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Chapter 6
Audit Planning
and
Documentation

PowerPoint to accompany:

Planning the Audit

Gaining an understanding of the clients business and
industry is one of the most important steps in audit
planning.
Auditors should plan audit engagements (ASA 300):
To enable the auditor to obtain sufficient
appropriate evidence
To keep audit costs reasonable
To avoid misunderstandings with the client.

Risk Terms
Acceptable (desired) audit risk:
How willing the auditor is to accept that the financial
statements may be materially misstated when an
unmodified opinion has been issued.
Inherent risk:
Auditors assessment of the likelihood of material
misstatements in an account balance before
considering the effectiveness of internal control.

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Planning and Designing the Audit Approach

Initial Audit Planning

Step 1: Accept new client or continue to service
existing client.
Step 2: Identify the clients reasons for an audit.
Step 3: Obtain mutual understanding with the client
about the terms of the engagement.
Step 4: Select staff for the engagement and evaluate
need for outside specialists.

Client Acceptance and Continuance

New client investigation:

Investigating the company to determine its

acceptability

Examining the prospective clients:

Standing in the business community

Financial stability

Relations with previous accounting firm.

Continuing engagements:

Reasons to drop a client: e.g. conflicts over audit

scope, type of opinion or fees.

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Identify the Clients Reasons for Audit

Most likely uses of the statements can be determined from:

o

Previous experience with the client

Discussion with management.

Information may affect the auditors assessment of acceptable audit

risk.

Obtain an Understanding With the Client

Engagement letter:
Documents the auditors understanding with the client
Includes:
o Objectives of engagement
o Responsibilities of the auditor and management
o Limitations of engagement
o Agreement to provide other services
o Agreement on fees
o Does not affect auditors responsibility to external users.

Overall Audit Strategy

Audit Strategy considers the nature of the clients
business and industry, and the areas where there is
greater risk of significant misstatement, in order to
develop a preliminary approach to the audit,
including:
Engagement team staff selection:
o

Must have the appropriate capabilities,

competence and time to perform the audit

Staff must be knowledgeable about the

clients industry.

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Evaluate the Need for Outside Specialists

If an audit requires specialised knowledge:

o

It may be necessary to consult a specialist or

an expert.

The auditor needs to evaluate the experts:

o

Professional competence and qualifications

Relationship to the client.

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ASA 315

Understanding the
Clients Business and
Industry

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Why do we need to understand the client?

All of these components may influence

Accounting policy choice

Management decisions

Where misstatements are likely to occur

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Increased Importance of Understanding the Clients

Business and Industry
Increased auditor understanding of economic declines
on clients business risks
Information technology (IT)
Client expansions of operations globally
IT impacts on clients internal processes
Business impact on the environment
Importance of human capital, intangibles
Complexity of financial instruments and accounting.
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Industry and the External Environment

Risks associated with specific industries may affect the auditors
assessment of client business risk and acceptable audit risk.
Certain inherent risks are typically common to all clients in certain
industries. Familiarity with those risks aids the auditor in assessing their
relevance to the client.
Many industries have unique accounting requirements that the auditor
must understand to evaluate whether the clients financial statements are
in accordance with Australian accounting standards.

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Business Operations and Processes

Auditor needs understanding of:

Major sources of revenue

Key customers and suppliers

Sources of financing

Identify related parties:

inquiry of management regarding known related parties

review of the information related to third parties

examination of share registers

inquiry as to the affiliation of management with other entities

Review minutes of meetings.

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Management and Governance

Auditor should understand and assess:

Managements philosophy and operating style

Clients ability to identify and respond to risk

The companys governance system

The company policies, companys constitution

The companys code of ethics

The corporate minutes

The company's system of measuring/reviewing performance.

Auditor should understand client objectives related to:

o

Reliability of financial reporting

Effectiveness and efficiency of operations

Compliance with laws and regulations.

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Client Business Risk

The risk that the client will fail to achieve its objectives.

Auditors primary concern is:

o

The risk of material misstatements in the financial statements

due to client business risk.

Management is the primary source for identifying client business

risks.

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Assessing Client Business Risk

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Preliminary Analytical Procedures

Preliminary analytical procedures are performed to:

Better understand the clients business

Assess client business risk.

Comparing client ratios to industry or competitor benchmarks:

Reveals unusual changes in ratios compared to prior years or

industry averages

Identifies areas with increased risk of misstatements.

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Purposes of Audit Documentation

Audit documentation is the principal record of:

Auditing procedures performed

Evidence obtained

Conclusions the auditor reached.

Purposes of working papers:

Basis for planning

Record of evidence accumulated and results of tests

Data for deciding on audit report

Basis for review by supervisors and partners.

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Ownership and Retention of Audit Files

The working papers prepared during the audit are the property of the
audit firm (ASA 230)
At the completion of an engagement:

The audit firm retains the working papers and computer files
until the end of seven years after the date of the audit report.
This period may be extended, depending on the possible
period of reliance that could be placed on the audit report and
the need to satisfy any pertinent legal requirements of record
retention.

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Confidentiality of Audit Documentation

The auditor is responsible for adopting appropriate policies
and procedures for maintaining the confidentiality, safe
custody, integrity and retrievability of working papers (ASA
230 Aus A 24.1 and ASQC 1).

Ordinarily, the working papers can be provided to someone

else only with the express permission of the audit client
(APES 110).

They may be subject to review by the professional bodies.

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Content and Organisation of Audit Files

Permanent audit files:

Contain data of a historical or continuing nature pertinent to

the current audit e.g.:
o

Extracts of key company documents

Important analyses from previous years

Details of internal control systems and assessment of

control risk

Results of previous analytical procedures.

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Contents and Organisation of Audit Files (Contd)

Current audit files:

Audit documentation applicable to the year under audit e.g.:

o

Audit program

General information and planning

Working trial balance

Adjusting and reclassification entries

Supporting schedules.

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Contents and Organisation of Audit Files (Contd)

Working papers should possess certain characteristics:

Clients name, period covered, description of contents, initials

of the preparer, date of preparation and an index code

Indexed and cross-referenced

Indication of audit work performed

To prepare working papers, auditors must know their goals

Conclusions reached about the audit segment.

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Contents and Organisation of Audit Files (Contd)

Documentation should be prepared in sufficient detail to provide
an experienced auditor with no connection to the audit a clear
understanding of the:

Work performed

Evidence obtained and its source

Conclusions reached.

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Audit Files Content Comparison

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Electronic Audit Documentation

Audit evidence is increasingly in electronic form

Auditors use computers to read and examine evidence

Auditors also use technology to:

o

Convert traditional paper-based documentation into electronic

files

Organise and analyse audit documentation.

Commercial audit software programs such as ACL Software and
Interactive Data Extraction and Analysis (IDEA) software are
designed specifically for use by auditors

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NOTE THIS MATERIAL IS NOT COVERED IN THE TEXTBOOK

Auditors and off-shoring

What is off-shoring?

Sending audit work to centres in India and other countries to be

completed

Why do audit firms engage in off-shoring?

Tighter reporting deadlines

Saving cost

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NOTE THIS MATERIAL IS NOT COVERED IN THE TEXTBOOK

Auditors and off-shoring

What are the risks?

No auditing standards around off-shoring

How can auditors be sure work is being completed appropriately?

Experiment showed that jurors are less likely to have confidence in

audit work conducted overseas

How much should/could be off-shored?

A good article for you to learn more (also in Flipboard Magazine):

http://www.reuters.com/article/us-usa-audit-india-idUSBRE89F1GC20121016

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