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Chapter 3
Engagement Planning
ACCT-4080 1Chapter 3
Chapter 3 2
1. Audit Process Stages of an audit
1. Initial audit planning2. Obtain an understanding of the client and
its environment, including internal control3. Assess the risks of material misstatement
and design further audit procedures4. Perform further audit procedures5. Complete the audit6. Form an opinion and issue the audit report
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1. Audit Process AU-C 300 Planning an Audit
Performance Principle (FW Std. No. 1): The auditor must adequately plan the work and must properly supervise any 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
Objective is to plan the audit so that it will be performed in an effective manner
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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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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 that is relevant to the 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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2. Structure of CPA Firm Positions in firm Up or out Partnership potential Women in public accounting Work load Busy season Size of firm Size of engagement team
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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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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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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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4. Evidence Provided bySpecialists
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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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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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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8. Materiality (continued)
Financial statement level materiality methods to establish annualizing financial results
Account balance level materiality performance materiality tolerable error
Clearly trivial Top down approach Planning materiality vs. final evaluation level materiality Cost benefit considerations
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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) Relationship between audit risk and materiality Nonadditive nature of tolerable error Materiality example example2
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9. Audit Tests and Procedures Risk assessment procedures
procedures to obtain understanding of client, its environment, including IC
observation, inquiry, inspection, and analytics (walkthrough) Tests of controls
procedures to determine the operating effectiveness of controls inquiry, observation, inspection, reperformance
Substantive tests procedures to verify account balances activities performed to detect material misstatement or fraud at
assertion level includes tests of balances, transactions, and SAP
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9. Audit Tests and Procedures inspecting observing confirming inquiring tracing vouching
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9. Audit Tests and Procedures
scanning counting recalculating reperforming analytical procedures
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10. Audit Programs Transactions cycles Audit plans Audit programs
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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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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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APOLLO SHOES, INC. C-1Inventory Lead Schedule
APOLLO SHOES, INC. B-1Accounts Receivable Lead Schedule
Current File
APOLLO SHOES, INC. A-3Bank Confirmation
APOLLO SHOES, INC. A-2First National Bank Reconciliation
APOLLO SHOES, INC. A-1Cash Lead Schedule12/31/04
Ref Account Unaudited AJE BalanceC-1 1rst Natl $484,000 $50,000 $534,000
APOLLO SHOES, INC. TB-1Working Trial Balance12/31/04
Ref Account Unaudited AJE BalanceA-1 Cash $484,000 $50,000 $534,000B-1 A/R C-1 Inventory
APOLLO SHOES, INC. TB-2Adjusting Entries
dr crCash $50,000 Expenses $50,000
Other Lead Schedules
Supporting Schedules
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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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12. Review Questions for Discussion
Chapter 33.23.33.63.73.93.103.11
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3.133.163.193.203.233.24
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