Chief Financial Officer (CFO) Influence On Audit Planning

Prepare by: ONG HUI LING KOH SO HA

AH090283 AH090116

Introduction
Aims is to contribute with field-based empirical research in the area of auditor-client interaction Auditors have to make trade-offs between being close to the clients and at the same time maintaining enough distance

Knechel (2007)
The increased use of audit tools such as internal control evaluations and the performance of analytical tests require much interaction with client personnel

Bamber& Iyer (2007)

The interaction with clients creates risks for reduce audit quality and threats to auditor independence

Purpose
1. To investigate the extent to which CFOs of listed companies seek to influence audit planning 2. What issues CFOs seek to influence 3. How CFOs justify the seeking of influence

Prior Research Client Influence On Audit Planning

ISA 300
The purpose of Audit Planning
Help the auditor to obtain sufficient appropriate evidence for the circumstances Help keep audit costs at a reasonable level Helps avoid misunderstanding with the client

ISA 315
The need for understanding the entity and its environment, which in turn requires much interaction in order to gain knowledge regarding business matters and internal control systems It does not seem possible to perform a good audit without getting rather close to the clients operation (business, organization, system) Keeping distance to the auditee may increase the reliability of the audit evidence, but the information received from closer interaction with the client may be considered more relevant when performing the audit.

The role of clients in the auditing context

Knechel (2007)
The increase reliance on systems controls and performance measurement as audit evidence tends to make the auditors relationship with management increasingly symbiotic because of the close interaction needed

 The interaction between client representatives and members of the audit team will take place at many different levels. The board of directors and the audit committee will have direct contact with the auditors and may influence the relationship between management and auditor , Carrington & Johed (2007)

Turley& Zaman (2007)

Audit Committee effectiveness - the need for distinguishing between routine and non-routine activities. Routine activities- external auditors tended to rely on negotiation and communication with management and the AC had limited impact on power relationships External auditor presented the audit plan to the AC after it had first been discussed with executive management and the discussions at the AC did not normally lead to any adjustments to the plan

ISA 300
Planning an audit is a continual and iterative process where the nature of planning activities will vary according to the size and complexity of the entity and any changes in circumstances The auditor may decide to discuss elements of planning with the entitys management to facilitate the conduct and management of the audit engagement Discussing about audit strategy or audit plan, care is required in order not to compromise the effectiveness of the audit

McCracken et al. (2008)

Relationship between the CFO and the audit partner The CFOs defined the roles and the relationships with the audit partners in terms of proactive and reactive relationships

Proactive relationship: CFO might initiate consultations with the audit partner before transactions were undertaken or disclosures drafted

Research Questions
1. To what extent do CFOs seek to influence audit planning and how is this manifested during audit planning meetings? 2. With regard to what issues do CFOs seek to influence audit planning? 3. How do CFOs justify the seeking of influence over audit planning?

Method
Interviews with CFOs in 52 of the largest listed companies in Sweden

1) To what extent did CFOs seek to influence audit planning and how was this visible during audit planning meetings?

 Data analysis shows 49 of the 52 clients seeking to influence audit planning

Interviewee sought influence on audit planning- Weak level
10

Interviewee sought influence on audit planning- Intermediate level

31

Interviewee sought influence on audit planning- Strong level

 the interviewees used cautious and passive formulations towards their influence the interviewees believed the auditors should have different plan compared to the company CFO try to enter the planning process at early stage, before the internal audit department and Audit Committee, which give him better position to seeking influence

 the interviewees took their own initiative to seek to influence audit planning CFOs used expressions like we plan shows that the auditors did the planning together with the client

 CFOs emphasized the right to influence because the company paid for the audit and should get value for the fee CFOs believed they had the same goal and equal position as the auditors regard to audit planning and therefore should participate in the planning

Strong level
when interviewees considered auditors to be providers of consultancy services CFOs appeared to order things they demanded from the audit, asking for audit by paying a high price and expressing desires to change staff on the audit team CFO seek to order what the auditors should do and view audit as tool for management control purposes

2) With regard to what issues do CFOs seek to influence audit planning?

 Table below summarizes what issues brought up by the interviewees

Category
Internal control issues Entities subject to audit Financial accounting issues Time schedules Audit fees/time budgets Management expenses Audit teams Management letters Financial position/going concern

Frequency(%)
85 50 33 17 13 13 12 8 4

Internal control issues

Many interviewees perceived auditing regulation required very little regarding on audit of internal control, and therefore there was more room for client demands Though the standard open discussion with the client concerning limitations and restrictions regarding audit strategy and timing, the issues of interviewees right to influence internal control threaten the auditors ability to not compromise the effectiveness of audit

Selection of entities subject to audit

Discussion at planning meeting could concern what audit scope to apply to a certain entities, they present an audit scope for different legal entities Entities- countries, factories, project , depending on what was relevant in a particular company From an auditor view, scope of audit in legal entities is key issue where one would expect little client impact

3) How do CFOs justify the seeking of influence over audit planning?

CFO perceived their relation with auditors as customer-supplier relationship, which give them the right to demand things from the auditor belief that the CFO and the auditors shared a common interest of examine the company in order to discover inappropriateness

Conclusion
CFOs seek to influence audit planning Because they benefit from audit work related to internal control Because they believe they have the right to influence, viewing themselves as customers who share a common interest with the auditors in terms of controlling subordinates in the company

 The available room for influence during planning meeting was related to flexibility in the terms of engagement given the opportunity for clients to influence certain parts during the audit planning meeting