1. Chapter 4 Engagement Planning "Vision without action is a daydream.
Action without vision is a nightmare.”
- - Japanese Proverb
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 4-2
Goals of Planning
Obtain (or update) an understanding of important events that have affected the client and its operations
Identify areas of the engagement that may represent special risks to the public accounting firm.
Ensure that the engagement can be completed in a timely fashion

3. Pre-Engagement Arrangements
4-3
Pre-Engagement Arrangements
Client selection and retention
Communication between predecessor and successor auditors
Engagement letters
Staff assignment
Time budget

4. Communication between Predecessor and Successor Auditors (SAS 84)
4-4
Communication between Predecessor and Successor Auditors (SAS 84)
Attempt to communicate required
If client permits, issues to discuss
Disagreements about accounting principles or audit procedures.
Communications the predecessor auditors gave the former client about fraud, illegal acts, and internal control recommendations.
The predecessor auditors’ understanding about the reasons for the change of auditors (particularly about the predecessor auditors’ termination).

5. Understanding the Client’s Business
4-5
Understanding the Client’s Business
Methods and sources of information
Inquiry, including prior year working papers
Observation
Study
Other aspects of planning
Materiality and planning
First-time audits
Internal auditors
Identification of related parties
Specialists
Analytic procedures

6. Enterprise Risk Management Framework
4-6
Enterprise Risk Management Framework
Monitoring
Internal Environment
Objective
Setting
Event
Identification
Information
and
Communication
Risk
Assessment
Risk
Response
Control
Procedures

7. Planning Memorandum 4-7 Summary of planning procedures Considerations
1. Investigation or review of the prospective or continuing client relationship.
2. Provision of special services or reports and needs for special technical or industry expertise.
3. Staff assignment and timing schedules.
4. Assessed level of control risk.
5. Significant industry or company risks.
6. Computer system control environment.
7. Utilization of the company’s internal auditors.
8. Identification of unusual accounting principles problems.
9. Schedules of work periods, meeting dates with client personnel, and completion dates.
Basis for audit program

8. Preliminary Analytic Procedures (SAS 56)
4-8
Preliminary Analytic Procedures (SAS 56)
RECORDED ACCOUNT BALANCE
ESTIMATED ACCOUNT
BALANCE
Attention directing
Identify potential problem areas
An organized approach
A standard starting place to start examining the financial statements
Describe the financial activities
Identify unusual changes in relationships in the data
Ask relevant questions
What could be wrong?
What legitimate reasons are there for these results?
Cash flow analysis

9. Analytic Procedure Steps
4-9
Analytic Procedure Steps
Develop an expectation.
Define a significant difference.
Calculate predictions and compare them with the recorded amount.
Investigate significant differences.
Document each of the above steps.

10. Analytic Procedures: Sources of Information
4-10
Analytic Procedures: Sources of Information
Analytic Procedures
Sources of Information
Comparison of current-year account balances to those of one or more comparable periods
Financial account information for comparable periods.
Comparison of the current-year account balances to anticipated results found in the company’s budgets and forecasts.
Company budgets and forecasts.
Evaluation of the relationships of current-year balances to other current-year balances for conformity with predicable patterns based on the company’s experience.
Financial relationships among accounts in the current period (ratios).
Comparison of the current-year account balances and ratios with similar industry information.
Industry statistics.
Study of the relationships of current-year balances with relevant nonfinancial information (e.g., production statistics).
Nonfinancial information, such as production statistics.

11. Analytic Procedures: Stages of Use
4-11
Analytic Procedures: Stages of Use
Preliminary planning-- required
Substantive testing -- optional
Final review -- required

12. Effect of Electronic Environment on Audit Engagement
4-12
Effect of Electronic Environment on Audit Engagement
The definition of auditing is not changed.
The purposes of auditing are not changed.
The generally accepted auditing standards are not changed.
The assertions of management embodied in financial statements are not changed.
The requirement to gather sufficient competent evidence is not changed.
The independent auditor's report on financial statements is not changed.

13. 4-13
What has changed?
The auditor must evaluate the impact of technology on the client’s operations.
The auditor must evaluate computer controls implemented by the client in the auditor’s study and evaluation of the client’s internal controls.
The auditor can use the computer’s speed and accuracy to assist in the audit.

14. Effect of Computer Processing on Transactions
4-14
Effect of Computer Processing on Transactions
Transaction trails
Uniform processing of transactions
Segregation of duties
Potential for fraud
Potential for increased management supervision
Initiation or subsequent execution of transactions by computer

15. Planning considerations
4-15
Planning considerations
Extent to which computers are used
Complexity of computer operations
Organizational structure of computer processing
Availability of data
Use of CAATs- the use of software to perform audit procedures
Need for specialized skills

16. Computer Assisted Audit Tools and Techniques (CAATs)
4-16
Computer Assisted Audit Tools and Techniques (CAATs)
With CAATS, the auditor is able to access and extract client information without disrupting data processing.
Some CAATs Procedures:
Calculate field statistics (totals, high, low and average value)
Perform complex recalculations
Join, concantenate and compare different files
Perform detailed analysis
Stratification
Gap and duplicate key detection
Sample selection

17. Audit Documentation (AS 3)
4-17
Audit Documentation (AS 3)
Definition
The written record of the basis for the auditor’s conclusions that provides the support for the auditor's representations, whether those representations are contained in the auditor's report or otherwise.
Objectives
Improve audit quality
Enhance public confidence
Contents
Planning and performance of the work
Procedures performed
Evidence obtained
Conclusions reached by the auditor

18. Purposes of Audit Documentation
4-18
Purposes of Audit Documentation
Integral part of audit quality
Documents the nature, timing and extent of work performed
Evidence of due professional care
Basis for conclusion
Facilitates planning, performance and supervision
Provides basis for review

19. Audit Documentation Files
4-19
Audit Documentation Files
Current files
Permanent files
Prior year files

20. Exhibit 4.6 Current Audit Documentation File
4-20

21. Exhibit 4.7 Illustrative Audit Documentation
4-21
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
Insert Exhibit 4.7

22. Audit Documentation Requirements
4-22
Audit Documentation Requirements
Audit documentation should be prepared in sufficient detail to enable an experienced auditor having no previous connection with the engagement to:
Understand the nature timing, extent and results of procedures, evidence obtained and conclusions reached.
Determine who performed the work, date of work, reviewer and date of review.
Audit documentation should provide a clear link to significant findings or issues and
Demonstrate compliance with PCAOB standards.
Support basis for conclusions on every relevant assertion.
Document that accounting records agree with financial statements.

23. Significant Findings or Issues
4-23
Significant Findings or Issues
Selection, application and consistency of accounting principles, including disclosures
Results of procedures that indicate need for significant modification of procedures, existence of material misstatements, significant deficiencies in controls
Audit adjustments
Disagreements
Circumstances that cause significant difficulty
Significant changes in assessed audit risk
Matters that could result in report modification

24. Specific Audit Documentation Matters
4-24
Specific Audit Documentation Matters
Should include identification of items inspected, confirmed or tested.
Satisfied by indicating source and selection criteria.
Documentation of inspected agreements should include abstracts or copies.
Should include contradictory information found
Information the auditor has identified relating to significant findings or issues that is inconsistent with or contradicts the auditor’s final conclusions.
Procedures performed in response.
Records documenting consultation on or resolutions of differences among team and with others consulted.

25. Engagement Completion Document (AS 3)
4-25
Engagement Completion Document (AS 3)
Must include all significant findings or issues.
Must include items identified during interim review.
Must have completed all necessary procedures and obtained sufficient evidence before report release date.
Documentation should be complete (documentation completion date) no more than 45 days after report release date.

26. Documentation Retention (AS 3)
4-26
Documentation Retention (AS 3)
Documentation must be retained seven years from report release date.
If no report—from last day of fieldwork
Additions/Amendments
Documentation may not be deleted or discarded after report release date.
Additions must indicate
Date the information was added
Name of preparer
Reason

27. Specific Documentation Retention Requirements (AS 3)
4-27
Specific Documentation Retention Requirements (AS 3)
Issuing office must retain prior to report release date
Engagement completion document
List of significant fraud risk factors, responses and results of related procedures
Inconsistent or contradictory information
Finding affecting consolidating or combining of accounts
Information to reconcile amounts audited by other auditors to consolidated financial statements
Schedule of audit adjustments
All significant control deficiencies and material weakness and clear distinction between categories
Representation letters
Matters to be communicated to audit committee

28. Audit Documentation Review
4-28
Audit Documentation Review
Hierarchical review process
Reviewers include
New auditors
Supervisory personnel
Engagement supervisors and quality reviewers
Successor auditor
Inspection teams
Others including advisors engaged by the audit committee or parties to an acquisition

29. Other Issues Related to Audit Documentation
4-29
Other Issues Related to Audit Documentation
Ownership
Auditors maintain ownership, even after auditor-client relationship is over.
Confidentiality
Only can be made public with permission, or if subpoenaed, or as part of a peer review of firm practices, or as part of an ethics investigation of firm personnel.