Chapter 4
Engagement Planning
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I. Pre-Engagement Arrangements
A. Client selection and
retention
B. Communication between
predecessor and successor
auditors
C. Engagement letters
D. Staff assignment
E. Time budget
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A. Client Selection and Retention
Professional service firms
are not obligated to
accept undesirable clients,
nor are they obligated to
continue to serve clients
when relationships
deteriorate or when
management comes under
a cloud of suspicion.
(See Auditing Insight on
p. 101 of text.)
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B. Communication between Predecessor and
Successor Auditors (SAS 84)
• Attempt to communicate required
• If client permits, issues to discuss
– Disagreements about accounting principles or
audit procedures.
– Communications the predecessor gave the
former client about fraud, illegal acts, and
internal control recommendations.
– The predecessor’s understanding about the
reasons for the change of auditors (particularly
about the predecessor’s termination).
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C. Engagement Letters
Recommended procedure to
establish understanding
with client regarding:
Engagement objectives
Management
responsibilities
Auditor responsibilties
Engagement limitations
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D. Staff Assignment
Typical team includes:
 Engagement partner with final responsibility
 Audit manager
 Industry specialist
 Senior auditors
 Computer specialists
 Tax partner
 Concurring partner
Concurring partner required for SEC audits.
Engagement partner must rotate off every 5
years.
New or complex clients are assigned more
experienced staff.
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E. Time Budget
Number of hours for each audit
segment is set out in a time
budget.
Interim audit work is done
several weeks or months before
the balance sheet date.
Year-end work is done shortly
before or after the balance sheet
date.
Staff are to maintain time
records of their work to allow
for future planning and
determining audit efficiency.
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II. Understanding the Client’s
Business
A. Enterprise Risk Management (ERM)
B. Risk-Based Auditing (RBA)
C. Minutes of Board of Directors
D. Related Parties
E. Tolerable Misstatement
F. Specialists
G. Analytical Procedures
H. Planning Memorandum
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A.
Enterprise Risk Management Framework
(See discussion on pp. 107-108 of text)
Monitoring
Internal Environment
Objective
Setting
Event
Identification
Risk
Assessment
Information
and
Communication
Risk
Response
Control
Procedures
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B. Risk-Based Auditing (RBA)
Business risk is the risk that the client will fail
to achieve its objectives.
Account-based auditing involves understanding control risk
for certain types of errors or fraud in specific accounts.
Account
Balances
Identified
Risks
Risk-based auditing involves understanding control risk that
the client will not meet their objectives and seeing if
management has controls in place to mitigate these risks.
Control
Procedures
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Identified
Risks
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C. Minutes of Board of Directors
Auditors take notes or
make copies of important
parts of these minutes and
compare them to
information in the
accounts and disclosures.
A company’s failure to
provide minutes is a
significant scope
limitation that could
result in a disclaimer of
opinion on the financial
statements.
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D. Related Parties
Related parties are those
individuals or
organizations that are
closely tied to the
auditee, possibly through
family ties or
investments.
Evidence from related
parties can be biased.
See Auditing Insight on
p. 112 of text.
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E. Tolerable Misstatement
Tolerable misstatement is
the amount by which a
particular account may be
misstated, yet still not
cause the financial
statements taken as a whole
to be materially misleading.
Top-down approach is
preferable because it forces
the audit team to think
about the financial
statements taken as a
whole.
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Allowance for
sampling risk
200
TM
1,000
Direct
Projection
630
(70 net overstatement error
found in sample / 1,000 dollar
value of sample) x 10,000 dollar
value of population – 70 net
overstatement error in sample
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F. Specialists
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Specialists are persons skilled in
fields other than accounting and
auditing who are not members
of the audit firm, but are used
by auditors in the audit.
The specialist should be
unrelated to the company.
Auditors should have an
understanding of the specialist’s
methods and assumptions.
Specialists are not referred to in
the audit report unless their
findings indicate a GAAP
departure causing the audit
report to be modified.
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G. Analytical Procedures
Five steps when creating
analytical procedures:
1. Develop an expectation
2. Define a significant
difference
3. Calculate predictions and
compare them with the
recorded amount
4. Investigate significant
differences
5. Document each of the
preceding steps
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Example:
See question regarding
collectibility of accounts
receivable on p. 118 of text.
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H. Planning Memorandum
 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
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III. Planning in an Electronic
Environment
A. Items Unchanged by Electronic
Processing
B. Effects of Computer Processing on Audit
C. Computer-Assisted Audit Tools and
Techniques (CAATTs)
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A. Items Unchanged by Electronic Processing
The definition of auditing.
The purposes of auditing.
The generally accepted auditing standards.
The assertions of management embodied in
financial statements.
The requirement to gather sufficient competent
evidence.
The independent auditor's report on financial
statements.
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B. Effects of Computer Processing
on Audit
The auditor must evaluate the
impact of technology on the client’s
operations (see points on pp. 122123 of text).
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.
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C. Computer-Assisted Audit
Tools and Techniques
(CAATTs)
CAATTS are used on most audits where accounting
records are stored in computer files or in a database.
Advantages include:
 Preprogrammed editing, operating, and output subroutines.
 Same software can be used with various clients.
 A week of intensive training is generally sufficient.
See Auditing Insight on p. 126 of text for typical audit
procedures performed by CAATTS.
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IV. Audit Documentation
A. Audit Documentation Defined
B. Audit Documentation Files
C. Current Audit Documentation File Format
D. Illustrative Audit Documentation
E. Document Completion and Retention
F. Audit Documentation Ownership and
Confidentiality
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A. Audit Documentation Defined
 Definition
The 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.
 Objectives
 Improve audit quality
 Enhance public confidence
 Contents
 Planning and performance of the work
 Procedures performed
 Evidence obtained
 Conclusions reached by the auditor
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B. Audit Documentation Files
 Current
 Audit Administrative Files - contain
documentation of the early planning
phases of the audit. See examples on p.
128 of text.
 Audit Evidence Files – contain the
specific assertions under audit, a record
of the procedures performed, the
evidence obtained, and decisions made in
the course of the audit. The most
important facet of audit evidence is
showing decision problems and
conclusions.
 Permanent file contains information of
continuing audit significance over many
years. See examples on p. 128 of text.
 Prior Year Working Papers
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C. Current Audit Documentation File Format
Documentation is grouped
behind the trial balance
according to balance sheet and
income statement captions.
Current assets usually appear
first, followed by fixed assets,
other assets, liabilities, equities,
income, and expense accounts.
A lead schedule is a summary
of the accounts or components in
an account group. Amounts on
these schedules should agree
with adjusted ledger and
financial statement balances.
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D. Illustrative Audit Documentation
(Review bulleted items on p. 130 of text)
Insert Exhibit
4.7
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Information on Workpaper
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
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E. Documentation Completion and Retention
 PCAOB regulations require that all documentation must be
finalized within 45 days of the audit report’s release
 AS 3 requires that audit documentation, including workpapers
and other documents that form the basis of the engagement, be
retained for seven years following the conclusion of the
engagement (usually the audit report date).
 Additions/Amendments
 Documentation may not be deleted or discarded after report
release date.
 Additions must indicate
• Date the information was added,
• Name of preparer
• Reason
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F. Audit Documentation Ownership and
Confidentiality
Ownership
Auditors maintain ownership, even after auditor-client
relationship is over.
Confidentiality
Only 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.
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Summary
Client acceptance and audit planning
Understanding the client’s business and
establishing planning memorandum
Influence of electronic processing on the
audit process
Form of audit documentation
Documentation retention, ownership, and
confidentiality
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