The table below lists the four major parts and the related activities in audit planning.

Phases of the audit Activities

a.Accept client and perform initial audit planning 1.Send an engagement letter to the client 7.Identify whether any experts are required for the engagement 9. Determine the likely users of the financial statements b.Understand the client's business and industry 2.Tour the client's plant and offices 5. Identify potential related parties that may require disclosure 6.Review the company's constitution 8. Review accounting principles unique to the client's industry 4. Review management risk, managemenent controls and procedures. 3.Compare key ratios for the company with those of industry competitors.

c.Assess client business risk d.Perform preliminary analytical procedures

Phase a Activity 1 Sending engagement letter to the client is the final step in the client acceptance phase. The engagement letter to the client documents and conforms the auditor's acceptance of the appointment, the objective and the scope of the audit and the extent of the responsibilities to the client. Activity 7 Identifying whether any experts are required for the engagement is one of the major steps in accepting an audit. If the auditor thinks the technical competence of the audit team is insufficient to perform audit ,the auditor may use the work of experts to obtain sufficient appopriate audit evidence. Activity 9. Determining the likely users of the financial statements is important part in initial audit planning because auditor owes duty of care to groups like investors, creditors, managers, shareholders, suppliers and public who rely and make decisions based on auditor's report. He/she is liable under statute and common law to the plantiff for any negligent performance. Phase b Activity 2 Touring the client's plant and offices is the part of understanding the client's business and industry. Tours to the client's plant and offices provides background knowledge on material handling methods, the physical layout of facilities and the general condition of fixed assets and inventory. During the visit the auditor is able to meet key people.

Activity 5. 1 Ram Kumar Maharjan (0099276, 108100)

Identifying potential related parties that may require disclosure is one of the major parts of understanding clients business and industry. Auditor identifies whether transactions are with independent parties or related parties. It is auditors responsibility to make sure that there is no transactions of client with related parties (i.e. with directors or their relatives) because the related parties may be paying lower prices for the deal. Activity 6. Reviewing the company's constitution contributes to an understanding the client's business and industry. Constitution contains information about specific items that should be compared with data in the accounting records and any mismatch indicates the poor integrity of management. Activity 8. Reviewing accounting principles unique to the client's industry is the part of understanding the client's business and industry.Reviewing accounting principles helps in the selection and application of accounting policies. For example, the terms and conditions of sales made in the normal course of business willn influence revenue recognition principles. Phase c Activity 4. Reviewing management risk, managemenent controls and procedures gives the auditor an idea of what the controlling mechanism for internal and external risk associated with the business are. The auditor attempts to minimize the risks by risk assessment and corporate governance. Phase d Activity 3. Comparing key ratios (liquidity, activity, profitability and solvency) of the company with those of industry competitors is one of the major parts in analytical procedures. Ratio analysis helps auditor in understanding of business and identifying areas of potential risk. Thus any ratios that don't meet with the auditor's expectation indicates areas requring significant audit attention. References: 1. Gay and Simnett (2007), Auditing and Assurance Services in Australia, McGraw-Hill, Chapter 6 2. Leung, Coran and Cooper (2007), Auditing and Assurance Services, 3rd ed,Wiley, Chapter 5

2 Ram Kumar Maharjan (0099276, 108100)