Auditing 81.3550
Planning & Documentation
Chapter 7
Highlights
• Examine preplanning phase of the
audit
• Examine preplanning procedures
• Audit working papers purpose and
organization
Why to we plan the audit?
• Aid in collecting
sufficient and
appropriate evidence
• Aids in keeping cost
reasonable
• Prevent client
misunderstandings
• Assists in planning
staffing requirements
Audit Planning Process Steps
1.
2.
3.
4.
5.
Preplan
Collect background info
Gather information on Client’s legal obligations
Perform analytical procedures
Set materiality assess Audit Risk and Inherent
Risk
6. Understand and assess Internal Control Risk
7. Develop overall audit plan and associated
program
This Chapter’s Focus
Steps in audit planning
preplan
obtain
background
information
obtain
information
about
client’s legal
obligations
perform
preliminary
analytical
procedures
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7-6
preplan
early brainstorming
- client acceptance issues
- client lacking
What
integrity
potential
financially
client might the
unstable client
auditor turn
- client unable to
down?
pay audit fees
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7-9
Predecessor and Successor Auditors
- Rules of Professional Conduct require
the successor auditor to communicate
with the predecessor
- the client must give permission for the
communication
- the successor is required to initiate
the communication
- the predecessor is required to respond
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preplan
early brainstorming
- client acceptance issues
If a prospective client has not been
audited before, the auditor may base
client acceptance on discussions with:
- lawyers
BANK
- banks
- other
businesses
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preplan
early brainstorming
- client acceptance issues
- identify client’s reasons for an audit
For a large business, what is the
probable reason for an audit?
Companies subject to securities
commission regulation are required
to have annual audits.
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preplan
early brainstorming
- client acceptance issues
- identify client’s reasons for an audit
Because of audit risk, an auditor will
typically gather more evidence for:
- publicly held clients
- clients with extensive indebtedness
- clients changing ownership
- newly formed, rapidly growing businesses
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preplan
early brainstorming
- client acceptance issues
- identify client’s reasons for an audit
- obtain an engagement letter
The intent is to
document terms of the
audit and minimize
misunderstandings.
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Engagement Letter
• Outlines audit purpose and coverage
• Outlines all parties responsibilities including
management of the firm
• May include preliminary schedule of audit timing
and reporting deadlines
• Should be initially signed by the auditor on behalf
of the firm
• Agreement should be indicated by a signature of
client representative(s)
preplan
early brainstorming
- select audit team
Considerations?
- training and overall experience
- industry and client experience
- supervision
- need for specialists
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Staff Selection
• Another consideration continuity
• Continuity = i.e. staffing audit with those
who have worked the same audit in prior
years
• Increases closeness to client
• Familiar with operations and clients
business already as well as prior audit
results
Steps in audit planning
preplan
obtain
background
information
obtain
information
about
client’s legal
obligations
perform
preliminary
analytical
procedures
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obtain
background
information
Why should the auditor
obtain background
information?
- to identify the need for outside
specialists
- to identify related parties
- affiliated company
- principal owner
- party that can influence management
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Related Party Transactions
• Can affect accounting
treatment of transaction
depending on level of
influence
• Transactions need often to
be disclosed
• May increase inherent risk
obtain
background
information
GAAS requires an extensive
knowledge of the client’s
business, industry and
operations.
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obtain
background
information
Why understand the
client’s business,
industry or operations?
- to determine if any unique accounting
requirements exist
- to identify industry risks for setting
acceptable audit risk
- to identify industry risks for setting
inherent risk
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obtain
background
information
Why understand the
client’s business,
industry or operations?
- Also helps in:
- determining materiality
- understanding internal control
- identifying sources and nature of available audit
evidence
- understanding substance of transactions
- assessing whether sufficient appropriate evidence
is available
- assessing appropriateness of accounting policies
- evaluating overall financial statement presentation
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obtain
background
information
What are the auditor’s
sources of industry
information?
- prior auditors
- firm industry experts
- CICA research studies, audit technique
studies and other publications
- industry journals and other literature
- discussions with management
- plant and office tour
- review of policies and procedures
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Background Information
• Permanent Files – normally contain this
type of background information
• Historical point of view including business
history, accounting policies, senior officers
and officials, incorporation etc.
Steps in audit planning
preplan
obtain
background
information
obtain
information
about
client’s legal
obligations
perform
preliminary
analytical
procedures
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obtain
information
about
client’s legal
obligations
how?
- study articles of incorporation & bylaws
- study minutes of board and shareholder meetings
...it’s a deal!!
- study existing
contracts
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obtain
information
about
client’s legal
obligations
Why is this part of
audit planning?
Throughout the engagement, auditors will be
observing evidence that
may relate to these items
and their disclosure.
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Steps in audit planning
preplan
obtain
background
information
obtain
information
about
client’s legal
obligations
perform
preliminary
analytical
procedures
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What is the
purpose of
preliminary
analytical
procedures?
- understanding the
client’s industry
- assessing going
concern issues
- indicating possible
misstatements
- reducing detailed
tests
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What are working papers?
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What are working papers?
auditor records of:
tests
performed
procedures
applied
conclusions
reached
information
obtained
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Working papers
Their objective is to aid the auditor in
providing reasonable assurance that an
adequate audit was conducted in
accordance with GAAS.
Working papers also provide:
- a basis for planning the audit
- a record of the evidence accumulated
and the results of tests
- data supporting the audit report
- a basis for supervisor/partner review
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Permanent files contain data of a
historical nature of continuing relevance
to current and future engagements.
INCLUDE:
-copies of client documents of
continuing importance
- analyses from prior audits that have
continuing importance
- internal control information
- results of prior audit analytical
procedures
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Current Files Contents
• Current file for each
year of audit
• Risk and materiality
assessment
• Audit Plan/Program
• Trial Balance
• My contain lead
schedules – listing of
account totals making
up an item on the TB
• Adjusting Entries
• Supporting Schedules
and audit work
performed
• Audit Documentation
– i.e. reconciliation,
reperformance results,
testing results, etc.
Does an audit client have a
legal right to audit working
papers?
NO!
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Considered to be exclusive property of the auditors
Confidential Client Information
A member in public practice shall not disclose
any confidential client information without the
specific consent of the client, or when
required by the courts of by the professional
accounting association...
audit working papers
During the course of an audit,
auditors obtain information of a
confidential nature which is
retained in the working papers.
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Audit Working Papers
Tick Marks
• contain a standard set of symbols
indicating what work has been done
on certain balances
• If non standard symbols are used
normally a legend is provided
• All trial balances/F/S are indexed to
their supporting schedules using a
form of referencing