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


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


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


Practice problem 7-19 (p. 205)

What do you do before you begin fieldwork?

What are your resources?


Preplanning

New client acceptance or client continuance

Client’s reasons for audit Independence threat analysis Engagement letter Staffing capabilities and meetings


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


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?


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


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


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?


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


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


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


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?


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


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



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


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?



Here’s an example of a possible related party situation

How does this affect your audit opinion?


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


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?


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?


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


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


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


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


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


Types of working paper files

Permanent Current

– Risk assessment and materiality– Audit program– General information– Working trial balance– Adjusting and reclassification entries– Supporting schedules


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



Let’s look at an example working paper What have they done appropriately? What is missing or what needs to be done

differently?


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

copyright © 2007 pearson education canada 7-1 chapter 7: audit planning and documentation

Documents

client risk profileexplain

clients business risk

client continuancewould

audit team

purposes of audit

neededclient risk profile

industryclient risk

engagement letterdiscuss