Audit Planning, Strategy & Execution
1. SA 300: Audit Strategy vs. Audit Plan (NET)
📊 Interrelationship: Strategy Sets the Scope, Plan Guides Execution
Overall Audit Strategy: Sets the scope, timing, and direction of the audit, guiding the development of the audit plan (resource allocation, industry factors, reporting deadlines).
Audit Plan: More detailed than the strategy; includes the Nature, Timing, and Extent (NET) of risk assessment procedures, further audit procedures (tests of controls & substantive procedures).
- Dynamic Nature: Planning is not a discrete phase; it is a continuous and iterative process that often begins shortly after completion of the previous audit and continues until completion.
2. SA 315: The 5 Components of Internal Control (COSO)
| COSO Component | Core Internal Control Function | Exam Testing Angle |
|---|---|---|
| 1. Control Environment | Governance and management functions; tone at the top, ethical values, organizational structure, HR policies. | Sets foundation; weak environment increases fraud risk across all accounts. |
| 2. Risk Assessment | Entity's process for identifying business risks relevant to financial reporting objectives and deciding actions. | Failure to identify new digital or regulatory risks. |
| 3. Information System | Procedures and records established to initiate, record, process, and report transactions and maintain accountability. | Audit trail testing and IT general controls. |
| 4. Control Activities | Policies and procedures that ensure management directives are carried out: segregations of duties, approvals, reconciliations. | Preventive vs detective automated controls. |
| 5. Monitoring of Controls | Ongoing evaluation of whether internal controls are functioning as intended (internal audit, periodic reviews). | Management review of exception reports. |
3. SA 320: Materiality Hierarchy & Benchmarks
| Level of Materiality | Definition & Purpose | Standard Benchmark Range |
|---|---|---|
| Overall Materiality | Materiality for financial statements as a whole; threshold where misstatements influence economic decisions of users. | • Profit before tax: 5% – 10% • Total Revenue: 0.5% – 1% • Total Assets: 1% – 2% |
| Performance Materiality | Amount set below overall materiality to reduce to acceptably low level the probability that aggregate uncorrected misstatements exceed overall materiality. | Typically 60% – 75% of Overall Materiality depending on risk assessment. |
| Clearly Trivial Threshold | Matters that are clearly inconsequential; below which misstatements need not even be accumulated under SA 450. | Typically 1% – 5% of Overall Materiality. |
4. Significant Risks under SA 315
A Significant Risk is an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration.
- Statutory Determination Factors: Risk of fraud, significant economic or accounting developments, complexity of transactions, significant transactions with related parties, high degree of estimation uncertainty, transactions outside normal course of business.
- Mandatory Audit Procedure: If the auditor identifies a significant risk, substantive procedures directly responsive to that risk are mandatory. If relying on controls, testing in the *current period* is mandatory (cannot rely on prior-period testing!).
5. High-Frequency Exam Traps
⚠️ Examiner Traps Alert
- Trap 1 (Revision of Materiality): If the auditor revises overall materiality to a lower amount during the audit, he MUST ALSO REVISE performance materiality and re-evaluate whether the nature, timing, and extent of audit procedures remain appropriate.
- Trap 2 (Qualitative Materiality): An uncorrected misstatement below the quantitative threshold can still be material qualitatively if it affects compliance with loan covenants, changes a loss into a profit, or increases director bonuses.