modul 1-engagement planning

8/12/2019 Modul 1-Engagement Planning

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Module 1

ENGAGEMENTPLANNING


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Approach to Designing Tests of Details of Balances


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Auditingis a systematicprocess of objectively obtaining and

evaluating evidence regarding assertions about economicactions and events to ascertain the degree of

correspondence between the assertions and established

criteria and communicating the results to interested users.

Planning the engagement

1. Overall audit planning requirements.

2. Procedures followed Prior to obtaining a new client.

3. Audit planning procedures.

A.OVERALL AUDIT PLANNING RE QUIREMENTS

a. Management Assertions. Existence(assets)or occurrence (transactions).Completeness- all accounts included

. Valuation or allocation

. Valuation or allocation

. Presentation and disclosure


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General Transaction-Related Audit Objectives

1. Existence-Recorded transactions exist

2. Completeness-Existing transactions are recorded3. Accuracy-Recorded transactions are stated at the correct

amount

4. Classification-transactions included in the clients journals are

properly classified

5. Timing-Transactions are recorded on the correct dates.

6. Posting and Summarization-Recorded transactions are

properly included in the master files and are correctlysummarized.


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General Balanced-Related Audit Objectives

1. Existence-Amounts included exist

2. Completeness-Existing amounts are included

3. Accuracy-Amounts included are stated at the correct amounts.

4. Classification-Amounts included in the clients listing are properlyclassified.

5. Cutoff-Transactions near the balance sheet date are recorded in

the proper period.

6. Detail Tie-In Details in the account balance agree with relatedmaster file amounts, foot to the total in the account balance, and

agree with the total in the general ledger.

7. Realizable Value-Assets are included at the amounts estimated to

be realized.

8. Rights and Obligations

9. Presentation and Disclosure-Account balances and related

disclosure requirements are properly presented in the financial

statements.


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In planning and performing an audit, the auditor consider these assertions

for the various financial statement accounts. When all of these assertionshave been met for an account, the account is in conformity with GAAP.

(The Evidence Module)

b. Audit Risk ModelAudit risk = Inherent risk Control risk Detection risk

Audit riskis a measure of how willing the auditor is to accept that

the financial statements may be materially misstated after

the audit is completed and an unqualified opinion has been issued.

Inherent riskrefers to the likelihood of material misstatement of anassertion. This risk differs by account and assertion.

Control riskis the likelihood that a material misstatement will not be

prevented or detected on a timely basis by internal

control. This risk is assessed using the results of TOC.Detection riskis the likelihood that an auditors procedures lead to an

improper conclusion that no material misstatement exists

in an assertion when in fact such a misstatement does

exist. The auditors substantive tests are primarily relied

upon to restrict detection risk.


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c. Materiality

Analyze a materiality determination case and decide upon a

maximum amount of misstatement acceptable in a companys

financial statement.

An auditor must consider materiality both in (1) planning the audit

and designing audit procedures and (2) evaluating audit results.The measure of materiality may be either quantitative or

nonquantitative.

The auditor apportions the amount of materiality among the various

accounts (tolerable misstatement). This apportionment may be

based on factors such as the relative size of various accounts and

on professional judgment.

The measures of materiality used for evaluating purposes will

ordinarily differ from measures of materiality used for planning. This

is the result of information encountered during the audit.For evaluation purposes, the auditor is aware of qualitative aspects

of actual misstatements that s/he is not aware of during the planning

stage.


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d. Errors and fraudAn audit should be planned and performed to obtain reasonable

assurance about whether the financial statements are free of

material misstatement, whether caused by error or fraud.

Fraud includes (1) fraudulent financial reporting that makes the

financial statements misstatements (sometimes called management

fraud) and (2) misappropriation of assets(sometimes called

defalcation).

Auditor responsibility for error, fraud, and illegal acts.

e. Illegal ActsWhen an auditor discovers an act that mightbe illegal, s/he should

inquire of management at a level above those involved, if possible.

If management does not provide satisfactory information that there

has been no illegal act, the auditor should:1. Consult with the clients legal counsel or other specialists

2. Apply additional procedures such as- Examine supporting documents such as invoices, canceled

checks, and agreements and compare them with accounting

records.


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- Confirm significant information with the other involved party or with

intermediaries, such as banks or lawyers.- Determine whether the transaction has been properly authorized.

- Consider whether other similar transactions may be have occurred

and apply appropriate procedures.

When, based on procedures such as the above, the auditor believes thatan illegal act has or is likely to have occurred, the auditor should

1. Consider its financial statement effect

2. Consider its implications to other aspects of the audit, particularly the

reliability of representation by management.3. Communicate it to the audit committee.

4. Consider the need to modify the audit report as follows:

- Lack of disclosure is departure from GAAP and either a qualified or

an adverse opinion may be appropriate.

- Client-imposed scope restrictions will generally lead to a disclaimerof opinion.

- Circumstance-imposed scope restrictions may lead to either a

qualified opinion or a disclaimer of opinion.


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B. PROCEDURES FOLLOWED PRIOR

TO OBTAINING A NEW CLIENTThe overall goal is to determine whether to attempt to acquire the

client, and to gather adequate information so as to allow the auditor

to develop a proposal to be presented to the prospective client.

a. Communications Between Predecessor and Successor Auditor

Concepts such as the following:

1. Initiating the communication is the responsibility of the successor.2. If the prospective client refuses to permit the predecessor to

response, or limits the predecessors response, the successor

should inquire as to the reasons and consider the implications in

deciding whether to accept the engagement.3. The successors inquiries of the predecessor should include

Information bearing on integrityof management

Disagreementwith management as to accounting principles,

auditing procedures or other similarly significant matters.


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Communicationsto audit committee regarding fraud, illegal acts, and

internal control related matters.

Predecessors understanding of the reasons for the changein auditors.

b. Obtaining a General Understanding of the Client and Industry

Concerning the company itself, an auditor will generally tour the

clients facilities, and obtain an overall understanding of the clientsorganization, including the adequacy of its accounting records. In

addition to communicating with the predecessor auditor, the potential

successor will generally communicate with the companys audit

committee, its lawyers, and possibly with other practitioners and

bankers.

The process typically ends with a proposal to the client. If this proposal

is accepted, an engagement letter is ordinarily sent to the client.

c. Establishing an Understanding With the Client (EngagementLetters)

Auditors should establish an understanding with the client regarding

the services to be performed. Although this understanding may be

obtained orally or in writing, it must be documented in the working


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papers and is generally obtained through use of an engagement letter. The

engagement letter is sent to the client, who indicates approval through

returning a signed copy to the CPA.

The understanding must include four general topics: (1) objectives of the

engagement, (2) managements responsibilities, (3) auditors

responsibilities, and (4) limitations of the audit.

If an auditor believes that an understanding has not been established,s/he should decline to accept or perform the audit.

C. AUDIT PLANNING PROCEDURES

a. Developing an Overall StrategyThe nature, timing, and extent of planning will vary with the size and

complexity of the audit client, experience with the client, and

knowledge of the clients business. To develop an overall audit strategy,

the auditor may consider the following client and audit considerations:

Client cons iderat ions

1. Business and industry

2. Accounting policies and procedures

3. Methods of processing accounting information (e.g., computerservice center)


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4. Financial statement items likely to need adjustment

5. Considerations requiring extension of audit procedures (e.g., risk of

misstatement, related-party transactions)

Audi t considerat ion

6. Planned assessed level of control risk

7. Preliminary judgments about materiality levels8. Nature pf reports to be issued by auditor

In addition, the auditor may consider performing the following review and

Inquiry procedures during planning (this material has appeared as the

Solution to an essay question).Review of records

1. Correspondence, prior working papers, financial statements

2. Current years interim financial statements

Inquir ies w ithin CPA f irm

3. Effects of nonaudit services

4. Extent of assistance from specialists and consultants

5. Timing of audit work

6. Staffing requirements


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Inquir ies of cl ient

7. Current business developments8. Discussion of audit (e.g., type, scope, timing)

9. Effects of new accounting and auditing pronouncements

10. Coordinate client assistance, including that from internal auditors

b. Communicate With Predecessor AuditorsThis communication relates primarily to the review of working papers

related to opening balance and the consistency of application of

accounting principles. With regard to working papers:

1. Areas generally examined includeDocumentation of planning

Internal control

Audit results

Other matters of continuing accounting andauditing significance

such as analyses of balance sheet accounts

2. If in reviewing the working papers the successor identifies financial

statement misstatements, the successor should request that the client

inform the predecessor and arrange a meeting of the three parties.


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c. Analytical ProceduresDuring the planning stage the objective of analytical procedures is to assist

in planning the nature, timing, and extent of audit procedures that will be

used to obtain evidence for specific accounts.

1. Compare client and industry data

2. Compare client data with similar prior period data

3. Compare client data with client-determined expected results

4. Compare client data with auditor-determined expected results

5. Compare client date with expected results, using nonfinancial data

d. Consideration of Internal ControlThis understanding must be sufficient to allow the auditor to (1) identify

type of potential misstatements, (2) consider factors affecting the risk of

misstatements, and (3) design substantive tests.

e. Audit ProgramA written audit program must be developed and used for the audit.


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f. Supervision Requirement

Supervision includes instructing assistants. The work of each assistantshould be reviewed (1) to determine whether it was adequately performed

and (2) to evaluate whether the results are consistent with the

considerations to be presented in the audit report.

g. Timing of Audit ProceduresTiming of test of controls and substantive tests

modul 1-engagement planning

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