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7 - 2Copyright 2003 Pearson Education Canada Inc.
What are the What are the main reasonsmain reasons for audit for audit planningplanning??
7 - 3Copyright 2003 Pearson Education Canada Inc.
What are the What are the main reasonsmain reasons for audit for audit planningplanning??
- to enable the auditor to obtain suffi- cient appropriate evidence
$
7 - 4Copyright 2003 Pearson Education Canada Inc.
What are the What are the main reasonsmain reasons for audit for audit planningplanning??
- to enable the auditor to obtain suffi- cient appropriate evidence- to help keep audit costs reasonable
7 - 5Copyright 2003 Pearson Education Canada Inc.
What are the What are the main reasonsmain reasons for audit for audit planningplanning??
- to enable the auditor to obtain suffi- cient appropriate evidence- to help keep audit costs reasonable- to avoid misunderstandings with the client
7 - 6Copyright 2003 Pearson Education Canada Inc.
Steps in audit planningSteps in audit planning
obtaininformation
about client’s legalobligations
performpreliminaryanalytical
procedures
preplan
obtainbackgroundinformation
7 - 7Copyright 2003 Pearson Education Canada Inc.
early brainstormingearly brainstormingabout the audit about the audit
preplan
7 - 8Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues
Whatpotential
client might theauditor turn
down?
early brainstormingearly brainstormingpreplan
7 - 9Copyright 2003 Pearson Education Canada Inc.
- client lacking integrity- financially unstable client- client unable to pay audit fees
- client acceptance issues
Whatpotential
client might theauditor turn
down?
early brainstormingearly brainstormingpreplan
7 - 10Copyright 2003 Pearson Education Canada Inc.
Predecessor and Successor AuditorsPredecessor and Successor Auditors
- Rules of Professional Conduct require the successor auditor to communicate
with the predecessor.
WHY?WHY?
7 - 11Copyright 2003 Pearson Education Canada Inc.
- Rules of Professional Conduct require the successor auditor to communicate
with the predecessor
WHY?WHY?
Predecessor and Successor AuditorsPredecessor and Successor Auditors
to facilitate the successor auditor’sclient acceptance decision
7 - 12Copyright 2003 Pearson Education Canada Inc.
Predecessor and Successor AuditorsPredecessor and Successor Auditors
- Rules of Professional Conduct require the successor auditor to communicate with the predecessor- the client must give permission for the communication
7 - 13Copyright 2003 Pearson Education Canada Inc.
- Rules of Professional Conduct require the successor auditor to communicate with the predecessor- the client must give permission for the communication- the successor is required to initiate the communication
Predecessor and Successor AuditorsPredecessor and Successor Auditors
7 - 14Copyright 2003 Pearson Education Canada Inc.
Predecessor and Successor AuditorsPredecessor and Successor Auditors
- Rules of Professional Conduct require the successor auditor to communicate with the predecessor- the client must give permission for the communication- the successor is required to initiate the communication- the predecessor is required to respond
7 - 15Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues If a prospective client has not been audited before, the auditor may base client acceptance on discussions with:- lawyers- banks- other businesses
BANK
early brainstormingearly brainstormingpreplan
7 - 16Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues
- identify client’s reasons for an audit
WHY?WHY?
early brainstormingearly brainstormingpreplan
7 - 17Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit
WHY?WHY? The client’s motivation for the
audit is one of the major factors affecting audit risk.
early brainstormingearly brainstormingpreplan
7 - 18Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit
For a large business,For a large business,what is the what is the probableprobablereason for an audit?reason for an audit?
early brainstormingearly brainstormingpreplan
7 - 19Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit
For a large business, what is the For a large business, what is the probable probable reason for an audit?reason for an audit?
Companies subject to securities commission regulation are required to have annual audits.
early brainstormingearly brainstormingpreplan
7 - 20Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit
Because of Because of audit riskaudit risk, an auditor will, an auditor willtypically gather typically gather more evidencemore evidence for: for:
??
early brainstormingearly brainstormingpreplan
7 - 21Copyright 2003 Pearson Education Canada Inc.
- publicly held clients- clients with extensive indebtedness- clients changing ownership- newly formed, rapidly growing businesses
Because of Because of audit riskaudit risk, an auditor will, an auditor willtypically gather typically gather more evidencemore evidence for: for:
- client acceptance issues - identify client’s reasons for an audit
early brainstormingearly brainstormingpreplan
7 - 22Copyright 2003 Pearson Education Canada Inc.
What is an engage-ment letter and why
is it necessary?
- client acceptance issues - identify client’s reasons for an audit- obtain an engagement letter
early brainstormingearly brainstormingpreplan
7 - 23Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit- obtain an engagement letter
The intent is todocument terms of the
audit and minimizemisunderstandings.
early brainstormingearly brainstormingpreplan
7 - 24Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit- obtain an engagement letter
The letter iswritten by the auditor tothe client, then signed
by both.
early brainstormingearly brainstormingpreplan
7 - 25Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter
The morespecific, the better -
including:
early brainstormingearly brainstormingpreplan
7 - 26Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter
The morespecific, the better -
including: fees
schedules
use of clientpersonnel
early brainstormingearly brainstormingpreplan
7 - 27Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit - obtain an engagement letter
When should theletter be prepared
and signed?
early brainstormingearly brainstormingpreplan
7 - 28Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit- obtain an engagement letter
When should theletter be prepared
and signed?
in advance of any audit procedures
early brainstormingearly brainstormingpreplan
7 - 29Copyright 2003 Pearson Education Canada Inc.
- client acceptance issues - identify client’s reasons for an audit- obtain an engagement letter- select audit team
Considerations?Considerations?
early brainstormingearly brainstormingpreplan
7 - 30Copyright 2003 Pearson Education Canada Inc.
- select audit team
Considerations?Considerations?- training and overall experience
early brainstormingearly brainstormingpreplan
7 - 31Copyright 2003 Pearson Education Canada Inc.
- select audit team
Considerations?Considerations?- training and overall experience- industry and client experience
early brainstormingearly brainstormingpreplan
7 - 32Copyright 2003 Pearson Education Canada Inc.
- select audit team
Considerations?Considerations?- training and overall experience- industry and client experience- supervision
early brainstormingearly brainstormingpreplan
7 - 33Copyright 2003 Pearson Education Canada Inc.
- select audit team
Considerations?Considerations?- training and overall experience- industry and client experience- supervision- need for specialists
early brainstormingearly brainstormingpreplan
7 - 34Copyright 2003 Pearson Education Canada Inc.
preplan
Steps in audit planningSteps in audit planning
obtain information about client’s legal obligations perform
preliminaryanalytical
procedures
obtainbackgroundinformation
7 - 35Copyright 2003 Pearson Education Canada Inc.
obtainbackgroundinformation
Why should the auditorWhy should the auditorobtain backgroundobtain background
information?information?
7 - 36Copyright 2003 Pearson Education Canada Inc.
- to identify the need for outside specialists
obtainbackgroundinformation
Why should the auditorWhy should the auditorobtain backgroundobtain background
information?information?
7 - 37Copyright 2003 Pearson Education Canada Inc.
- to identify the need for outside specialists- to identify related parties
?
obtainbackgroundinformation
Why should the auditorWhy should the auditorobtain backgroundobtain background
information?information?
7 - 38Copyright 2003 Pearson Education Canada Inc.
obtainbackgroundinformation
Why should the auditorWhy should the auditorobtain backgroundobtain background
information?information?
- affiliated company- principal owner- party that can influ- ence management
- to identify the need for outside specialists- to identify related parties
7 - 39Copyright 2003 Pearson Education Canada Inc.
obtainbackgroundinformation
Why should the auditorWhy should the auditorobtain backgroundobtain background
information?information?- to identify the need for outside specialists- to identify related parties
GAAPrequires disclosure of
related partytransactions.
7 - 40Copyright 2003 Pearson Education Canada Inc.
obtainbackgroundinformation
Why should the auditorWhy should the auditorobtain backgroundobtain background
information?information?
- to identify the need for outside specialists- to identify related parties
Whataudit procedures
may discloserelated parties?
7 - 41Copyright 2003 Pearson Education Canada Inc.
obtainbackgroundinformation
Why should the auditorWhy should the auditorobtain backgroundobtain background
information?information?- to identify the need for outside specialists- to identify related parties
- inquire of management- review shareholder records for principal shareholders
7 - 42Copyright 2003 Pearson Education Canada Inc.
GAAS requires an extensiveGAAS requires an extensiveknowledge of the client’sknowledge of the client’sbusiness, industry and business, industry and
operations.operations.
obtainbackgroundinformation
7 - 43Copyright 2003 Pearson Education Canada Inc.
obtainbackgroundinformation
Why understand theWhy understand theclient’s business, client’s business,
industry or operations?industry or operations?
7 - 44Copyright 2003 Pearson Education Canada Inc.
- to determine if any unique accounting requirements exist
Why understand theWhy understand theclient’s business, client’s business,
industry or operations?industry or operations?
obtainbackgroundinformation
7 - 45Copyright 2003 Pearson Education Canada Inc.
- to determine if any unique accounting requirements exist- to identify industry risks for setting acceptable audit risk
Why understand theWhy understand theclient’s business, client’s business,
industry or operations?industry or operations?
obtainbackgroundinformation
7 - 46Copyright 2003 Pearson Education Canada Inc.
- to determine if any unique accounting requirements exist- to identify industry risks for setting acceptable audit risk- to identify industry risks for setting inherent risk
Why understand theWhy understand theclient’s business, client’s business,
industry or operations?industry or operations?
obtainbackgroundinformation
7 - 47Copyright 2003 Pearson Education Canada Inc.
- Also helps in:- determining materiality- understanding internal control- identifying sources and nature of available audit
evidence- understanding substance of transactions- assessing whether sufficient appropriate evidence
is available- assessing appropriateness of accounting policies- evaluating overall financial statement presentation
Why understand theWhy understand theclient’s business, client’s business,
industry or operations?industry or operations?
obtainbackgroundinformation
7 - 48Copyright 2003 Pearson Education Canada Inc.
obtainbackgroundinformation
What are the auditor’s What are the auditor’s sources of industry sources of industry
information?information?
7 - 49Copyright 2003 Pearson Education Canada Inc.
- prior auditors - firm industry experts- CICA research studies, audit technique studies and other publications- industry journals and other literature- discussions with management- plant and office tour- review of policies and procedures
What are the auditor’s What are the auditor’s sources of industry sources of industry
information?information?
obtainbackgroundinformation
7 - 50Copyright 2003 Pearson Education Canada Inc.
Industry Industry diversitydiversity
is one reason is one reason why many why many auditorsauditors
specializespecialize..
obtainbackgroundinformation
Doe & Smith, publicaccountants
“We know banks. Banks know us.”
7 - 51Copyright 2003 Pearson Education Canada Inc.
preplan
Steps in audit planningSteps in audit planning
performpreliminaryanalytical
procedures
obtainbackgroundinformation
obtaininformation
aboutclient’s legal obligations
7 - 52Copyright 2003 Pearson Education Canada Inc.
obtaininformation
aboutclient’s legal obligations
how?
7 - 53Copyright 2003 Pearson Education Canada Inc.
- study articles of incorporation & bylaws
obtaininformation
aboutclient’s legal obligations
how?
Articles of Incorporation
7 - 54Copyright 2003 Pearson Education Canada Inc.
- study articles of incorporation & bylaws- study minutes of board and share- holder meetings Minutes of
Board of DirectorsMeetings
Ace Company
obtaininformation
aboutclient’s legal obligations
how?
7 - 55Copyright 2003 Pearson Education Canada Inc.
- study articles of incorporation & bylaws- study minutes of board and share- holder meetings- study existing contracts
obtaininformation
aboutclient’s legal obligations how?
...it’s a deal!!
7 - 56Copyright 2003 Pearson Education Canada Inc.
Why is this part of audit planning?
obtaininformation
aboutclient’s legal obligations
7 - 57Copyright 2003 Pearson Education Canada Inc.
Throughout the engage-ment, auditors will be
observing evidence thatmay relate to these items
and their disclosure.
Why is this part of audit planning?
obtaininformation
aboutclient’s legal obligations
7 - 58Copyright 2003 Pearson Education Canada Inc.
preplan
Steps in audit planningSteps in audit planning
performpreliminaryanalytical
procedures
obtainbackgroundinformation
obtaininformation
aboutclient’s legal obligations
7 - 59Copyright 2003 Pearson Education Canada Inc.
What is thepurpose of preliminary
analyticalprocedures?
7 - 60Copyright 2003 Pearson Education Canada Inc.
What is thepurpose of preliminary analytical
procedures?
- understanding the client’s industry- assessing going concern issues- indicating possible misstatements- reducing detailed tests
7 - 62Copyright 2003 Pearson Education Canada Inc.
What are What are working papersworking papers??
auditor records of:auditor records of:
proceduresapplied
7 - 63Copyright 2003 Pearson Education Canada Inc.
What are What are working papersworking papers??
proceduresapplied
testsperformed
auditor records of:auditor records of:
7 - 64Copyright 2003 Pearson Education Canada Inc.
What are What are working papersworking papers??
proceduresapplied
testsperformed
informationobtained
auditor records of:auditor records of:
7 - 65Copyright 2003 Pearson Education Canada Inc.
What are What are working papersworking papers??
proceduresapplied
informationobtained
conclusionsreached
testsperformed
auditor records of:auditor records of:
7 - 66Copyright 2003 Pearson Education Canada Inc.
Working papersWorking papersTheir objective is to aid the auditor in
providing reasonable assurance that anadequate audit was conducted in
accordance with GAAS.
7 - 67Copyright 2003 Pearson Education Canada Inc.
Working papersWorking papers
Working papers also provide:- a basis for planning the audit
Their objective is to aid the auditor in providing reasonable assurance that an
adequate audit was conducted inaccordance with GAAS.
January
7 - 68Copyright 2003 Pearson Education Canada Inc.
Working papersWorking papers
Working papers also provide:- a basis for planning the audit- a record of the evidence accumulated and the results of tests
Their objective is to aid the auditor in providing reasonable assurance that an
adequate audit was conducted inaccordance with GAAS.
Ace Co.
Audit File
7 - 69Copyright 2003 Pearson Education Canada Inc.
Working papersWorking papers
Working papers also provide:- a basis for planning the audit- a record of the evidence accumulated and the results of tests- data supporting the audit report
Their objective is to aid the auditor in providing reasonable assurance that an
adequate audit was conducted inaccordance with GAAS.
7 - 70Copyright 2003 Pearson Education Canada Inc.
Working papersWorking papers
Working papers also provide:- a basis for planning the audit- a record of the evidence accumulated and the results of tests- data supporting the audit report- a basis for supervisor/partner review
Their objective is to aid the auditor in providing reasonable assurance that an
adequate audit was conducted inaccordance with GAAS.
7 - 71Copyright 2003 Pearson Education Canada Inc.
Working papersWorking papersWorking papers include
current files andpermanent files.
?
7 - 72Copyright 2003 Pearson Education Canada Inc.
Permanent filesPermanent files contain data of a contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance
to current and future engagements.to current and future engagements.
PERMANENT
7 - 73Copyright 2003 Pearson Education Canada Inc.
CONTRACTCONTRACT
Permanent files contain data of a Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance
to current and future engagements.to current and future engagements.
INCLUDE:- copies of client documents of continu- ing importance (e.g., articles of incor- poration, bylaws, contracts)
Articles of Incorporation
7 - 74Copyright 2003 Pearson Education Canada Inc.
Permanent files contain data of a Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance to current and future engagements.to current and future engagements.
INCLUDE:-copies of client documents of
continuing importance
- analyses from prior audits that have continuing importance (e.g., bond premium amortization, depreciation)
7 - 75Copyright 2003 Pearson Education Canada Inc.
Permanent files contain data of a Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance to current and future engagements.to current and future engagements.
INCLUDE:-copies of client documents of
continuing importance - analyses from prior audits that have continuing importance - internal control information (flow- charts, descriptions of transaction cycles)
7 - 76Copyright 2003 Pearson Education Canada Inc.
Permanent files contain data of a Permanent files contain data of a historical naturehistorical nature of of continuingcontinuing relevance relevance
to current and future engagements.to current and future engagements.
INCLUDE:-copies of client documents of
continuing importance- analyses from prior audits that have continuing importance - internal control information - results of prior audit analytical procedures
7 - 77Copyright 2003 Pearson Education Canada Inc.
Does an audit client haveDoes an audit client havea legal right to audit a legal right to audit working papers?working papers?
7 - 78Copyright 2003 Pearson Education Canada Inc.
Does an audit client have a Does an audit client have a legal right to audit working legal right to audit working
papers?papers?
NO!NO!
7 - 79Copyright 2003 Pearson Education Canada Inc.
audit working papersaudit working papers
How does theprovincial CA
institutes’ Rules of Professional
Conduct apply?
7 - 80Copyright 2003 Pearson Education Canada Inc.
audit working papersaudit working papers
Confidential Client InformationConfidential Client InformationA member in public practice shall not discloseany confidential client information without the
specific consent of the client, or when required by the courts of by the professional
accounting association...
During the course of an audit,auditors obtain information of a
confidential nature which isretained in the working papers.
7 - 81Copyright 2003 Pearson Education Canada Inc.
What are working paper What are working paper tick markstick marks??
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