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

7 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 7Audit Planning

and Documentation


What are the What are the main reasonsmain reasons for audit for audit planningplanning??



- to enable the auditor to obtain sufficient appropriate evidence

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- to enable the auditor to obtain sufficient appropriate evidence- to help keep audit costs reasonable



- to enable the auditor to obtain sufficient appropriate evidence- to help keep audit costs reasonable- to avoid misunderstandings with the client


Steps in audit planningSteps in audit planning

obtaininformation

about client’s legalobligations

performpreliminaryanalytical

procedures

preplan

obtainbackgroundinformation


early brainstormingearly brainstormingabout the audit about the audit

preplan


- client acceptance issues

Whatpotential

client might theauditor turn

down?

early brainstormingearly brainstormingpreplan


- client lacking integrity- financially unstable client- client unable to pay audit fees


Whatpotential

client might theauditor turn

down?



Predecessor and Successor AuditorsPredecessor and Successor Auditors

- Rules of Professional Conduct require the successor auditor to communicate

with the predecessor.

WHY?WHY?


- Rules of Professional Conduct require the successor auditor to communicate

with the predecessor

WHY?WHY?


to facilitate the successor auditor’sclient acceptance decision



- Rules of Professional Conduct require the successor auditor to communicate with the predecessor- the client must give permission for the communication


- 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




- 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


- 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




- identify client’s reasons for an audit

WHY?WHY?



- client acceptance issues - identify client’s reasons for an audit

WHY?WHY? The client’s motivation for the

audit is one of the major factors affecting audit risk.




For a large business,For a large business,what is the what is the probableprobablereason for an audit?reason for an audit?




For a large business, what is the For a large business, what is the probable probable reason for an audit?reason for an audit?

Companies subject to securities commission regulation are required to have annual audits.




Because of Because of audit riskaudit risk, an auditor will, an auditor willtypically gather typically gather more evidencemore evidence for: for:

??



- publicly held clients- clients with extensive indebtedness- clients changing ownership- newly formed, rapidly growing businesses

Because of Because of audit riskaudit risk, an auditor will, an auditor willtypically gather typically gather more evidencemore evidence for: for:




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




The intent is todocument terms of the

audit and minimizemisunderstandings.




The letter iswritten by the auditor tothe client, then signed

by both.



- client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter

The morespecific, the better -

including:




The morespecific, the better -

including: fees

schedules

use of clientpersonnel




When should theletter be prepared

and signed?




When should theletter be prepared

and signed?

in advance of any audit procedures



- client acceptance issues - identify client’s reasons for an audit- obtain an engagement letter- select audit team

Considerations?Considerations?



- select audit team

Considerations?Considerations?- training and overall experience



- select audit team

Considerations?Considerations?- training and overall experience- industry and client experience



- select audit team

Considerations?Considerations?- training and overall experience- industry and client experience- supervision



- select audit team

Considerations?Considerations?- training and overall experience- industry and client experience- supervision- need for specialists



preplan


obtain information about client’s legal obligations perform

preliminaryanalytical

procedures




Why should the auditorWhy should the auditorobtain backgroundobtain background

information?information?


- to identify the need for outside specialists





- to identify the need for outside specialists- to identify related parties

?








- affiliated company- principal owner- party that can influ- ence management





information?information?- to identify the need for outside specialists- to identify related parties

GAAPrequires disclosure of

related partytransactions.






Whataudit procedures

may discloserelated parties?




information?information?- to identify the need for outside specialists- to identify related parties

- inquire of management- review shareholder records for principal shareholders


GAAS requires an extensiveGAAS requires an extensiveknowledge of the client’sknowledge of the client’sbusiness, industry and business, industry and

operations.operations.




Why understand theWhy understand theclient’s business, client’s business,

industry or operations?industry or operations?


- to determine if any unique accounting requirements exist





- to determine if any unique accounting requirements exist- to identify industry risks for setting acceptable audit risk





- 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





- 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 What are the auditor’s sources of industry sources of industry



- 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 What are the auditor’s sources of industry sources of industry




Industry Industry diversitydiversity

is one reason is one reason why many why many auditorsauditors

specializespecialize..


Doe & Smith, publicaccountants

“We know banks. Banks know us.”


preplan



procedures


obtaininformation

aboutclient’s legal obligations


obtaininformation


how?


- study articles of incorporation & bylaws

obtaininformation


how?

Articles of Incorporation


- study articles of incorporation & bylaws- study minutes of board and shareholder meetings Minutes of

Board of DirectorsMeetings

Ace Company

obtaininformation


how?


- study articles of incorporation & bylaws- study minutes of board and shareholder meetings- study existing contracts

obtaininformation

aboutclient’s legal obligations how?

...it’s a deal!!


Why is this part of audit planning?

obtaininformation



Throughout the engage-ment, auditors will be

observing evidence thatmay relate to these items

and their disclosure.

Why is this part of audit planning?

obtaininformation



preplan



procedures


obtaininformation



What is thepurpose of preliminary

analyticalprocedures?


What is thepurpose of preliminary analytical

procedures?

- understanding the client’s industry- assessing going concern issues- indicating possible misstatements- reducing detailed tests


What are What are working papersworking papers??



auditor records of:auditor records of:

proceduresapplied



proceduresapplied

testsperformed




proceduresapplied

testsperformed

informationobtained




proceduresapplied

informationobtained

conclusionsreached

testsperformed



Working papersWorking papersTheir objective is to aid the auditor in

providing reasonable assurance that anadequate audit was conducted in

accordance with GAAS.


Working papersWorking 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 inaccordance with GAAS.

January



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 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 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 papersWorking papersWorking papers include

current files andpermanent files.

?


Permanent filesPermanent files contain data of a contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance

to current and future engagements.to current and future engagements.

PERMANENT


CONTRACTCONTRACT

Permanent files contain data of a Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance


INCLUDE:- copies of client documents of continuing importance (e.g., articles of incorporation, bylaws, contracts)

Articles of Incorporation


Permanent files contain data of a Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance to current and future engagements.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 Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance to current and future engagements.to current and future engagements.


continuing importance - analyses from prior audits that have continuing importance - internal control information (flow- charts, descriptions of transaction cycles)


Permanent files contain data of a Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance



continuing importance- analyses from prior audits that have continuing importance - internal control information - results of prior audit analytical procedures


Does an audit client haveDoes an audit client havea legal right to audit a legal right to audit working papers?working papers?


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

papers?papers?

NO!NO!


audit working papersaudit working papers

How does theprovincial CA

institutes’ Rules of Professional

Conduct apply?


audit working papersaudit working papers

Confidential Client InformationConfidential Client InformationA member in public practice shall not discloseany 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 isretained in the working papers.


What are working paper What are working paper tick markstick marks??

~ ! @ # ^ & * “ < >


What are working paper What are working paper tick tick marksmarks??

symbols of audit work completed

~ ! @ # ^ & * “ < >

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