Audit Ch 3 Engagement Planning

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Audit Ch 3 Engagement Planning


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1.Client Acceptance or Continuance 2. Communication between predecessor and prospective auditors 3. Compliance with Independence and Ethical Requirements 4. Engagement Letters 5. Termination Letter
pre engagement activities
responsibilities principle
•principle requires auditors to comply with appropriate ethical requirements for each audit engagement 
independence in appearance
•relates to perceptions of auditors’independence 
engagement letter
when a new client is accepted or when an audit engagement continues
-contract between auditor and client
engagement letter
•Serves as a means of reducing the risk of misunderstandings with the client and as a means of avoiding legal liability for claims that the auditors did not perform the work promised
obj of engagement, mgmt & auditors responsibilities, any limitations of engagement
engagement letter should include
audit plan
•A comprehensive list of the specific audit procedures that the audit team needs to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements
audit plan
•describes the procedures to be performed to assess the risk of material misstatement at the financial statement and assertion level
audit plan
•plan the nature, timing and extent of control tests and substantive tests that are designed to mitigate these risks to an acceptable level
–Audit engagement partner –Audit manager –IT audit specialist –Tax partner –Quality assurance partner –Audit staff
audit engagement teams usually consist of
objectivity and competence
•Prior to using the work of internal auditors, external auditors should consider internal auditors’
professional judgment
Internal auditors should not be delegated tasks that require extensive 
•persons skilled in fields other than accounting and auditing who are not members of the audit team
•professional qualifications, experience and reputation and methods and assumptions
auditors must know about the specialist's
should be unrelated to the company being audited
•are not referred to in the audit report unless the findings cause the auditors’report to be modified
IT auditors
•Specialized skills are often needed to evaluate the effect of computerized processing on the audit, to understand the flow of transactions, or to design and perform audit procedures
IT auditors
•are members of the audit team and are called in when the need for their skills arises
time budget
•Used to maintain control of the audit by identifying problem areas early in the engagement, thereby ensuring that the engagement in completed on a timely basis
interim audit work
refers to procedures performed several weeks or months before the balance sheet date
year end audit work
refers to procedures performed shortly before and after the balance sheet date
time reports
•Everyone who works on the audit engagement is required to report the time taken to perform procedures for each phase of the audit
time reports
help in evaluating the efficiency of the audit team member
time reports
•Compiling a record for billing the client •Compiling a record for planning the next audit
refers to an amount (or transaction) that would influence the decisions of users(i.e., an amount (or event) that would make a difference).  The emphasis is on user, rather than management or the audit team
–Absolute size –Relative size –Cumulative effects
quantitative criteria of materiality
–Nature of the item or issue –Circumstances –Uncertainty
qualitative criteria of materiality
professional judgment
ultimately materiality is a matter of
using materiality on the audit as a guide to planning substantive procedures
•directing attention and audit work to those items or accounts that are important, uncertain, or susceptible to errors or frauds.
performance materiality
Auditors use ____________  to make sure that the aggregate of uncorrected and undetected immaterial misstatements does not exceed materiality for the financial statements as a whole.  
performance materiality
evaluate evidence
decisions about the audit report
use materiality for (3)
risk assessment procedures
To gain an understanding of the client and the risks associated with the client 
test of controls
To test the operating effectiveness of client internal control activities 
substantive procedures
To produce evidence about management’s assertions related to the amounts and disclosures in a client’s financial statements 
substantive audit plan
•Should contain a list of audit procedures for gathering evidence related to the relevant assertions identified for the significant financial statement accounts and disclosures of an audit client
–Substantive analytical procedures –Tests of details
two ways to conduct substative tests
substantive analytical procedures
more efficient
tests of details
more effective
1.Inspection of records and documents 2.Inspection of tangible assets 3.Observation 4.Inquiry 5.Confirmation 6.Recalculation 7.Reperformance 8.Analytical Procedures
types of audit procedures
vouching, tracing, scanning
3 types of inspection of records and docs
existence or occurence
(top down)
-start iwth pmt and trace up to journal entry then to finc stmts
were all shipments actually recorded as sales?
-computer assisted audit tools and techniques
the auditor is able to access and extract client information without disrupting data processing
–Calculate field statistics (totals, high, low and average value) –Perform complex recalculations –Join and compare different data files –Perform detailed analysis •Stratification •Gap and duplicate detection •Sample selection
CAAT procedures
audit documentation
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
–Improve audit quality –Enhance public confidence
objectives of audit documentation
CAAT cannot perform
CAAT cannot perform
*record of everything you have done on the engagement
•Integral part of audit quality •Documents the nature, timing and extent of work performed •Evidence of due care •Basis for conclusion •Facilitates planning, performance and supervision •Provides basis for review
purposes of audit documentation
*auditor pulls out each year
–Information of continuing audit significance –For example, key contracts, bylaws, organization chart, royalty and bond agreements
permanent files (audit documentation)
current files
everything for this year
–Includes the entire engagement administration file for the year under audit –Includes all documentation that is sufficient to support all conclusions on the audit
–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 doc should be prepared to enable auditor having no previous connection to the engagement to
–Name, date, purpose, page number –Procedures performed and conclusions  •Evidence GAAS •Audit Tick Mark Legend –Preparer’s and Reviewers’initials
info on each workpaper
7 years, report release date
documentation must be retained ____ from ________
45 days
all documentation must be finalized within _____ of the audit reports realase date
planning materiality (materiality)
–Applicable to overall financial statements
performance materiality (tolerable error/ misstatement)
–Applicable  to individual populations
•The maximum error that the auditor is willing to accept in a population
indivdually significant items
–Threshold for examining individual transactions or line items
trivial amounts (posting scope)
–Errors that are ignorable
–An account balance –A class of transactions (e.g. purchases)
performance materiality is usually ____________ or materiallity
individually significant items
•These are transactions or accounts that are significant due to: –Size –High risk of material misstatement (RMM) •Usually calculated as performance materiality divided by a factor (3-6)
trivial amounts (posting scope)
•A threshold at which misstatements below this amount need not be accumulated •Usually 1-5% of planning materiality (notperformance materiality)
performance materiality and posting scope
changes to materiality will also affect
1.Determine the appropriate benchmark 2.Determine planning materiality 3.Determine performance materiality 4.Determine individually significant items (ISI) 5.Determine posting scope
steps for calculating materiality