Ch5-PlanningandDocument

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Chapter 5 Audit Planning and Documentation

LEARNING OBJECTIE!

1. Understand the nature and purposes of an engagement letter.

2. Explain the importance and elements of audit planning.

3. Explain the purposes of audit working paper and apply the concepts behind the

preparation and organization of audit working papers.

S o u r c e o f

K n o w l e d g e

o f C l i e n t

K e y M a t t e r s t o

U n d e r s t a n dC l i e n t ' s B u s i n e s s

O p e r a t i o n

C o n t i n u a n c e o f

a n E x i s t i n g

A u d i t

F a c t o r s f o r

A c c e p t i n g

N e w C l i e n t

C a n g e s i n

! r o f e s s i o n a l

A p p o i n t " e n t

E n g a g e " e n t

# e t t e r

A u d i t

E n g a g e " e n t

B e n e f i t s

A u d i t

S t r a t e g y

! r e l i " i n a r y

A n a l y t i c a l

! r o c e d u r e s

M a t e r i a l i t y

i n A u d i t

! l a n n i n g

A s s e s s $ i s %

o f M a t e r i a l

M i s s t a t e " e n t s

A u d i t

! l a n n i n g

! u r p o s e s

C o n t e n t

S t a n d a r d i s e d

& o r % i n g

! a p e r s

A u d i t

F i l e s

A u d i t

o c u " e n t a t i o n

A u d i t

! l a n n i n g

a n d

o c u " e n t a t i o n

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"# Audit Engagement

1.1 "he following issues must be considered when deciding the acceptance and

retention of client because this may affect the reliability of financial information

pro#ided by the client.

$a% &nowledge of existing or potential client's business and industry.

$b% (ode of ethics for professional accountants $refer to (hapter 3%.

$c% )ndependence of the audit team $refer to (hapter 3%.

$d% "erms of engagement.

"#$ %no&ledge o' client() *u)ine))

1.2.1 *&+, 31 Understanding the Entity and Its Environment and Assessing the Risks

of Material Misstatement re-uires auditors to ac-uire knowledge of client's

business before and during the audit engagement.

1.2.2 efore accepting an engagement/ auditors would obtain a preliminary knowledge

of the industry and of the background of the entity to be audited so as to assess their

ability to undertake the audit.

1.2.3 !ource) o' +no&ledge o' client() *u)ine)) ,June -./ Dec "0/ Jun "12

$a% Re3ie& o' pre3iou) 4ear)( audit 'ile) to obtain pre#ious experience with the

entity and its industry.

$b% Di)cu))ion) &ith management of the entity.

$c% Di)cu))ion) &ith internal auditor and re#iew of internal audit report.

$d% Di)cu))ion) &ith )peciali)t) including other auditors/ legal ad#isors/ and

other knowledgeable people.

$e% Pu*lication) related to the industry.

$f% Legi)lation and regulation) that significantly affect the entity.

$g% i)it) to the entity's premises and plant facilities.

$h% Internal document) of the entity.

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1.2.0 %e4 matter) to under)tand the client() *u)ine)) operation

,Jun ""/ Dec "$/ Jun "0/ Dec "0/ Jun "1/ Dec "12

$a% Nature o' re3enue )ource) all o#er the world or ust in certain locations

$b% %e4 cu)tomer) large number of customers across the whole population

$c% Product) or )er3ice) and mar+et) facing with keen competition

4ifferent types of products for sales

$d% Conduct o' operation) 5ainly on cash sales or credit sales 6perate in a

computerized billing system

$e% Emplo4ment mainly in full!time staff or part!time staff

$f% Geographical di)per)ion

$g% Alliance)/ 6oint 3enture)/ and out)ourcing acti3itie)

$h% Re)earch and de3elopment acti3itie) and e7penditure)

8ue)tion "

*&+, 31 Understanding the Entity and )ts En#ironment and ,ssessing the 7isks of

5aterial 5isstatement re-uires auditors to ac-uire knowledge of client's business before

and during the engagement.

8rom what sources can 4a#id ac-uire knowledge of 89's business and industry

$ marks%

$*&),," :E :aper ))) ,uditing and )nformation +ystems ;une 2


4/17

"#0 Continuance o' an e7i)ting audit

,Dec "$2

1.3.1 9actor) to *e con)idered 'or the continuance o' an e7i)ting audit

$a% "he integrity of the principal owners/ key management and those charged

with go#ernance of the entity.

$b% ?hether the engagement team is competent to perform the audit engagement

and has the necessary capabilities/ including time and resources.

$c% ?hether the firm and the engagement team can comply with rele#ant ethical

re-uirements.

$d% +ignificant matters that ha#e arisen during the current or pre#ious audit

engagement/ and their implications for continuing the relationship.

"#1 Acceptance o' ne& audit engagement

,Jun "-/ Dec ""/ Jun "02

1.0.1 9actor) to *e con)idered &hen accepting a ne& engagement

$a% "he +no&ledge for an engagement e.g. preliminary knowledge of the

ownership/ directors/ management and operations of the entity

$b% "he integrit4 o' management.$c% ?hether the auditor is competent to per'orm the audit engagement/ for

example whether the auditor is familiar with the rele#ant industry.

$d% ?hether the auditor has the ade:uate time and re)ource) to complete the

audit.

$e% ?hether the acceptance of such a new client will *reach the pro'e))ional

ethic) of independence and other professional ethics.

1.0.2 Precondition) *e'ore accepting a ne& engagement under ;%!A $"- ,Clari'ied2

,Jun "$2

$a% 4etermine whether the financial reporting framework to be applied in the

preparation of the financial statements is acceptable@ and

$b% 6btain the agreement of management that it acknowledges and understands

its responsibilityA

$i% for the preparation of the financial statements in accordance with the

applicable financial reporting framework/ including where rele#ant

their fair presentation@

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$ii% for such internal control as management determines is necessary to

enable the preparation of financial statements that are free from

material misstatement/ whether due to fraud or error@ and

$iii% to pro#ide the auditor withA1. access to all information of which management is aware that is

rele#ant to the preparation of the financial statements such as

records/ documentation and other matters@

2. additional information that the auditor may re-uest from

management for the purpose of the audit@ and

3. unrestricted access to persons within the entity from whom the

auditor determines is necessary to obtain audit e#idence.

"#5 Change) in pro'e))ional appointment

,Jun "-2

1..1 O*ligation) o' the incoming auditor) regarding the change in auditor)

$a% 8ind out whether the change o' auditor &a) properl4 dealt &ith in

accordance &ith the Companie) Ordinance andBor other legislation@ and

$b% re-uest the prospecti#e client's permi))ion to communicate &ith the

auditor la)t appointed. )f the prospecti#e client does not permit the member

to do so/ he should decline the offer.

$c% ,fter recei#ing the permission to communicate with the pre#ious auditor/ the

new auditor should write to pre#ious auditor to o*tain pro'e))ional

clearance@ that is/ a re-uest in writing to pre#ious auditor to establish if

there are any unusual circumstances surrounding the proposed change which

the new auditor should be aware of/ so that the new auditor may determine

whether he or she should accept such nomination.

8ue)tion 0

$a% ?hat are the responsibilities of the auditors regarding the acceptance of the audit

engagement $ marks%

$b% ?hat are the obligations of the incoming auditors regarding the change in auditors

of C8 9imited $ marks%

$*&),," :E :aper ))) ,uditing and )nformation +ystems ;une 21$a%D$b%%

$c% ?hat matter should be considered by (, D (o. for the acceptance of a new

client $0 marks%

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$*&),," :E :aper ))) ,uditing and )nformation +ystems 4ecember 21$a%%

"#< Engagement letter

1..1 *&+, 21< F"erms of ,udit EngagementG re-uires an auditor to agree the terms of

engagement with the new client and to issue letters of engagement to new clients

before the new audit assignments begin.

1..2 6n recurring audits/ the auditor should consider whether circumstances re-uire the

terms of engagement to be re#ised so that a new engagement letter should be

issued.

1..3 Purpo)e) o' engagement letter

$a% confirm the acceptance of his appointment@

$b% state the obecti#e and scope of the audit@

$c% define the extent of the auditor's responsibilities@ and

$d% minimize misunderstanding between auditor and client.

1..0 Content o' engagement letter

$a% the terms of appointment@

$b% respecti#e responsibilities of auditor and client@

$c% scope/ obecti#es and limitations of the audit@

$d% unrestricted access to records/ documents and other information for audit

purpose@

$e% form of the report@

$f% management representations@

$g% arrangement regarding the planning of the audit@

$h% in#ol#ement of internal auditor/ other auditor/ outgoing auditor and expert@

$i% restriction of auditor's liabilities/ if possible@

$% other ser#ices/ such as accounting and taxation ser#ices.

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$# Audit Planning

$#" The importance o' planning

2.1.1 ,n effecti#e and efficient audit relies on proper planning procedures. "he planning

process is co#ered in general terms by *&+, 3


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financial reporting.

8ue)tion 1

4iscuss the benefits of audit planning. $ marks%

$*&),," :E :aper ))) ,uditing and )nformation +ystems 4ecember 22$a%%

$#$ The audit )trateg4

2.2.1 "he audit )trateg4 )et) the )cope/ timing and direction o' the audit / and guide)

the de3elopment o' the more detailed audit plan.

2.2.2 Each entity is uni-ue and an audit strategy should be adapted to suit the particular

re-uirements and characteristics of the entity concerned.

2.2.3 , strategy should be deri#ed from the audit engagement partnerIs understanding of

the entity and its particular en#ironment/ which indicate where the most significant

risks of misstatements lie. "he audit partnerIs responsibilities in this regard are set

out in *&+, 31 $(larified%.

2.2.0 *owe#er/ there are common elements to all strategies which are presented in the

table that followsA

The audit )trateg4= matter) to con)ider

(haracteristics of the

engagement

7ele#ant financial reporting framework

)ndustry regulation

Expected scope of audit

(haracteristics of business segments

,#ailability of internal audit staff and work performed

Use of ser#ice organisations

Effect of information and communications technology onaudit procedures

,#ailability of entity staff and information

7eporting obecti#es/

timing of the audit and

nature of

communications

EntityIs timescale for reporting and accounting policies

New accounting standards

6rganisation of meetings with management and those

charged with go#ernance

4iscussions with management and those charged with

go#ernance

Expected communications with third parties

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+ignificant factors/

preliminary engagement

acti#ities/ and

knowledge gained onother engagements

4etermination of materiality

,reas identified with higher risks of material

misstatement

7esults of pre#ious audits Need to maintain professional scepticism

E#idence of managementIs commitment to design/

implementation and maintenance of sound internal

controls

Kolume of transactions

+ignificant business de#elopments

+ignificant industry de#elopments and conditions

+ignificant changes in financial reporting framework

6ther significant recent de#elopments

,ny going concern issues

Nature/ timing and

extent of resources

+election of engagement team

,ssignment of work to team members

Engagement budget

$#0 Prepare the audit plan

2.3.1 "he audit plan con3ert) the audit )trateg4 into a more detailed plan and

include) the nature/ timing and e7tent o' audit procedure) to be performed by

engagement team members in order to obtain sufficient appropriate audit e#idence

to reduce audit risk to an acceptably low le#el.

2.3.2 "he audit plan shall include the followingA

$a% , description of the nature/ timing and extent of planned risk assessment

procedures

$b% , description of the nature/ timing and extent of planned further audit

procedures at the assertion le#el$c% 6ther planned audit procedures re-uired to be carried out for the

engagement to comply with *&+,s

$#1 Conducting preliminar4 anal4tical procedure)

,Jun ""2

2.0.1 :reliminary analytical procedure is u)e'ul in gaining an under)tanding o' client()

*u)ine)) and indu)tr4 at planning )tage.

2.0.2 Anal4tical procedure) consist of the e#aluations of financial information made by

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a study of plau)i*le relation)hip) among *oth 'inancial and non>'inancial data.

"hey also encompass the in3e)tigation o' identi'ied 'luctuation) and

relation)hip) that are consistent with other rele#ant information or de#iate

significantly from predicted amounts.

2.0.3 Preliminar4 anal4tical procedure) per'ormed *4 auditor) ,Jun ""2

$a% )ndustry data/ e.g. industry a#erage.

$b% :rior period data/ e.g. account balance/ total balance/ ratios.

$c% ,uditor!determined expected results/ e.g. commission calculated by

multiplying sales amount with commission rate.

$d% (lient!determined expected results/ e.g. budgeted data.

$e% Expected non!financial data.

2.0.0 Purpo)e) o' preliminar4 anal4tical procedure) ,Jun ""2

$a% "o understand the client's business and industry in order to assess the client's

business risk.

$b% "o understand the client's classes of transactions and account balances.

$c% "o indicate aspects of the entity of which the auditor was unaware and will

assist in assessing the risks of material misstatement/ in particular risks of material misstatement due to fraud in order to determine nature/ timing and

extent of further audit procedures.

$d% "o identify financial statement accounts that are likely to contain errors.

$e% "o pro#ide an indication of the company's performance by comparing

client's ratios to ratios of industry or competitors.

$f% "o identify areas of increased risk of misstatements that may re-uire further

attention during the audit where unusual changes in ratios compared to prior

years or industry a#erage.

$g% "o identify areas of specific risk by comparing the li-uidity and acti#ity

ratios with prior years.

$h% "o allocate more resources for in#estigation of areas of high risk of material

misstatement.

$i% "o help identify the existence of unusual transactions or e#ents/ and

amounts/ ratios/ and trends that might indicate matters that ha#e audit

implications.

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8ue)tion 5

"he firm of ?5 D (o./ your employer/ is the external auditor of North ?est 9imited

$N?9% which is a company in the manufacturing and retail business.

Lou ha#e worked on this audit assignment for a few years and this year you are the senior

in charge of the audit. Lou ha#e to prepare the audit plan. "he audit team consists of three

members. Lou decide to let the senior assistant carry out the preliminary risk assessment

procedures. "he other assistant/ 5ary/ a newly recruited accounting graduate/ has no

practical experience. 5ary re-uested you to assign more tasks to her as she wants to

accumulate more experience. +he is confident that she can carry out the tasks effecti#ely

and efficiently because her boyfriend works at N59 as the accounting manager.

Re:uired=

$a% ?hat are the purposes of analytical procedures to be applied as part of risk

assessment procedures at the planning stage $ marks%

$b% +tate some preliminary analytical procedures that may be performed by auditors.

$0 marks%

$c% ?hat is auditor's independence Explain why it is essential for an auditor to be

independent of his or her assurance clients $ marks%

$d% ?hat is the independence issue in this case and how should the issue be sol#ed

$0 marks%

$*&),," :E :aper ))) ,uditing and )nformation +ystems ;une 23%

$#5 ?aterialit4 in audit planning

2..1 5ateriality considerations during audit planning are extremely important. "he

assessment of materiality at this stage should be based on the most recent and

reliable financial information and will help to determine an effecti#e and efficientaudit approach.

2..2 5ateriality assessment will help the auditors to decideA

$a% the cut o'' point on how much information should be obtained $-uantity%

and what type of information is rele#ant $nature%.

$b% whether to use )ampling techni:ue)#

$c% what le3el o' error is likely to lead to a -ualified audit opinion. )t ser#es the

obecti#e of audit/ i.e. express an opinion whether the financial statements

are prepared/ in all material respects/ in accordance with an applicable

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financial reporting framework.

8ue)tion <

; 9imited $I;I% is a listed entity with a wide spread of shareholders. "he entity is engagedin the manufacture and trading of ci#il engineering products. Lour firm has been the

auditor of ; for the past fi#e years/ and has not encountered any significant audit

problems during this period. ; has been operating with its present entity structure and its

basic product range for the past three!and!a half years. "he entity has built a strong

reputation in the market place based on its astute/ conser#ati#e management style and

-uality product range. "he IgeotextileI products/ targeted mainly at the road construction

market/ which represent 0< per cent of ;Is re#enue/ ha#e come under hea#y competition

in the last six months/ eroding ;Is profit margins on these products significantly.

"he following is a summary of ;Is key financial dataA

Lear 7e#enue 6perating

profit

"otal assts Net assets

Mm Mm Mm Mm

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ha#e to consider what le3el or error or misstatement in the financial statements

would cause them not to )ho& a true and 'air 3ie&.

$#@ Determining the nature/ timing and e7tent o' audit procedure)

2.H.1 ,t the planning stage of the audit/ the auditor determines the extent and nature of

the audit work to be performed.

2.H.2 (learly/ the greater the degree o' audit ri)+ attached to an assignment/ the more

audit &or+ should be built into the audit plan. "his in turn is likely to a''ect the

time )pent on the audit and the le#el of experience of audit staff employees on the

audit.

0# Audit Documentation

3.1 De'inition

Audit documentation means the record o' audit procedure) per'ormed/ rele#ant

audit e3idence o*tained/ and conclu)ion) the auditor reached $terms such as

Fworking papersG $工作底稿% or FworkpapersG are also sometimes used%. $*&+,

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8ue)tion @

,ccording to *&+, 23< $(larified%/ the auditor should prepare/ on a timely basis/ auditdocumentation that pro#idesA

, sufficient and appropriate record of the basis for the auditor's report' and

E#idence that the audit was planned and performed in accordance with *&+,s and

applicable legal and regulatory re-uirements.

?hat are the purposes of preparing audit working papers $ marks%

$*&),," :E :aper ))) ,uditing and )nformation +ystems 4ecember 23$e%%

0#0 Content) o' &or+ing paper)

3.3.1 ?orking papers should include contents of audit obecti#e/ audit testing/ e#aluation

of results and conclusion.

$a% Audit o*6ecti3e) that is the purpose of the audit testing recorded on that

working paper.

$b% !ampling method

$i% 4efinition of population/ sampling units/ error or de#iation.

$ii% 5eans of determining the sample size.

$iii% "he sampling method selected.

$c% Audit te)t) carried out

$i% 4etails of the items selected.

$ii% 4etails of test and checking on documents/ records/ etc.

$iii% Errors or de#iations noted and the explanations as to their causes.

$d% Interpretation of the results

$i% :roection of error or de#iations.

$ii% ,uditor's assessment of the assurance obtained as to the possible

size of actual error or de#iation rate.$e% Conclu)ion)

$i% Nature and details of the conclusion drawn from the sample testing

results.

$ii% 4etails of further action taken where re-uired.

3.3.2 ?orking papers should showA

$a% "he name of the client

$b% "he balance sheet date

$c% "he file reference of the working paper

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$d% "he name of the person preparing the working paper

$e% "he date the working paper was prepared.

$f% "he subect of the working paper

$g% "he name of the person re#iewing the working paper

$h% "he date of the re#iew

3.3.3 +ample working paper

0#1 The u)e o' )tandardied &or+ing paper)

3.0.1 Bene'it) of using standardized working papersA

$a% E''icient in organizing.

$b% 9acilitate communication and planning.

$c% Ea)e o' delegation.

$d% Promote control and re3ie&.

3.0.2 Limitation) of using standardized working papersA

$a% ?orking papers are designed and organized to meet the circum)tance) and

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the auditor's needs for each indi#idual audit.

$b% )t is inappropriate to u)e a mechanical approach without regard to the

need to exercise pro'e))ional 6udgement.

0#5 Audit 'ile)

3..1 De'inition

"here are two types of audit filesA

$a% Permanent 'ile $永久保存檔案 % it is kept to record all data of a

permanent nature which pro#ides the necessary background information to

the auditor from year to year.

$b% Current 'ile $本期檔案% it is kept to record all audit work programs and

working papers 'or the 4ear under re#iew.

3..2 Permanent 'ile) contain information of continuing importance to the audit.

$a% Engagement letters

$b% New client -uestionnaire

$c% "he memorandum and articles

$d% 6ther legal documents such as prospectuses/ leases/ sales agreement

$e% 4etails of the history of the client's business

$f% oard minutes of continuing rele#ance

$g% :re#ious years' signed accounts/ analytical re#iew and management letters

$h% ,ccounting systems notes/ pre#ious years' control -uestionnaires

3..3 Current 'ile) contain information of rele#ance to the current year's audit.

$a% 8inancial statements

$b% ,ccounts checklists

$c% 5anagement accounts details

$d% 7econciliationIs of management and financial accounts

$e% , summary of unadusted errors$f% ,scertaining $探知% and e#aluation of internal controls

$g% 7eport to partner including details of significant e#ents and errors

$h% 7e#iew notes

$i% "ime budgets and summaries

$% 9etter of representation

$k% 5anagement letter

$l% Notes of board minutes

$m% (ommunications with third parties such as experts or other auditors

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8ue)tion @"he auditors ha#e two types of working paper files/ the current file $C9% and the

permanent file $P9%. Using the initials and the spaces pro#ided/ indicate which file each of

the following documents would most likely be filed.

1. , lease agreement. :8

2. , confirmation of financial institution deposits. (8

3. ,rticles of incorporation. :8

0. ,n analysis of long!term debt. :8

. , pension agreement. :8

. ,n adusted trial balance. (8

H. ,dusting ournal entries. (8

J. ,n analysis of miscellaneous expense. (8

=. ,n analysis of owners' e-uity accounts. (8

1( 1 indicates/ the retention period for audit engagements ordinarily is no

)horter than 'i3e 4ear) from the date of the auditor's report/ or/ if later/ the date of

the group auditor's report.

3..2 ?orking papers are the propert4 o' the auditor). "hey are not a )u*)titute 'or/ or

part of/ the entity's accounting record).

3..3 ,uditors should not release parts of or whole working papers to third parties

without permission of the entity. ,uditors can disclose the working papers to the

entity as long as it does not undermine $破壞 % the independence or #alidity of the

audit process.

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