1. 7 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 7 Audit Planning and Documentation

2. 7 - 2 Copyright  2003 Pearson Education Canada Inc. What are the main reasons for audit planning?

3. 7 - 3 Copyright  2003 Pearson Education Canada Inc. What are the main reasons for audit planning? - to enable the auditor to obtain suffi- cient appropriate evidence $

4. 7 - 4 Copyright  2003 Pearson Education Canada Inc. What are the main reasons for audit planning? - to enable the auditor to obtain suffi- cient appropriate evidence - to help keep audit costs reasonable

5. 7 - 5 Copyright  2003 Pearson Education Canada Inc. 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

6. 7 - 6 Copyright  2003 Pearson Education Canada Inc. Steps in audit planning obtain information about client’s legal obligations perform preliminary analytical procedures preplan obtain background information

7. 7 - 7 Copyright  2003 Pearson Education Canada Inc. early brainstorming about the audit preplan

8. 7 - 8 Copyright  2003 Pearson Education Canada Inc. - client acceptance issues What potential client might the auditor turn down? early brainstorming preplan

9. 7 - 9 Copyright  2003 Pearson Education Canada Inc. - client lacking integrity - financially unstable client - client unable to pay audit fees - client acceptance issues What potential client might the auditor turn down? early brainstorming preplan

10. 7 - 10 Copyright  2003 Pearson Education Canada Inc. Predecessor and Successor Auditors - Rules of Professional Conduct require the successor auditor to communicate with the predecessor.WHY?

11. 7 - 11 Copyright  2003 Pearson Education Canada Inc. - Rules of Professional Conduct require the successor auditor to communicate with the predecessorWHY? Predecessor and Successor Auditors to facilitate the successor auditor’s client acceptance decision

12. 7 - 12 Copyright  2003 Pearson Education Canada Inc. 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

13. 7 - 13 Copyright  2003 Pearson Education Canada Inc. - 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

14. 7 - 14 Copyright  2003 Pearson Education Canada Inc. 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

15. 7 - 15 Copyright  2003 Pearson Education Canada Inc. - 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 early brainstorming preplan

16. 7 - 16 Copyright  2003 Pearson Education Canada Inc. - client acceptance issues - identify client’s reasons for an auditWHY? early brainstorming preplan

17. 7 - 17 Copyright  2003 Pearson Education Canada Inc. - 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 preplan

18. 7 - 18 Copyright  2003 Pearson Education Canada Inc. - client acceptance issues - identify client’s reasons for an audit For a large business, what is the probable reason for an audit? early brainstorming preplan

19. 7 - 19 Copyright  2003 Pearson Education Canada Inc. - 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 preplan

20. 7 - 20 Copyright  2003 Pearson Education Canada Inc. - client acceptance issues - identify client’s reasons for an audit Because of audit risk, an auditor will typically gather more evidence for: ? early brainstorming preplan

21. 7 - 21 Copyright  2003 Pearson Education Canada Inc. - publicly held clients - clients with extensive indebtedness - clients changing ownership - newly formed, rapidly growing businesses Because of audit risk, an auditor will typically gather more evidence for: - client acceptance issues - identify client’s reasons for an audit early brainstorming preplan

22. 7 - 22 Copyright  2003 Pearson Education Canada Inc. What is an engage- ment letter and why is it necessary? - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter early brainstorming preplan

23. 7 - 23 Copyright  2003 Pearson Education Canada Inc. - 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. early brainstorming preplan

24. 7 - 24 Copyright  2003 Pearson Education Canada Inc. - 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 preplan

25. 7 - 25 Copyright  2003 Pearson Education Canada Inc. - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter The more specific, the better - including: early brainstorming preplan

26. 7 - 26 Copyright  2003 Pearson Education Canada Inc. - 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 preplan

27. 7 - 27 Copyright  2003 Pearson Education Canada Inc. - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter When should the letter be prepared and signed? early brainstorming preplan

28. 7 - 28 Copyright  2003 Pearson Education Canada Inc. - 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 preplan

29. 7 - 29 Copyright  2003 Pearson Education Canada Inc. - client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter - select audit team Considerations? early brainstorming preplan

30. 7 - 30 Copyright  2003 Pearson Education Canada Inc. - select audit team Considerations? Considerations? - training and overall experience early brainstorming preplan

31. 7 - 31 Copyright  2003 Pearson Education Canada Inc. - select audit team Considerations? Considerations? - training and overall experience - industry and client experience early brainstorming preplan

32. 7 - 32 Copyright  2003 Pearson Education Canada Inc. - select audit team Considerations? Considerations? - training and overall experience - industry and client experience - supervision early brainstorming preplan

33. 7 - 33 Copyright  2003 Pearson Education Canada Inc. - select audit team Considerations? Considerations? - training and overall experience - industry and client experience - supervision - need for specialists early brainstorming preplan

34. 7 - 34 Copyright  2003 Pearson Education Canada Inc. preplan Steps in audit planning obtain information about client’s legal obligations perform preliminary analytical procedures obtain background information

35. 7 - 35 Copyright  2003 Pearson Education Canada Inc. obtain background information Why should the auditor obtain background information?

36. 7 - 36 Copyright  2003 Pearson Education Canada Inc. - to identify the need for outside specialists obtain background information Why should the auditor obtain background information?

37. 7 - 37 Copyright  2003 Pearson Education Canada Inc. - to identify the need for outside specialists - to identify related parties ? obtain background information Why should the auditor obtain background information?

38. 7 - 38 Copyright  2003 Pearson Education Canada Inc. obtain background information Why should the auditor obtain background information? - affiliated company - principal owner - party that can influ- ence management - to identify the need for outside specialists - to identify related parties

39. 7 - 39 Copyright  2003 Pearson Education Canada Inc. 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.

40. 7 - 40 Copyright  2003 Pearson Education Canada Inc. obtain background information 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?

41. 7 - 41 Copyright  2003 Pearson Education Canada Inc. obtain background information 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

42. 7 - 42 Copyright  2003 Pearson Education Canada Inc. GAAS requires an extensive knowledge of the client’s business, industry and operations. obtain background information

43. 7 - 43 Copyright  2003 Pearson Education Canada Inc. obtain background information Why understand the client’s business, industry or operations?

44. 7 - 44 Copyright  2003 Pearson Education Canada Inc. - to determine if any unique accounting requirements exist Why understand the client’s business, industry or operations? obtain background information

45. 7 - 45 Copyright  2003 Pearson Education Canada Inc. - 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

46. 7 - 46 Copyright  2003 Pearson Education Canada Inc. - 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

47. 7 - 47 Copyright  2003 Pearson Education Canada Inc. - 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 Why understand the client’s business, industry or operations? obtain background information

48. 7 - 48 Copyright  2003 Pearson Education Canada Inc. obtain background information What are the auditor’s sources of industry information?

49. 7 - 49 Copyright  2003 Pearson Education Canada Inc. - 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 What are the auditor’s sources of industry information? obtain background information

50. 7 - 50 Copyright  2003 Pearson Education Canada Inc. Industry diversity is one reason why many auditors specialize. obtain background information Doe & Smith, public accountants “We know banks. Banks know us.”

51. 7 - 51 Copyright  2003 Pearson Education Canada Inc. preplan Steps in audit planning perform preliminary analytical procedures obtain background information obtain information about client’s legal obligations

52. 7 - 52 Copyright  2003 Pearson Education Canada Inc. obtain information about client’s legal obligations how?

53. 7 - 53 Copyright  2003 Pearson Education Canada Inc. - study articles of incorporation & bylaws obtain information about client’s legal obligations how? Articles of Incorporation

54. 7 - 54 Copyright  2003 Pearson Education Canada Inc. - study articles of incorporation & bylaws - study minutes of board and share- holder meetings Minutes of Board of Directors Meetings Ace Company obtain information about client’s legal obligations how?

55. 7 - 55 Copyright  2003 Pearson Education Canada Inc. - study articles of incorporation & bylaws - study minutes of board and share- holder meetings - study existing contracts obtain information about client’s legal obligations how?...it’s a deal!!

56. 7 - 56 Copyright  2003 Pearson Education Canada Inc. Why is this part of audit planning? obtain information about client’s legal obligations

57. 7 - 57 Copyright  2003 Pearson Education Canada Inc. Throughout the engage- ment, auditors will be observing evidence that may relate to these items and their disclosure. Why is this part of audit planning? obtain information about client’s legal obligations

58. 7 - 58 Copyright  2003 Pearson Education Canada Inc. preplan Steps in audit planning perform preliminary analytical procedure s obtain background information obtain information about client’s legal obligations

59. 7 - 59 Copyright  2003 Pearson Education Canada Inc. What is the purpose of preliminary analytical procedures?

60. 7 - 60 Copyright  2003 Pearson Education Canada Inc. What is the purpose of preliminary analytical procedures? - understanding the client’s industry - assessing going concern issues - indicating possible misstatements - reducing detailed tests

61. 7 - 61 Copyright  2003 Pearson Education Canada Inc. What are working papers?

62. 7 - 62 Copyright  2003 Pearson Education Canada Inc. What are working papers? auditor records of: procedures applied

63. 7 - 63 Copyright  2003 Pearson Education Canada Inc. What are working papers? procedures applied tests performed auditor records of:

64. 7 - 64 Copyright  2003 Pearson Education Canada Inc. What are working papers? procedures applied tests performed information obtained auditor records of:

65. 7 - 65 Copyright  2003 Pearson Education Canada Inc. What are working papers? procedures applied information obtained conclusions reached tests performed auditor records of:

66. 7 - 66 Copyright  2003 Pearson Education Canada Inc. Working papers Their objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS.

67. 7 - 67 Copyright  2003 Pearson Education Canada Inc. Working papers Working papers also provide: - a basis for planning the audit Their objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS. January

68. 7 - 68 Copyright  2003 Pearson Education Canada Inc. Working papers Working papers also provide: - a basis for planning the audit - a record of the evidence accumulated and the results of tests Their objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS. Ace Co. Audit File

69. 7 - 69 Copyright  2003 Pearson Education Canada Inc. Working papers 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 Their objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS.

70. 7 - 70 Copyright  2003 Pearson Education Canada Inc. Working papers 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 Their objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS.

71. 7 - 71 Copyright  2003 Pearson Education Canada Inc. Working papers Working papers include current files and permanent files. ?

72. 7 - 72 Copyright  2003 Pearson Education Canada Inc. Permanent files contain data of a historical nature of continuing relevance to current and future engagements. PERMANENT

73. 7 - 73 Copyright  2003 Pearson Education Canada Inc. CONTRACT 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) Articles of Incorporation

74. 7 - 74 Copyright  2003 Pearson Education Canada Inc. 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)

75. 7 - 75 Copyright  2003 Pearson Education Canada Inc. 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 - internal control information (flow- charts, descriptions of transaction cycles)

76. 7 - 76 Copyright  2003 Pearson Education Canada Inc. 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 - internal control information - results of prior audit analytical procedures

77. 7 - 77 Copyright  2003 Pearson Education Canada Inc. Does an audit client have a legal right to audit working papers?

78. 7 - 78 Copyright  2003 Pearson Education Canada Inc. Does an audit client have a legal right to audit working papers? NO!

79. 7 - 79 Copyright  2003 Pearson Education Canada Inc. audit working papers How does the provincial CA institutes’ Rules of Professional Conduct apply?

80. 7 - 80 Copyright  2003 Pearson Education Canada Inc. 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... During the course of an audit, auditors obtain information of a confidential nature which is retained in the working papers.

81. 7 - 81 Copyright  2003 Pearson Education Canada Inc. What are working paper tick marks? ~ ! @ # ^ & * “

82. 7 - 82 Copyright  2003 Pearson Education Canada Inc. What are working paper tick marks? symbols of audit work completed ~ ! @ # ^ & * “