ch07 70 360

Chapter 7: Audit Planning and
Documentation
7-1
Copyright © 2007 Pearson Education Canada
Chapter 7 objectives
 Explain the importance of audit planning
 Identify the steps to preplanning
 Note the contents and relevance of an
engagement letter
 Discuss the role of a client risk profile
 Explain the purposes of audit working
papers and their typical characteristics
7-2
Planning the audit
 Planning is the “development of a
general strategy and a detailed
approach for the expected nature,
extent, and timing of the audit”–
what are you going to do, why
and how!
 Three distinct phases:
 Preplan
 Develop client risk profile
 Assess control risk and design
testing plans
7-3
Practice problem 7-19 (p. 205)
 What do you do
before you begin
fieldwork?
 What are your
resources?
7-4
Preplanning
 New client acceptance or client
continuance
 Client’s reasons for audit
 Independence threat analysis
 Engagement letter
 Staffing capabilities and meetings
7-5
Preplanning: New client acceptance
or client continuance
 Would you accept a client where the owner
had filed for bankruptcy three times, is
currently being sued for tax evasion, and is
considering a public offering of shares?
 Why or why not?
 Both new and existing clients should be re-
evaluated for every engagement
7-6
Communication with predecessor
 When the auditor is asked to take on a new

client, he/she is required to communicate
with the predecessor auditor
 Why?
 What could go wrong if this
communication is not initiated?
7-7
Preplanning: Client’s reasons for
audit
 Who are the users?
 What are the intended uses of the financial
statements?
 For publicly held companies, the auditor is

likely to set audit risk to low because of
the large number of users
7-8
Preplanning: Independence threat
analysis
 Recall the five potential threats to
independence (self-interest, self-review,
advocacy, familiarity, intimidation)
 These need to be explicitly addressed,
potential threats described, safeguards put
into place
 If independence cannot be achieved, the
engagement must be declined
7-9
Preplanning: Engagement letter
 Provides documentation of a clear
understanding of the terms of the
engagement between the client and the
public accounting firm
 What are several of the issues that are
included in the engagement letter?
7-10
Preplanning: Staffing capabilities
and meetings
 Overall, the audit team needs to have
sufficient training and proficiency to
conduct the engagement
 This includes continuity of staff,
complying with rules of conduct
(familiarity threat), and assigning internal
or external specialists as needed
7-11
Client risk profile: to assess the client’s
business risk and document portions of
the audit risk model
 Obtain knowledge of  Assess risks of fraud
industry and business  Decide on need for
environment outside specialists
 Obtain knowledge of Chapter 8:
client’s business  Determine audit risk
 Assess control  Determine inherent
environment and risk
corporate governance  Calculate materiality
process
7-12
Client risk profile: Obtain knowledge
of industry and business
environment
 Why is this necessary?
 1. Many industries have unique accounting
environments
 2. Risks in the industry may affect the
auditor’s assessment of audit risk for this
client
 3. Some inherent risks are common to all
businesses in an industry
7-13
of industry and business
environment
 What are some
examples of sources
that you could use to
find out about the car
dealership industry?
 What about the health
care industry, in
particular, hospitals?
7-14
of client’s business
 Finding out about
your client helps you
to decide what
questions to ask in the
balance of the
planning process
7-15
How to: obtain knowledge of
client’s business (Table 7-1)
 Tour the plant and  Review significant
offices contracts
 Identify related  Perform preliminary
parties analytical procedures
 Review articles of  Document control
incorporation and environment and
bylaws corporate governance
 Read minutes of processes
directors’ meetings
7-16
 What is some of the type of information
that you would find in board of director’s
minutes?
 Examine an extract of minutes to assess the
impact on the audit engagement
7-17
Related parties
 What is a related party?
 Why is it important to find out about
related parties as part of our knowledge of
business?
 What could go wrong if we did not find
out about related parties?
7-18
 Here’s an example of
a possible related
party situation
 How does this affect
your audit opinion?
7-19
Client risk profile: Assess control
environment and corporate
governance process
 Corporate governance processes include
‘tone at the top,’ how senior executive is
monitored, how management is managed
 Control environment includes policies and
procedures that affect all aspects of the
business
7-20
Corporate governance and control
environment
 What happens when management does not
pay attention to the ethical environment?
 If a business is well run, with a corporate
code of ethics that is demonstrated and
enforced by management, what is the
effect upon the auditor’s assessment of
inherent risk?
7-21
Client risk profile: Assess risks of
fraud
 Why does the auditor need to assess risks
of fraud?
 Have you read anything recently that
illustrates what can go wrong with senior
management fraud?
7-22
Client risk profile: Decide on need
for outside specialists
 What type of specialist would you need for
the following types of clients? Why?
 A retail store that sells fashion clothing
 A distributor of electronics products
 An insurance company
 A fuel oil exploration and development
company
7-23
Primary purposes of audit planning
 Provide information to assist in assessing

audit risk and inherent risk
 Affects client acceptance or continuance
decision
 Obtain information that influences
evidence collection process
7-24
Working papers
 Can be stored in paper or electronic form
 Aid the auditor in providing reasonable
assurance that an adequate audit was
conducted in accordance with GAAS
7-25
Purposes of working papers
 Basis for planning the audit
 Record of the evidence accumulated and
the results of the tests
 Data for determining the proper type of
auditor’s report
 Basis for review
7-26
How are working papers
organized?
 Each firm has its own approach for
organizing working papers
 Organization will depend upon whether
they are manual or electronic
 Depends upon the firm standards used for
documentation: may be firm specific or
standard approaches that can be purchases
7-27
Types of working paper files
 Permanent
 Current
– Risk assessment and materiality
– Audit program
– General information
– Working trial balance
– Adjusting and reclassification entries
– Supporting schedules
7-28
Standards for preparing working
papers
 Properly identified
 Well organized (indexed and cross-
referenced)
 Clearly indicate the work performed
(including supervision)
 Sufficient documentation to indicate that it
meets the purpose for which it was
prepared
 Conclusions clearly stated
7-29
 Let’s look at an example working paper
 What have they done appropriately?
 What is missing or what needs to be done
differently?
7-30
Ownership and confidentiality of
working papers
 Ownership: auditor
 Client documentation must be kept
confidential: may be disclosed only to peer
review, when subpoenaed, or in other
circumstances with the consent of the
client
7-31

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ch07 70 360

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Chapter 7: Audit Planning and

 When the auditor is asked to take on a new

 For publicly held companies, the auditor is

 Provide information to assist in assessing

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