Discussion of Other Critical Matters in Engangement Planning

1. Application of Analytical Procedures in Planning the Audit

The purpose of applying analytical procedures in planning the audit is to assist in understanding the
business and in identifying areas of potential risk. It will therefore assist the auditor in planning the
nature, time, and extent of auditing procedures that will be used to obtain evidential matter for specific
account balances of classes of transactions. By identifying such things as the existence of unusual
transactions and events, and amount ratios and trends, matters that have financial statement and audit
planning ramifications might be brought to light.

2. Establishment of an Engagement or Audit Team

An audit team consists people with different levels of expertise and experience. The team usually is
composed of an engagement partner, a manager, at least one senior, and one or more staff auditors. In
determining the number of people who will be assigned to an engagement, an auditor normally
considers the audit's size and complexity, availability and experience of personnel, the necessity for
special expertise, the opportunity to train personnel, and the continuity and rotation of personnel.

3. Consideration of Work Performed by Other Auditors /Parties

The following should be considered :

-The involvement of other auditors in the audit of components, for example, subsidiaries, branches and
divisions.

-The involvement of experts.

-The number of locations.

a. Predecessor Auditor

The successor auditor's examination may be greatly facilitated by consulting with the predecessor
auditors and reviewing the predecessor's working papers. Communication with the predecessor
auditors can provide the successor CPA with background information about the client, details but the
client's system of internal control, evidence as to the account balances at the beginning of the year
under audit.

b. Other CPA

Large companies generally consist of divisions and subsidiaries located in many different parts of the
country of the world. For variety of reasons, on or several of the subsidiaries or divisions may have
different auditors.

To be able to report on the statements of the combined entity, an auditor must determine that she or
he is able to be the principal auditor.
Principal auditor means the auditor with responsibility for reporting on financial statements of an entity
when those financial statements include financial information of one or more components audited by
another auditor. Other auditor means auditor, other than the principal auditor, with responsibility for
reporting on the financial information of a component which is included in the financial statements
audited by the principal auditor.

Other auditors include affiliated firms whether using the same name or not, correspondents as well as
unrelated auditors.

Component means a division, branch, subsidiary, joint venture, associated company or other entity
whose financial information is included in financial statements audited by the principal auditor.

PSA 600, "Using the Work of Another Auditor " establishes standards and provides guidance when an
auditor uses the work of another auditor on the financial information of one or more components
included in the financial statements of the entity.

In deciding to become the principal auditor, the auditor must consider among other things, the
following:

1. The materiality of the portion of the financial statements which the principal auditor audits;

2. The principal auditor's degree of knowledge regarding the business of the components;

3. The risk of material misstatements in the financial statements of the components audited by the other
auditor; and

4. The performance of additional procedures regarding the components audited by the other auditor
resulting in the principal auditor having significant participation in such audit.

c. Specialists

CPAs may lack the qualifications necessary to perform certain technical tasks relating to the audit. A
specialist brings unique knowledge and judgement in a field other than accounting and auditing. An
auditor might decide to have an art appraiser place values on works of art, a mineralogist determine the
physical characteristics of mineral reserves, or an actuary provide data related to a group's life
expectancy.

d. Use of Client's Staff

The auditor should obtain an understanding with the client as to the extent to which the client's staff,
including the internal auditors, can help prepare for the audit. The client's staff should have the
accounting records up-to-date when the auditors arrive. In addition, many audit working papers can be
prepared for the auditors by the client's staff, this reducing he cost of the audit and freeing the auditors
from routine work.

e. Internal Auditors
Internal auditors can affect the audit in two ways. First, they can enhance internal control. For example,
if internal auditors determined that bank reconciliations were properly prepared and all cash receipts
were deposited, the entity's controls would enhance the reliability of the accounting records. The
second way internal auditors affect an audit is by assisting independent auditors in performing specific
audit procedures. For example, an internal auditor may observe client personnel taking the inventory.

4. Assessment of Going Concern Assumption

PSA 570 (Clarified) requires auditors to evaluate whether substantial doubt exists about an entity's
ability to continue as a going concern, based on procedures planned and performed to obtain evidence
about the management assertions embodied in the financial statements. That is, an auditor is not
required to design specific procedures to evaluate whether an entity is a going concern. But when
information obtained during the audit raises substantial doubt about the entity's ability to continue in
operation for a year following the date of the financial statements being audited, the auditor should add
a paragraph calling the attention to the fact that the statements have been prepared assuming that the
entity will continue as a going concern.

Examples of events or conditions, which individually of collectively, may cast significant doubt about the
going concern assumption are set out below. This listing is not all-inclusibe nor does the existence of
one or more of the items always signify that a material uncertainty exists.

Financial

- Net liability of net current liability position.

- Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or

excessive reliance on short-term borrowingsbto finance long-term assets.

- Indications of withdrawal of financial support by debtors and other creditors.

- Negative operating cash flows indicated by historical or prospective financial statements.

-Adverse key financial ratios.

- Substantial operating losses of significant deterioration in the value of assets used to generate cash
flows.

-Arrears or diaxontinuance of dividens

-Inability to pay creditors on due dates.

- Inability to comply with the terms of loan agreements.

-Change from credit to cash-on-delivery transactions with suppliers.

- Inability to obtain financing for essential new product development or other essential investments.
Operating

- Loss of key management without replacement.

- Loss of major market, franchise, license, or principal supplier.

-Labor difficulties or shortages of important supplies.

Other

- Non-compliance with capital or other statutory requirements.

- Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that
are unlikely to be satisfied.

- Changes in legislation or government policy expected to adversely affect the entity.

5. Identification of Rated Parties

Transactions with related parties are important to auditors because they will be disclosed in the financial
statements if they are material. Generally accepted accounting principles require disclosure of the
nature of the related party relationship; a description of transactions, including peso amounts; and
amount due from and related to parties.

A related party is defined as an affiliated company, principal owner of the client company, or any other
party with which the client deals where one of the parties can influence the management or operating
policies of the other.

A related party transaction is any transaction between the client and a related party. Examples include
sales or purchase transactions between a patent company and it's subsidiary, exchanges of equipment
between two companies owned by the same person, and loans to officers.

Because material related party transactions must be disclosed, it is important that all related parties be
identified and included in the permanent files early in the engagement. Finding undisclosedbrelated
party transactions is thereby enhanced. Common ways of identifying related parties include inquiry of
management, review SEC filings, and examination of stockholders' listings to identify principal
stockholders.

6. Client's Legal Obligations

Pertinent current-year information that auditors should review includes (1) minutes of directors'and
stckholders' meetings, (2) changes to articles of incorporation or by-laws, and (3) any significant
contracts executed during the year. By reading the minutes, an auditor will obtain information about
significant events hat have or will have an impact on the client. For example, an auditor should be alert
to the following:
- Major contracts or arrangements, including merger and acquisition agreements, debt agreements,
compensation agreements, and asset purchase agreements

- Information about current situations and future business plans

- Authorization of dividends.

For new clients for which historical information relating to these matters is unavailable, the auditor
should review information relating to prior years. For example, instead of reading only the changes to
the articles of incorporation and by-laws since the inception of the entity, making appropriate
summaries for the permanent file. The auditor should also read all contacts having an impact on the
current year.

7. Completion of the Initial Audit Program

An audit program is a set of audit procedures specifically designed for each audit. The program which
includes both substantive tests and tests of controls will enable the auditor to express am opinion on the
financial statements taken as a whole.

The auditor should develop and document an program seeing out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan. The audit program serves as a
set of instructions to assistants involved in the audit and as a means to control and record the proper
execution of the work. The audit program may also contain the audit objectives for each area and a time
budget in which goes are budgeted for the various audit areas or procedures.

Considering materiality, risk of misstatement, and the relative cost of performing audit procedures,
auditors determine the procedures to test the assertions embodied in the financial statements. The
audit program is a list of audit procedures to be performed so that the auditor will have evidence as a
basis for expressing an opinion on the financial statements. For example, an auditor might include the
following two steps in the initial audit program to test the existence of sales:

1. For a sample of entries in the sales journal, compare data in the sales journal to the approved
customer order the sales order, the shipping document, and the sales invoice.

2. Confirm a sample of accounts receivable at year-round end.

Auditing standards require a written audit program be prepared as a part of each engagement.

In preparing the audit program, the auditor would consider the specific assessments of inherent and
control risks and the required level of assurance to be provided by substantive procedures. The auditor
should also consider the timing of tests of controls and substantive procedures, the coordination of any
assistance expected from the entity, the availability of assistants and the involvement of others auditors
our experts. Other matters may also need to be considered in now detail during the development of the
audit program. On initial engagements, the audit program typically will develop in three stages:

(1) the broad phases of the program can be outlined at the time of engagement;
(2) other details of the program can be identified after the review of internal control structure and
accounting procedures has begun; and

(3)procedures on specific phases of the audit can be further challenged and revised a the work
progresses.

On recurring engagements, the program for the preceding audit should be studied before preparing the
program for the current audit. The program for the current audit should reflect modifications or are
required by thebexperiencw gained in the business, internal control or accounting methods of the
client.

In planning his examination, the auditor should consider the nature, extent, and timing of work to be
performed and should prepare a written audit program (or a set of written audit program). An audit
program aids in instructing assistants in the work to be done. It should set forth to reasonable detail the
audit procedures that the auditor believes are necessary to accomplish the objectives of the
examination. The form of the audit program and the extent of its detail will vary. In developing the
program the auditor should be guided by the results of the planning considerations or unexpected
results of audit procedures applied may make it necessary to modify planned audit procedures.

In preparing the audit program, the auditor, having an understanding of the accounting system and
related internal control, may wish to rely on certain controls in determining the nature, timing, and
extent of required auditing procedures. The auditor may conclude that relying on certain internal
controls is an effective and efficient way to conduct his audit. However, the auditor may decide not to
rely on internal controls when there are other more sufficient ways of obtaining sufficient appropriate
audit evidence. The auditor should also consider the timing of the procedures, the coordination of any
assistance expected from the client, the availability of assistance, and the involvement of the auditors or
experts.

8. Preparation of a Time Budget

A time budget is an estimate of the total hours an audit is expected to take. It is based on the
information obtained in the first major step in the audit, that is, obtaining an understanding of the
client. It takes into consideration such things as:

(a) the client's size as indicated by its gross assets, sales, number of employees

(b) location of client facilities

(c) the anticipated accounting and auditing problems

(d) the competence and experience of staff available.

The total time must be allocated by the preparation of work schedules indicating who is to do what and
how long it should take. This, total hours are budgeted by major categories and may be scheduled on a
weekly basis. Time budget also serves as the basis for estimating fees. It is also an important tool to
communicate to the audit staff those areas the manager or partner believes are critical and require more
time. Furthermore, a time budget is used to measure the sufficiency of the staff and to determine at
each stage of the engagement whether the work is progressing at a satisfactory rate.

Managing time is
an important consideration because billing is often based on the amount of time charged to the
engagement. Indeed, the most costly element of an engagement is the auditor's time. Time budgets
can motivate staff to perform efficiently, and one criterion by which audit personnel are evaluated is
their ability to complete assignments within the adopted time. (However, placing too much emphasis
on time management can lower the quality of the audit).

A periodic accounting of time and budget may be prepared as a basis for determine the cause(s) of the
variance between actual and budgeted hours. This is illustrated in Figure 9.3. This report will also serve
as a guide in projecting the audit time for the succeeding audits.

9. Assignment of Personnel to the Engagement

Staff must, therefore, be assigned with that standard in mind. On larger engagements, there are likely
to be one or more partners and staff at several experience levels doing the audit. Specialists in such
technical areas as statistical sampling and computer auditing may also be assigned. On smaller audits
there may be only one or two staff members.

A major consideration affecting staffing is the need for continuity from year to year. An inexperienced
staff assistant is likely to become the most experienced nonpartner on the engagement within few years.
Continuity helps the CPA firm maintain familiarity with the technical requirements and closer
interpersonal relations with client personnel.

Another consideration is that thaw persons assigned to be familiar with the client's industry.

In PSA 220 (Clarified), "Quality Control for an Audit of Financial Statements, " the auditor, and assistants
with supervisory responsibilities, will consider the professional competence of assistants performing
work delegated to them when deciding the extent of direction, supervision and review appropriate for
each assistant.

Any delegation of work assistants would be in manner that provides reasonable assurance that such
work will be performed with due care by persons having the degree of professional competence
required in the circumstances.

10. Scheduling of Work

Audit work that can always be performed during the interim period includes the consideration of
internal control, issuance of management letter, and substantive tests of transactions that have
occurred to the interim date.

Interim tests of certain financial statement balances, such as accounts receivable, may also be
performed, but this results in additional risk that must be controlled by the auditors. Significant errors
or irregularities could arise in these accounts during the remaining period between the time that the
interim test was performed and the statement of financial position date. This, to rely on the interim test
of a significant account balance, auditors must perform additional tests of the account during the
remaining period.

Performing audit work during the interim period has numerous advantages in addition to facilitating the
timely release of the audited financial statements. The independent auditors may be able to assess
internal control more effectively by observing and testing controls at various times throughout the year.
Also, they can give early consideration to accounting problems. Another advantage is that interim
auditing creates a more uniform work load for CPA firms. With a large client, such as San Miguel
Corporation, the auditors may have office space within the client's buildings and perform auditing
procedures throughout the entire year.

Performance of other substantive tests is schedules near at, and after year-end. Consideration should be
given to such factors as:

a) Deadline for submitting final audit report and filing of income tax returns.

b) Ability of the client's staff to submit required schedules

c) Other audit clients

Documentation of Audit Plan/Audit Program

The auditor should develop and document an audit program seeing out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan. The audit program serves as a
set of instructions to assistants involved in the audit plan and as means to control and record to proper
execution of the work. The audit program may also contain the audit objectives for each area and a time
budget in which hours are budgeted for the various audit areas or procedures.

The overall audit plan and the audit program should be revised as necessary during the course of the
audit. Planning is continuous throughout the engagement because of changes in conditions or
unexpected results of audit procedures. The reasons for significant changes would be recorded.

Documentation of the planning process is done through the preparation of working papers showing:

(1) Audit Plans (discussed in this section)

(2) Audit Programs (see Chapters 19 and 20 for examples)

(3) Time Budget (refer to page 407)

An audit plan contains the overview of the engagement, outlining the nature and characteristics of the
client's business operations and the overall audit strategy.

The following information are included in a typical audit plan:

1. Description of the client company- it's structure, nature of business and organization

2. Audit objectives- ( if the audit is for stockholders, creditors or it is a special-purpose audit)

3. Description of the nature and extent of other services such as tax returns preparation, etc.

4. Timetable of the audit work

5. Work to be done by the client's employer

6. Assignment of audit staff

7. Target completion dates of the major segments

8. Preliminary evaluation and judgment about materiality level for the engagement

9. Any special problems to be resolved during the engagement particularly those revealed by analytical
procedures.

10. Conditions that may require changes in audit test.

Normally, the audit plan is prepared before starting work at the client's office. It may, however be
modified throughout the engagement as the auditor deems necessary depending on his consideration of
internal control or as special problems are encountered.
The auditor may wish to prepare a memorandum setting forth the preliminary audit plan, particularly
for large and complex entity.

Planning a Repeat Engagement

It is far easier to plan for a repeat engagement than planning for a first audit of a new client. The
working papers in the previous year's audit provide a wealth of information useful in planning the
recurring engagement. Of course, the auditor-in-charge of a repeat engagement would have a good
working knowledge of the client's business. The auditor however should not merely duplicate last year's
audit program but should modify his approach to the he audit for any changes in the client's operating,
internal control structure, or business environment.