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• Audit Planning - involves developing a general audit strategy and a detailed approach for the expected conduct of the audit.
• PSA 315 - it requires the auditor to obtain sufficient understanding of the entity and its environment including its internal control.
• When developing an audit strategy, the auditor must consider carefully the appropriate levels of materiality and audit risk.
• Materiality - information is material if its omission or misstatements could influence the economic decision of users taken on the basis of the financial statements.
• Using Materiality Levels (Per step)

  1. Determine the overall materiality
  2. Determine the tolerable misstatement
  3. Perform audit procedures
  4. Compare the aggregate amount of uncorrected misstatements
• The allocated materiality to an account is called the tolerable misstatement.
• Audit risk - refers to the risk that the auditor gives an inappropriate audit opinion on the financial statements.
• Audit risk = Inherent risk * Control risk * Detection risk
• Inherent risk - is the susceptibility of an account balance or class of transactions to a material misstatement assuming that there was no related internal control.
• Factors that affect the risk of material misstatement:

  • Management integrity
  • Management characteristics
  • Operating characteristics
  • Industry characteristics
• Control risk - it is the risk that a material misstatement that could occur in an account balance or class of transactions will not be prevented or detected and corrected on a timely basis by accounting and internal control systems.
• Detection risk - it is the risk than an auditor's substantive procedure will not detect a material misstatement.
• Detection risk is controlled by the auditor.

  Inherent and control risk are functions of management.