5-1
Chapter 5
Audit Planning
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-2
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
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-3
Audit Planning Activities
• Pre-engagement arrangements
• Understanding the client’s business
• Analysis of Unaudited Financial Statements
– Analytic Procedures
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-4
Pre-Engagement
Arrangements
• Client selection and
retention
• Communication
between predecessor
and successor auditors
• Engagement letters
• Staff assignment
• Time budget
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-5
Understanding the Client’s
Business
• Methods and sources of information
– Inquiry, including prior year
working papers
– Observation
– Study
• Other aspects of planning
–
–
–
–
–
–
McGraw-Hill/Irwin
Materiality and planning
First-time audits
Internal auditors
Identification of related parties
Specialists
Analytic Procedures
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-6
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
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-7
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
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-8
Analytic Procedures:
Sources of Information
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-9
Analytic Procedures:
Stages of Use
• Preliminary -- required
• Substantive testing -- optional
• Final Review -- required
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-10
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.
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-11
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.
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-12
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.
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-13
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
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-14
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
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-15
WORKING PAPERS
• ORGANIZATION OF WPs
Working
Trial
Balance
McGraw-Hill/Irwin
Lead
Schedule
Supporting
Schedules
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-16
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
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-17
WORKING PAPERS
TYPES OF WPs
• Current
• Permanent
• Prior Year Working
Papers
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5-18
Other Issues Related to Workpapers
• Ownership of WPs
• Confidentiality of WPs
• Review of WPs
McGraw-Hill/Irwin
©2002 by The McGraw-Hill Companies, Inc. All rights reserved.