Chapter 7 Section 4 Copyright © 2008 Pearson Education, Inc. Publishing as Pearson Addison-Wesley.
Copyright © 2007 Pearson Education Canada 7-1 Chapter 7: Audit Planning and Documentation.
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Transcript of Copyright © 2007 Pearson Education Canada 7-1 Chapter 7: Audit Planning and Documentation.
Copyright © 2007 Pearson Education Canada7-1
Chapter 7: Audit Planning and Documentation
Copyright © 2007 Pearson Education Canada7-2
Chapter 7 objectives
Explain the importance of audit planning Identify the steps to preplanning Note the contents and relevance of an
engagement letter Discuss the role of a client risk profile Explain the purposes of audit working
papers and their typical characteristics
Copyright © 2007 Pearson Education Canada7-3
Planning the audit
Planning is the “development of a general strategy and a detailed approach for the expected nature, extent, and timing of the audit”– what are you going to do, why and how!
Three distinct phases: Preplan Develop client risk profile Assess control risk and design
testing plans
Copyright © 2007 Pearson Education Canada7-4
Practice problem 7-19 (p. 205)
What do you do before you begin fieldwork?
What are your resources?
Copyright © 2007 Pearson Education Canada7-5
Preplanning
New client acceptance or client continuance
Client’s reasons for audit Independence threat analysis Engagement letter Staffing capabilities and meetings
Copyright © 2007 Pearson Education Canada7-6
Preplanning: New client acceptance or client continuance
Would you accept a client where the owner had filed for bankruptcy three times, is currently being sued for tax evasion, and is considering a public offering of shares?
Why or why not? Both new and existing clients should be re-
evaluated for every engagement
Copyright © 2007 Pearson Education Canada7-7
Communication with predecessor
When the auditor is asked to take on a new client, he/she is required to communicate with the predecessor auditor
Why? What could go wrong if this
communication is not initiated?
Copyright © 2007 Pearson Education Canada7-8
Preplanning: Client’s reasons for audit
Who are the users? What are the intended uses of the financial
statements?
For publicly held companies, the auditor is likely to set audit risk to low because of the large number of users
Copyright © 2007 Pearson Education Canada7-9
Preplanning: Independence threat analysis
Recall the five potential threats to independence (self-interest, self-review, advocacy, familiarity, intimidation)
These need to be explicitly addressed, potential threats described, safeguards put into place
If independence cannot be achieved, the engagement must be declined
Copyright © 2007 Pearson Education Canada7-10
Preplanning: Engagement letter
Provides documentation of a clear understanding of the terms of the engagement between the client and the public accounting firm
What are several of the issues that are included in the engagement letter?
Copyright © 2007 Pearson Education Canada7-11
Preplanning: Staffing capabilities and meetings
Overall, the audit team needs to have sufficient training and proficiency to conduct the engagement
This includes continuity of staff, complying with rules of conduct (familiarity threat), and assigning internal or external specialists as needed
Copyright © 2007 Pearson Education Canada7-12
Client risk profile: to assess the client’s business risk and document portions of
the audit risk model Obtain knowledge of
industry and business environment
Obtain knowledge of client’s business
Assess control environment and corporate governance process
Assess risks of fraud Decide on need for
outside specialistsChapter 8:
Determine audit risk Determine inherent
risk Calculate materiality
Copyright © 2007 Pearson Education Canada7-13
Client risk profile: Obtain knowledge of industry and business
environment Why is this necessary? 1. Many industries have unique accounting
environments 2. Risks in the industry may affect the
auditor’s assessment of audit risk for this client
3. Some inherent risks are common to all businesses in an industry
Copyright © 2007 Pearson Education Canada7-14
Client risk profile: Obtain knowledge of industry and business
environment What are some
examples of sources that you could use to find out about the car dealership industry?
What about the health care industry, in particular, hospitals?
Copyright © 2007 Pearson Education Canada7-15
Client risk profile: Obtain knowledge of client’s business
Finding out about your client helps you to decide what questions to ask in the balance of the planning process
Copyright © 2007 Pearson Education Canada7-16
How to: obtain knowledge of client’s business (Table 7-1)
Tour the plant and offices
Identify related parties
Review articles of incorporation and bylaws
Read minutes of directors’ meetings
Review significant contracts
Perform preliminary analytical procedures
Document control environment and corporate governance processes
Copyright © 2007 Pearson Education Canada7-17
Practice problem 7-20 (p. 205)
What is some of the type of information that you would find in board of director’s minutes?
Examine an extract of minutes to assess the impact on the audit engagement
Copyright © 2007 Pearson Education Canada7-18
Related parties
What is a related party? Why is it important to find out about
related parties as part of our knowledge of business?
What could go wrong if we did not find out about related parties?
Copyright © 2007 Pearson Education Canada7-19
Practice problem 7-24 (p. 207)
Here’s an example of a possible related party situation
How does this affect your audit opinion?
Copyright © 2007 Pearson Education Canada7-20
Client risk profile: Assess control environment and corporate
governance process
Corporate governance processes include ‘tone at the top,’ how senior executive is monitored, how management is managed
Control environment includes policies and procedures that affect all aspects of the business
Copyright © 2007 Pearson Education Canada7-21
Corporate governance and control environment
What happens when management does not pay attention to the ethical environment?
If a business is well run, with a corporate code of ethics that is demonstrated and enforced by management, what is the effect upon the auditor’s assessment of inherent risk?
Copyright © 2007 Pearson Education Canada7-22
Client risk profile: Assess risks of fraud
Why does the auditor need to assess risks of fraud?
Have you read anything recently that illustrates what can go wrong with senior management fraud?
Copyright © 2007 Pearson Education Canada7-23
Client risk profile: Decide on need for outside specialists
What type of specialist would you need for the following types of clients? Why?
A retail store that sells fashion clothing A distributor of electronics products An insurance company A fuel oil exploration and development
company
Copyright © 2007 Pearson Education Canada7-24
Primary purposes of audit planning
Provide information to assist in assessing audit risk and inherent risk
Affects client acceptance or continuance decision
Obtain information that influences evidence collection process
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Working papers
Can be stored in paper or electronic form Aid the auditor in providing reasonable
assurance that an adequate audit was conducted in accordance with GAAS
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Purposes of working papers
Basis for planning the audit Record of the evidence accumulated and
the results of the tests Data for determining the proper type of
auditor’s report Basis for review
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How are working papers organized?
Each firm has its own approach for organizing working papers
Organization will depend upon whether they are manual or electronic
Depends upon the firm standards used for documentation: may be firm specific or standard approaches that can be purchases
Copyright © 2007 Pearson Education Canada7-28
Types of working paper files
Permanent Current
– Risk assessment and materiality– Audit program– General information– Working trial balance– Adjusting and reclassification entries– Supporting schedules
Copyright © 2007 Pearson Education Canada7-29
Standards for preparing working papers
Properly identified Well organized (indexed and cross-
referenced) Clearly indicate the work performed
(including supervision) Sufficient documentation to indicate that it
meets the purpose for which it was prepared
Conclusions clearly stated
Copyright © 2007 Pearson Education Canada7-30
Practice problem 7-21 (p. 206)
Let’s look at an example working paper What have they done appropriately? What is missing or what needs to be done
differently?
Copyright © 2007 Pearson Education Canada7-31
Ownership and confidentiality of working papers
Ownership: auditor Client documentation must be kept
confidential: may be disclosed only to peer review, when subpoenaed, or in other circumstances with the consent of the client