're trying to set up the audit we're trying to say and ultimately say what types of testing do we need how much testing do we need and in order to do that we have to think about these ideas of risk so we're going to say what are the risk factors and the risk factors will help us determine how to set up the audit how much time it will take to do the audit and how much work or what types of work and or what types of work we're going to have to put together for it we would like to do this in like a scientific method as possible and tell us well this is the level of risk we have here and that's going to determine how much testing we have to do on abc or d and that's we're going to try to do it as numerically as possible but of course assessing risk in something like the business risk in the business environment understanding the entity and the environment is somewhat of an art form as well as a science so note that we're going to have to get a feel for the understanding of the entity and the environment our goal then is to assess the business risk within that entity within that environment and that'll help us better understand and set up how much testing is going to be necessary as we go through the audit process to identify business risks that could result in material misstatement this is our objective as we consider the business risks we're saying what type of environment are they in what type of entity are we dealing with and then for for our purposes we're saying could these type of entities and the environment their end lead to a higher risk of material misstatement in the financial statements and obviously some industries are more highly complicated some industries are more risky just in general uh some some are risky in terms of being a going concern type of risk and some are just risky or complicated in terms of how they have to put together their business model and and those things can increase the likelihood of mistakes and and problems happening which would lead to misstatements those are the types of things we want to assess understand how the entity responds to the business risk and ensure response has been done so the business then should understand their entity of course their their environment what type of environment they're in what type of business they're in if they're in a type of business that has a complex type of business structure in order to to generate the revenue in some way then of course they know that and they should have a system set up a system of control set up in order to deal with whatever risk is involved for that particular industry we want to understand the risk we want to ask the business how do you deal with this risk and see if they are implementing whatever controls and whatever functions they have in place to deal with that uh with that particular risk for that particular type of business entity using this information the auditor assesses the level of risk of material misstatement in the financial statement accounts so we're going to use this information of course to assess the level of risk uh in the financial statements of material misstatement because of course that's our goal when we make the audit is to see whether or not or give an opinion if there's material misstatement that's what we're going to be gathering evidence for as detectives would and part of that evidence gathering process in the front side of things is to assess the business risk and put that in as part of our plan establish overall materiality so we're getting back to this idea of materiality now note again in the planning process we got to think of materiality because that means that the type of decision that could lead people that are reading or looking at the at the financial statements to affect their decision so a problem with the financial statement that could be large enough that a reasonable person may have their opinion affected if that is an if there's an error related to it of that size or something to say omitted of that size we need to know this in the planning stage and actually work it into our planning process because when we think about things of risk how much testing we're going to have to do we have to think about well what is an acceptable amount of uh overall materiality uh misstatement in essence which seems again a little bit counterproductive you would think that we would try to be eliminating all problems and that's going to be our ultimate goal you might think that we're going to try to shoot for eliminating all misstatements and then and then whatever we don't get is is fine but that's not the way we have to do it if we're trying to do this efficiently we have to say okay what's going to be the material misstatement that would be basically acceptable that would be under the threshold and then and then start to plan our process from there so to do that then we have to establish things like the overall materiality so we have to establish tolerable misstatement of accounts and establish tolerable misstatement of disclosures so when we break this down then when we think about okay what would be a reasonable material misstatement that would be tolerable acceptable something that uh if the financial statements were misstated up to this degree then they would not be materially misstated as we consider that we could think of the misstatements uh per account so we're going to establish tolerable misstatements for accounts then as we start to audit those accounts we will have a tolerable misstatement that we could work with as we go into those accounts same thing is true for establishing tolerable misstatements for the disclosures to the financial statement related parties identification of accounting for and disclosure of transactions with related parties note that an entity is related to a reporting entity if among other circumstances it is a parent subsidiary fellow subsidiary associate or joint venture so we're talking about related type of parties in these transactions and just like if we're talking about individuals and we were related parties to say siblings or something like that or family members then we know that transactions between those related parties are going to be a mess they're not going to follow normal what we would expect market type of behavior and therefore we need to know who the related parties are and how are they going to be recording information to the related parties so we're thinking about those entities that are related to them and we know that like family relationships with business transactions are going to be funny and so once we know that who the related parties are we want to know what the transactions are with them and how those transactions are taking place so we're going to inquire about the names of the related parties nature of the relationship the types of transactions with those related parties reasons for entering into the transactions with the related parties and again if we look into these things obviously the reasons for transactions with related parties could differ substantially than what we would expect for the reasons of transactions for parties that were not related in other words if you have a business transaction with a party that's not related to the company then of course it's probably due to the fact that the company needs revenue generation being the objective in some way shape or form we paid for something in order to have revenue generation in some way shape or form to help us with that process related party transactions it could be a little bit more convoluted as to what was the nature or reason of a particular type of business transaction and of course we will document the audit strategy audit plan and prepare audit reports got document about audit tests we want the nature the timing and the extent so when we have this documentation we want to be documenting nature timing extent document how the entity is managing risk and the effects of the risk on controls on the planned audit process audit supervision engagement partner and other supervisory members tell the engagement team members their responsibilities of course instruct engagement team members to identify and communicate audit issues and review the work of engagement team members