Activity Based Risk Evaluation Model of Auditing

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Planning activities

Planning activities in auditing correspond to hypothesis generation activities in human information processing theory. An auditor's planning activities include strategic, tactical and operational planning activities.

Strategic planning is long term planning and refers to the auditor's determination, in the client acceptance/retention stage, of the criteria by which prospective audit clients will be accepted and existing clients will be retained ^[fn]. An audit firm may refer to the final list of criteria as the firm's strategic plan for prospective and existing audit clients. The strategic audit plan not only specifies the factors that an audit firm includes in their client acceptance and retention policy, but also the relative emphasis placed on each factor. These factors include:

• the value of the acceptable audit risk AR*₁ at the financial statement level.
• the value of the achievable audit risk AR₁ at the financial statement level.
• other factors such as:
  • whether the audit fee provides an appropriate return on the audit firm's investment.
  • whether the auditor's appointment could violate legal statutes.
  • whether the appointment could violate professional standards or ethics.
  • the political and social consequences of the appointment.
  • the future potential of the entity as a growth client.
  • whether a scope limitation exists ^[fn].

Tactical planning involves the identification, in the audit planning stage, of the criteria by which the audit approach will be determined. The end results of tactical planning are documented in the audit working papers as the tactical audit plan. Tactical planning thus requires the auditor to identify the factors that s/he will use to determine the audit approach, as well as to identify the relative emphasis that s/he intends to place on these factors. Factors auditors identify as part of the tactical plan include:

• the value of the acceptable level of audit risk AR*₂ for each assertion relating to an account balance, and where appropriate, class of transaction.
• the values of inherent and control risks for each assertion relating to each account balance and where appropriate, underlying class of transaction. That is, the values of IR₂ and CR₂.
  (The relationship between the above three risk factors is the primary determinant of the audit approach.)
• other factors including staff availability, reliance on internal auditors, the need for experts, expected assistance from the client's management and staff, and the relative cost of gathering and evaluating evidence for alternative audit approaches^[fn].

Operational planning is the activity of determining what and how much evidence the auditor requires to be gathered and evaluated, and when, how and by whom it should be gathered and evaluated. These plans are recorded in detail in the audit program. Operational planning is relevant to the audit work to be performed in the final three audit stages and includes the continuous day-to-day planning in those stages.

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