2 4-2Goals of PlanningObtain (or update) an understanding of important events that have affected the client and its operationsIdentify 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 4-3Pre-Engagement ArrangementsClient selection and retentionCommunication between predecessor and successor auditorsEngagement lettersStaff assignmentTime budget
4 Communication between Predecessor and Successor Auditors (SAS 84) 4-4Communication between Predecessor and Successor Auditors (SAS 84)Attempt to communicate requiredIf client permits, issues to discussDisagreements 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 4-5Understanding the Client’s BusinessMethods and sources of informationInquiry, including prior year working papersObservationStudyOther aspects of planningMateriality and planningFirst-time auditsInternal auditorsIdentification of related partiesSpecialistsAnalytic 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) 4-8Preliminary Analytic Procedures (SAS 56)RECORDED ACCOUNT BALANCEESTIMATED ACCOUNTBALANCEAttention directingIdentify potential problem areasAn organized approachA standard starting place to start examining the financial statementsDescribe the financial activitiesIdentify unusual changes in relationships in the dataAsk relevant questionsWhat could be wrong?What legitimate reasons are there for these results?Cash flow analysis
9 Analytic Procedure Steps 4-9Analytic Procedure StepsDevelop 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 4-10Analytic Procedures: Sources of InformationAnalytic ProceduresSources of InformationComparison of current-year account balances to those of one or more comparable periodsFinancial 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 4-11Analytic Procedures: Stages of UsePreliminary planning-- requiredSubstantive testing -- optionalFinal review -- required
12 Effect of Electronic Environment on Audit Engagement 4-12Effect of Electronic Environment on Audit EngagementThe 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 4-13What 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 4-14Effect of Computer Processing on TransactionsTransaction trailsUniform processing of transactionsSegregation of dutiesPotential for fraudPotential for increased management supervisionInitiation or subsequent execution of transactions by computer
15 Planning considerations 4-15Planning considerationsExtent to which computers are usedComplexity of computer operationsOrganizational structure of computer processingAvailability of dataUse of CAATs- the use of software to perform audit proceduresNeed for specialized skills
16 Computer Assisted Audit Tools and Techniques (CAATs) 4-16Computer 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 recalculationsJoin, concantenate and compare different filesPerform detailed analysisStratificationGap and duplicate key detectionSample selection
17 Audit Documentation (AS 3) 4-17Audit Documentation (AS 3)DefinitionThe 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.ObjectivesImprove audit qualityEnhance public confidenceContentsPlanning and performance of the workProcedures performedEvidence obtainedConclusions reached by the auditor
18 Purposes of Audit Documentation 4-18Purposes of Audit DocumentationIntegral part of audit qualityDocuments the nature, timing and extent of work performedEvidence of due professional careBasis for conclusionFacilitates planning, performance and supervisionProvides basis for review
20 Exhibit 4.6 Current Audit Documentation File 4-20
21 Exhibit 4.7 Illustrative Audit Documentation 4-21Information on WorkpaperName, date, purpose, page numberProcedures performed and conclusions reached by the auditorEvidence that auditor followed general standards and standards of field workAudit Mark LegendReviewers’ initialsInsert Exhibit 4.7
22 Audit Documentation Requirements 4-22Audit Documentation RequirementsAudit 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 andDemonstrate 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 4-23Significant Findings or IssuesSelection, application and consistency of accounting principles, including disclosuresResults of procedures that indicate need for significant modification of procedures, existence of material misstatements, significant deficiencies in controlsAudit adjustmentsDisagreementsCircumstances that cause significant difficultySignificant changes in assessed audit riskMatters that could result in report modification
24 Specific Audit Documentation Matters 4-24Specific Audit Documentation MattersShould 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 foundInformation 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) 4-25Engagement 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) 4-26Documentation Retention (AS 3)Documentation must be retained seven years from report release date.If no report—from last day of fieldworkAdditions/AmendmentsDocumentation may not be deleted or discarded after report release date.Additions must indicateDate the information was addedName of preparerReason
27 Specific Documentation Retention Requirements (AS 3) 4-27Specific Documentation Retention Requirements (AS 3)Issuing office must retain prior to report release dateEngagement completion documentList of significant fraud risk factors, responses and results of related proceduresInconsistent or contradictory informationFinding affecting consolidating or combining of accountsInformation to reconcile amounts audited by other auditors to consolidated financial statementsSchedule of audit adjustmentsAll significant control deficiencies and material weakness and clear distinction between categoriesRepresentation lettersMatters to be communicated to audit committee
28 Audit Documentation Review 4-28Audit Documentation ReviewHierarchical review processReviewers includeNew auditorsSupervisory personnelEngagement supervisors and quality reviewersSuccessor auditorInspection teamsOthers including advisors engaged by the audit committee or parties to an acquisition
29 Other Issues Related to Audit Documentation 4-29Other Issues Related to Audit DocumentationOwnershipAuditors maintain ownership, even after auditor-client relationship is over.ConfidentialityOnly 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.