1. 5-1 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5 Audit Planning

2. 5-2 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. GOALS OF PLANNING Obtain (or update) an understanding of IMPORTANT EVENTS that have affected the client and its operations Identify areas of the audit engagement that may represent SPECIAL RISKS to the auditor Ensure that the audit is completed in a TIMELY fashion

3. 5-3 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Audit Planning Activities Pre-engagement arrangements Understanding the client’s business Analysis of Unaudited Financial Statements –Analytic Procedures

4. 5-4 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Pre-Engagement Arrangements Client selection and retention Communication between predecessor and successor auditors Engagement letters Staff assignment Time budget

5. 5-5 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Understanding the Client’s Business Methods and sources of information –Inquiry, including prior year working papers –Observation –Study Other aspects of planning –Materiality and planning –First-time audits –Internal auditors –Identification of related parties –Specialists –Analytic Procedures

6. 5-6 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Planning Memorandum Summary of planning procedures Considerations –Audit or review –Need for specialists –Staff assignment and timing schedules –Assessed level of control risk –Significant client or industry risks –Utilization of internal auditors –Identification of unusual accounting principle problems Basis for audit program

7. 5-7 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. PRELIMINARY ANALYTIC PROCEDURES RECORDED ACCOUNT BALANCE ESTIMATED ACCOUNT BALANCE Attention directing –identify potential problem areas An organized approach –a standard starting place to start examining the financial statements Describe the financial activities –identify unusual changes in relationships in the data Ask relevant questions –What could be wrong? –What legitimate reasons are there for these results? Cash flow analysis

8. 5-8 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analytic Procedures: Sources of Information

9. 5-9 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Analytic Procedures: Stages of Use Preliminary -- required Substantive testing -- optional Final Review -- required

10. 5-10 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Electronic Environment Today, information technology is indigenous to almost every element of the business environment. Information systems continue to have an impact on business processes, on the initiation and processing of accounting transactions and, therefore, on auditing. Auditors must keep pace with these developments.

11. 5-11 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Effect of Electronic Environment on Audit Engagement The 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 control objectives are not changed. The requirement to gather sufficient competent evidence is not changed. The independent auditor's report on financial statements is not changed.

12. 5-12 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. What 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.

13. 5-13 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Effect of Computer Processing on Transactions Transaction trails Uniform processing of transactions Segregation of duties Potential for fraud Potential for increased management supervision Initiation or subsequent execution of transactions by computer

14. 5-14 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Planning considerations Extent to which computers are used Complexity of computer operations Organizational structure of computer processing Availability of data Use of CAATS Need for specialized skills

15. 5-15 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. WORKING PAPERS ORGANIZATION OF WPs Working Trial Balance Lead Schedule Supporting Schedules

16. 5-16 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. WORKING PAPERS INFORMATION ON WPs –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

17. 5-17 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. WORKING PAPERS TYPES OF WPs Current Permanent Prior Year Working Papers

18. 5-18 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Other Issues Related to Workpapers Ownership of WPs Confidentiality of WPs Review of WPs