1. Chapter 3
Engagement Planning
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2. Audit Planning Abraham Lincoln
“If I had 6 hours to chop down a tree, I’d spend the first four sharpening my axe.”
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3. 1. Audit Process Stages of an audit 1. Initial audit planning
2. Obtain an understanding of the client and its environment, including internal control
3. Assess the risks of material misstatement and design further audit procedures
4. Perform further audit procedures
5. Complete the audit
6. Form an opinion and issue the audit report
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4. 1. Audit Process AU-C 300 Planning an Audit
Preliminary engagement activities auditor should take at beginning of engagement
perform procedures required by Quality Control Standards
evaluate compliance with ethical requirements
establish an understanding of the terms of engagement
Performance Principle: To obtain reasonable assurance the auditor must:
Plan work and supervise assistants
Planning involves developing an overall audit strategy - not a discrete phase of audit
Supervision involves directing the efforts of all assistants involved in the audit
Determine and apply appropriate materiality levels
Identify and assess risks of material misstatement based on understanding of business and internal control
Obtain sufficient appropriate evidence
Objective: plan the audit so that it will be performed in an effective manner
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5. 1. Audit Process AU-C 210 Terms of Engagement
Objective of auditor is to accept an engagement for a new or existing audit client only when the basis upon which it is to be performed has been agreed upon
establishing whether the preconditions for audit are present
confirming that common understanding exists between auditor and management
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6. 1. Audit Process Preconditions of audit
determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable
obtain the agreement of management that it acknowledges and understands its responsibility
for preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework
for the design, implementation, and maintenance of internal control
to provide the auditor with
access to all information relevant to preparation and fair presentation of the financial statements
additional information that the auditor may request from management for the purpose of the audit
unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence
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7. Happiness Is it important for CPAs to be happy in their job? retention
productivity
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8. Happiness What makes CPAs happy in their job? Hope Calling Autonomy
belief in a better professional future
goals and multiple paths to achieve them
Calling
sense of purpose, excitement, passion about your work
saying would do job for free
Autonomy
Being free to do your job the way you see best
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9. Happiness What area within public accounting is the happiest?
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10. Happiness What level in management accounting is the happiest?
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11. 2. Structure of CPA Firm ACCT-4080 Chapter 3 Positions in firm
Pyramid shape
up or out
effect of automation/outsourcing
Partnership potential
Accounting graduates
Grads AICPA Trends Report
Women in public accounting
Lawsuit Fortune article
Minorities in public accounting
AICPA Trends Report
Work load
Busy season
Size of firm
Size of engagement team
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12. 3. Preliminary Arrangements
Early appointment of auditors
Evaluate client
integrity of management
special risks
Evaluate your resources
staffing
interim vs. year-end work
time budget
independence
Quality assurance partner
required on issuer engagements
provides second review on high risk areas of audit
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13. 3. Preliminary Arrangements (continued)
Communicate with predecessor auditor (AU-C 210)
integrity of management
disagreements with management
reason for auditor change
required communications
Engagement letter (AU-C 210)
purpose
First time audits
auditing opening balances (AU-C 510)
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14. 3. Preliminary Arrangements (continued)
Using work of internal auditors (AU-C 610)
objectivity
competence
Identification of related parties (AU-C 550)
IT in an audit
IT audit specialist
CAATs in an audit
ACL, IDEA, proprietary software
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15. 4. Evidence Provided by Specialists
AU-C 620
Definition - a person (or firm) possessing special skill or knowledge in a particular field other than accounting or auditing
Examples: actuaries, appraisers, engineers, environmental consultants, geologists, and attorneys
Consider qualifications, experience, reputation
Independence
Review of work
Effect on audit report
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16. 7. Effect of Electronic Environment on Audit
Risks
risks related to hardware and software
reduced audit trail
need for IT experience and separation of IT duties
No effect on
purpose of audit (e.g., gathering sufficient appropriate evidence)
importance of management’s assertions
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17. 8. Materiality
AU-C 320 – Materiality in Planning and Performing the Audit
Definition
Assessing materiality
quantitative factors
qualitative factors
Materiality guidelines
SEC caution
Accounting materiality
ex post decision process
Auditing materiality
ex ante decision process
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18. 8. Materiality (continued)
Financial statement level materiality
methods to establish
annualizing financial results
Performance materiality
tolerable error
Clearly trivial
Top down approach
Cost benefit considerations
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19. 8. Materiality (continued)
Cumulative effects
Factual (no doubt actual error), judgmental (arise from management estimates), and projected (from sampling projections) errors
(known error and likely error)
Requirements to quantify materiality
Relationship between audit risk and materiality
Nonadditive nature of tolerable error
Materiality example example2
Should materiality be disclosed by auditors?
Materiality expectations gap
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20. 9. Audit Tests and Procedures
Tests Related to 2nd Field Work Standard
risk assessment procedures (used to obtain an understanding)
inquiry, inspection, observation, analytical procedures, walk through, and prior experience
tests of controls (used to determine effectiveness of controls you intend to rely upon)
inquiry, inspection, observation, prior experience, and reperforming
Accounting 408
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21. 9. Audit Tests and Procedures
Tests Related to 3rd Field Work Standard
substantive tests
substantive analytical procedures (used to verify account balances)
usually uses disaggregated and nonfinancial data
tests of details
of transactions (used to gain assurance that data produced by accounting system is accurate)
vouching, tracing, reperforming, etc.
of balances (used to verify account balances)
confirming, reconciling, observing, etc.
Accounting 408
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22. 9. Audit Tests and Procedures
inspecting
observing
confirming
inquiring
tracing
vouching
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23. 9. Audit Tests and Procedures
scanning
counting
recalculating
reperforming
analytical procedures
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24. 10. Audit Programs Transactions cycles Audit plans Audit programs
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25. 11. Audit Documentation AU-C 230 Purpose
Factors affecting type and content
Ownership
Organization
permanent file
current file
Electronic workpapers
AS 3 requirements
completion date – 45 days after report date
Retention – at least 7 years
additions/amendments – no deletions; fully documented additions
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26. 11. Audit Documentation (con’t)
Types
working trial balance
lead schedules
supporting schedules
adjusting journal entries
reclassification journal entries
Indexing
Tick marks
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27. Current File Other Lead Schedules Supporting Schedules
APOLLO SHOES, INC. C-1
Inventory Lead Schedule
Current File
APOLLO SHOES, INC. B-1
Accounts Receivable Lead Schedule
Other Lead Schedules
APOLLO SHOES, INC. A-3
Bank Confirmation
APOLLO SHOES, INC. A-2
First National Bank Reconciliation
APOLLO SHOES, INC. A-1
Cash Lead Schedule
12/31/04
Ref Account Unaudited AJE Balance
C rst Natl $484,000 $50,000 $534,000
Supporting Schedules
APOLLO SHOES, INC. TB-1
Working Trial Balance
12/31/04
Ref Account Unaudited AJE Balance
A-1 Cash $484,000 $50,000 $534,000
B-1 A/R
C-1 Inventory
APOLLO SHOES, INC. TB-2
Adjusting Entries
dr cr
Cash $50,000
Expenses $50,000
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28. Audit Documentation Information on Workpaper
Name, date, purpose, page number
Procedures performed and conclusions reached by the auditor
Evidence that auditor followed general standards and standards of field work
Audit Mark Legend
Reviewers’ initials
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29. 12. Review Questions for Discussion
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3.2
3.3
3.6
3.7
3.9
3.10
3.11
3.13
3.16
3.19
3.20
3.23
3.24
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