Audit Planning and Documentation

What are the main reasons for audit planning? - to enable the auditor to obtain sufficient appropriate evidence

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

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

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

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

early brainstorming about the audit preplan early brainstorming about the audit

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

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

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

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

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

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

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

early brainstorming - client acceptance issues preplan - 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 BANK

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

WHY? early brainstorming - client acceptance issues 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.

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

early brainstorming - client acceptance issues 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.

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

early brainstorming Because of audit risk, an auditor will 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

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

early brainstorming - client acceptance issues preplan - 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.

written by the auditor to 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.

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

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

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

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

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

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

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

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

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

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

Why should the auditor obtain background information?

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

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

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 influ- ence management

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

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

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

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

Why understand the client’s business, industry or operations? obtain background information Why understand the client’s business, industry or operations?

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

Why understand the client’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

Why understand the client’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

Why understand the client’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

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

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

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

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

obtain information about client’s legal obligations how?

how? - study articles of incorporation & bylaws obtain information about client’s legal obligations how? - study articles of incorporation & bylaws Articles of Incorporation

how? - study articles of incorporation & bylaws - study minutes of obtain information about client’s legal obligations how? - study articles of incorporation & bylaws - study minutes of board and share- holder meetings Minutes of Board of Directors Meetings Ace Company

how? - study articles of incorporation & bylaws obtain information about client’s legal obligations how? - study articles of incorporation & bylaws - study minutes of board and share- holder meetings - study existing contracts ...it’s a deal!!

Why is this part of audit planning? obtain information about client’s legal obligations

Why is this part of audit planning? obtain information about client’s legal obligations Throughout the engage- ment, auditors will be observing evidence that may relate to these items and their disclosure.

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

What is the purpose of preliminary analytical procedures?

What is the purpose of preliminary analytical procedures? - understanding the client’s industry - assessing going concern issues - indicating possible misstatements - reducing detailed tests What is the purpose of preliminary analytical procedures?

What are working papers?

What are working papers? auditor records of: procedures applied

What are working papers? auditor records of: procedures applied tests performed

What are working papers? auditor records of: procedures applied tests performed information obtained

What are working papers? auditor records of: procedures applied information obtained conclusions reached tests performed

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 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 January

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 Ace Co. Audit File

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

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

Working papers include current files and permanent files. ?

Permanent files contain data of a historical nature of continuing relevance to current and future engagements. PERMANENT

Permanent files contain data of a historical nature of continuing relevance to current and future engagements. INCLUDE: - copies of client documents of continu- ing importance (e.g., articles of incor- poration, bylaws, contracts) CONTRACT CONTRACT Articles of Incorporation

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 (e.g., bond premium amortization, depreciation)

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 - internal control information (flow- charts, descriptions of transaction cycles)

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 - internal control information - results of prior audit analytical procedures

Does an audit client have a legal right to audit working papers?

Does an audit client have a legal right to audit working papers? NO!

audit working papers How does the provincial CA institutes’ Rules of Professional Conduct apply? audit working papers

audit working papers 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.

What are working paper tick marks? ~ ! @ # ^ & * “ < >

What are working paper tick marks? ~ ! @ # ^ & * “ < > symbols of audit work completed