CHAPTER 7 Audit Planning and Documentation

1. CHAPTER 7Audit Planning and Documentation

2. What are the main reasons for audit planning?

3. What are the main reasons for audit planning? - to enable the auditor to obtain suffi- cient appropriate evidence $

4. What are the main reasons for audit planning? - to enable the auditor to obtain suffi- cient appropriate evidence - to help keep audit costs reasonable

5. What are the main reasons for audit planning? - to enable the auditor to obtain suffi- cient appropriate evidence - to help keep audit costs reasonable - to avoid misunderstandings with the client

6. preplan obtain background information Steps in audit planning obtain information about client’s legal obligations perform preliminary analytical procedures

7. preplan early brainstorming about the audit

8. early brainstorming preplan What potential client might the auditor turn down? - client acceptance issues

9. early brainstorming preplan What potential client might the auditor turn down? - client acceptance issues - client lacking integrity - financially unstable client - client unable to pay audit fees

10. Predecessor and Successor Auditors - Rules of Professional Conduct require the successor auditor to communicate with the predecessor. WHY?

11. Predecessor and Successor Auditors - Rules of Professional Conduct require the successor auditor to communicate with the predecessor WHY? to facilitate the successor auditor’s client acceptance decision

12. 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

13. 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

14. 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

15. early brainstorming preplan BANK - client acceptance issues If a prospective client has not been audited before, the auditor may base client acceptance on discussions with: - lawyers - banks - other businesses

16. early brainstorming preplan - client acceptance issues - identify client’s reasons for an audit WHY?

17. early brainstorming preplan - client acceptance issues - identify client’s reasons for an audit WHY? The client’s motivation for the audit is one of the major factors affecting audit risk.

18. early brainstorming preplan - client acceptance issues - identify client’s reasons for an audit For a large business, what is the probable reason for an audit?

19. early brainstorming preplan - 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.

20. early brainstorming preplan - client acceptance issues - identify client’s reasons for an audit Because of audit risk, an auditor will typically gather more evidence for: ?

21. early brainstorming preplan - 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

22. early brainstorming preplan What is an engage- ment letter and why is it necessary? - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter

23. early brainstorming preplan The intent is to document terms of the audit and minimize misunderstandings. - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter

24. early brainstorming preplan - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter The letter is written by the auditor to the client, then signed by both.

25. early brainstorming preplan The more specific, the better - including: - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter

26. early brainstorming preplan use of client personnel schedules The more specific, the better - including: fees - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter

27. early brainstorming preplan When should the letter be prepared and signed? - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter

28. early brainstorming preplan When should the letter be prepared and signed? - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter in advance of any audit procedures

29. early brainstorming preplan - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter - select audit team Considerations?

30. early brainstorming preplan - select audit team Considerations? - training and overall experience

31. early brainstorming preplan - select audit team Considerations? - training and overall experience - industry and client experience

32. early brainstorming preplan - select audit team Considerations? - training and overall experience - industry and client experience - supervision

33. early brainstorming preplan - select audit team Considerations? - training and overall experience - industry and client experience - supervision - need for specialists

34. obtain background information Steps in audit planning preplan obtain information about client’s legal obligations perform preliminary analytical procedures

35. obtain background information Why should the auditor obtain background information?

36. Why should the auditor obtain background information? obtain background information - to identify the need for outside specialists

37. Why should the auditor obtain background information? obtain background information ? - to identify the need for outside specialists - to identify related parties

38. Why should the auditor obtain background information? obtain background information - affiliated company - principal owner - party that can influ- ence management - to identify the need for outside specialists - to identify related parties

39. Why should the auditor obtain background information? obtain background information - to identify the need for outside specialists - to identify related parties GAAP requires disclosure of related party transactions.

40. Why should the auditor obtain background information? obtain background information - to identify the need for outside specialists - to identify related parties What audit procedures may disclose related parties?

41. Why should the auditor obtain background information? obtain background information - to identify the need for outside specialists - to identify related parties - inquire of management - review shareholder records for principal shareholders

42. obtain background information GAAS requires an extensive knowledge of the client’s business, industry and operations.

43. obtain background information Why understand theclient’s business, industry or operations?

44. Why understand theclient’s business, industry or operations? obtain background information - to determine if any unique accounting requirements exist

45. Why understand theclient’s business, industry or operations? obtain background information - to determine if any unique accounting requirements exist - to identify industry risks for setting acceptable audit risk

46. Why understand theclient’s business, industry or operations? obtain background information - 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

47. Why understand theclient’s business, industry or operations? obtain background information • - 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

48. obtain background information What are the auditor’s sources of industry information?

49. What are the auditor’s sources of industry information? obtain background 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

50. obtain background information Doe & Smith, public accountants “We know banks. Banks know us.” Industry diversity is one reason why many auditors specialize.