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The PwC Audit

A Continuous Improvement Approach


to Audit Methodology


Agenda

• Governance of PwC Audit


• Overview of recent evolution of PwC Audit
• Overview key elements of PwC Audit
– Acceptance and Continuance
– Audit Comfort Cycle
– Substantive Procedures
– Other Audit Procedures
– Audit Committee Communications Plan

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PwC Audit Governance

Global Audit Policy Board Global R&Q


Establish global overarching Ensure methodology is consistently
policy principles & goals implemented by providing feedback
and ratify policy statements. on practice issues.

Global Audit Methodology Steering Group


Drive execution of policy in practice through
processes, tools, guidance, training content, etc.

Implementation Partner Network

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Towards Performance Audit:
a continuous improvement program

PwC PwC
Audit Audit
2003:
• Converged
2002: approach,
• Business enhanced testing
2001: analysis guidance
• Audit Comfort framework • Enhanced client
Cycle • Enhanced audit communications,
guides/ practices transparency focus
• Management
controls focus • Scaling up - • Application to
different client small companies/
• Show me and
situations MNCs
Taking stock
• MyClient • Better use of
• Team re-
deployment integration specialists and Time
knowledge sources

Historical Financial Changes in Deliverables


Statements Opinion
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Changing the Focus of the Audit Model

Key
Risk
Key
Key Risk
Risk Key
Key Risk
Risk Key
Risk

Business Risks Audit Risks


Identified
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PwC Audit in 2004

• Acceptance and Continuance (FRISK)


• Audit Comfort Cycle
– Scoping
– Understanding
– Evaluating
– Validating
• Substantive Testing
• Other Audit Procedures
• Audit Committee Communications Plan

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PwC Audit Approach

Acceptance/Continuance Assessment

Audit
Comfort
Cycle

No / Limited Significant
controls controls
comfort comfort
Other audit evidence
Mainly Mainly
tests of details substantive analytical
procedures

•Other audit procedures


•Financial statements
•Completion

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PwC Audit Approach – With Attestation

Acceptance/Continuance Assessment
Broader and deeper assessment of COSO
controls over financial reporting, including
management’s evaluation of those controls.
e.g., estimates, fraud, tax accrual, more
locations.
Audit
Report on management’s assertions on
Comfort internal controls over financial reporting
Cycle

No / Limited Significant
controls controls
comfort comfort
Other audit evidence Additional procedures deemed necessary
Mainly Mainly to provide independent assurance on
tests of details substantive analytical financial statements, taking into
procedures consideration the internal controls
assessment.

•Other audit procedures


•Financial statements Report on Financial Statements
•Completion

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Acceptance & Continuance Process

• Governance and oversight of management


• Past performance
• Management’s expertise and skill
• Adequacy of management resources
• Audit relationship
• Audit adjustments
• Revenue recognition
• Accounting control
• Integrity and ethics
• Management inclination for intentional misstatement in financial reporting
• Reliability of estimates
• Incentive for intentional misstatements in financial reporting
• Risk of insolvency

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Acceptance & Continuance Process

Risk Conditions (13) Engagement Leader and Team Manager apply


(defined within professional judgment in describing specific Key
Acceptance & Risks that relate to the broader Risk Conditions
Continuance module)
1
Key Risks
(user defined or
selected from
2 Master Data)
Risk and
Approach
Schedule The Risk and Approach Schedule is populated
by the Key Risks selected and completed by the
Engagement Leader and Team Manager

Audit Comfort
3 MyClient
Matrix
Client File

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Audit Comfort Cycle

ACCEPTANCE/CONTINUANCE ASSESSMENT

4 Key Questions Market


Overview
Strategy Value
Creating
Financial
Performance
Activities
• What does management
need to get comfort on?
Audit
• How does management comfort
get comfort? cycle
• Are they entitled to that
comfort? SIGNIFICANT
CONTROLS
NO/LIMITED
CONTROLS
COMFORT COMFORT
• Can we audit that comfort?
SUBSTANTIVE AUDIT EVIDENCE

MAINLY SUBSTANTIVE MAINLY TESTS


ANALYTICAL OF DETAILS
PROCEDURES

OTHER AUDIT PROCEDURES


FINANCIAL STATEMENTS
COMPLETION

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Audit Comfort Cycle

ACCEPTANCE/CONTINUANCE ASSESSMENT

Market Strategy Value


Financial
Overview Creating
Performance
Activities
• What does management
need to get comfort on? Audit
comfort
cycle

SIGNIFICANT NO/LIMITED
CONTROLS CONTROLS
COMFORT COMFORT

SUBSTANTIVE AUDIT EVIDENCE

MAINLY SUBSTANTIVE MAINLY TESTS


ANALYTICAL OF DETAILS
PROCEDURES

OTHER AUDIT PROCEDURES


FINANCIAL STATEMENTS
COMPLETION

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Scoping: Forming a Point of View

• Perform company and industry analytical procedures


• Research and analyze external communications
• Partners connect with staff members
• Document the team’s understanding of the business
• Knowledge broker to capture and share industry
information
• Form a point of view on the risks that management
should be concerned about

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Scoping:
Business Analysis Framework

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Scoping:
Risk Assessment – Key Risks

Business
Risks
Key Risk

Key risks are those conditions or


factorsWewithin an audit that, in
identify audit risk
the judgment
through of the auditor, give
understanding Key Risk

rise tothe entity’srisk


a greater business
of material
objectives and related
financial misstatement or other Key Risk
risks. Key Risk
matters resulting in the issuance
of an inappropriate audit report.
Key Risk

Audit
Risks
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Scoping: Analytical Procedures

• High Level
– Understand the business
– Identify areas of risk
• Disaggregated Account Level
– Determine the nature, timing & extent of testing
• External benchmarking to peers, market trends
– Looking for anomalies, areas of risk
– Use of extensive knowledge management tools
available

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Scoping Translated into Audit Strategy

Business
Objectives

Risks Controls
Stakeholders

Alignment

Where controls over significant account balances or classes of transaction are not
aligned, we will need to perform substantive tests of details.
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Scoping: Audit Team of Specialists

Computer-Assisted Audit Energy Trading


Techniques Risk Enterprise-wide
Business Financial Risk
Business
Risk
Objectives Resilience
Project
Management
Business
Process
Risks Controls
Stakeholders

Performance Data Risk Fraud


Improvement
Internal Audit Regulatory/
Security Compliance
Systems & Alignment
Technology Treasury

Our best teams use our specialist capabilities to help in forming a point of view.

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Scoping: Use of Specialists

• Policies for the use of Systems and Process


Assurance specialists and Fraud Risk & Controls
specialists are based around risk attributes
• Policies are for consultation with specialists – level
of involvement remains a decision of engagement
leader
• At a minimum, Required to consider use of
specialists at mobilization stage

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Audit Comfort Cycle

ACCEPTANCE/CONTINUANCE ASSESSMENT

4 Key Questions Market


Overview
Strategy Value
Creating
Financial
Performance
Activities
• What does management
need to get comfort on?
Audit
• How does comfort
management get cycle
comfort?
SIGNIFICANT NO/LIMITED
• Are they entitled to CONTROLS
COMFORT
CONTROLS
COMFORT

that comfort?
SUBSTANTIVE AUDIT EVIDENCE
• Can we audit that
MAINLY SUBSTANTIVE MAINLY TESTS
comfort? ANALYTICAL
PROCEDURES
OF DETAILS

OTHER AUDIT PROCEDURES


FINANCIAL STATEMENTS
COMPLETION

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Applying Audit Comfort Cycle
from the Top-Down

• Organize audit team to align


with how management runs
the business.
Board
Audit controls Sr Mgmt
• Extend discussions about
from the business objectives & risk
top down Department to management controls.
Heads
• Understand & evaluate how
management controls risk.
Operations • Validate controls against
engagement team’s point of
view.
Transaction Processing

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“Taking Stock”: Real-Time Linkage in
the Iterative Process

• Share team members’ cumulative knowledge


• Update risk identification and assessment
• Consider the audit comfort gained to date, by audit
assertion
• Answer: “Do we have enough comfort?”
• Answer: “What do we do next?”

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Connecting the Dots …
Financial Statement
Business Process A Assertions/
Business Objectives
 Completeness Account Audit Objectives
 Accuracy Balances and
 Validity Transactions Classes of
 Restricted Access Transactions
 Occurrence
 Completeness
Business  Accuracy
Business Process B  Cutoff
Risks
 Completeness Account  Classification
related to Account
 Accuracy Balances and
achieving Balances
 Validity Transactions
Objectives  Rights &
 Restricted Access
…… Obligations
……  Existence
……  Completeness
Business Process C  Accuracy/Valuation
 Completeness Account Presentation &
 Accuracy Balances and Disclosure
 Validity Transactions  Occurrence/R&O
 Restricted Access  Completeness
 Understandability
 Accuracy/Valuation

General Computer Controls

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Audit Comfort Matrix

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Summary of Comfort

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Substantive Audit Evidence

ACCEPTANCE/CONTINUANCE ASSESSMENT

Market Strategy Value


Financial
Overview Creating
Performance
Activities

Audit
comfort
cycle

SIGNIFICANT NO/LIMITED
CONTROLS CONTROLS
COMFORT COMFORT

SUBSTANTIVE AUDIT EVIDENCE

MAINLY SUBSTANTIVE MAINLY TESTS


ANALYTICAL OF DETAILS
PROCEDURES

OTHER AUDIT PROCEDURES


FINANCIAL STATEMENTS
COMPLETION

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Achieving the Right Balance

No/Limited Controls Comfort Significant Controls Comfort

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Assurance Hierarchy

Will we obtain audit assurance from


tests of controls?

Yes
No
Test controls.

Can we obtain audit assurance from


substantive analytical procedures?

Yes
Perform substantive
No analytical procedures.

Do we need additional
audit assurance?

Yes No

Perform tests of No further testing


details. required.
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Other Audit Procedures

ACCEPTANCE/CONTINUANCE ASSESSMENT

Market Strategy Value


Financial
Overview Creating
Performance
Activities

Audit
comfort
cycle

SIGNIFICANT NO/LIMITED
CONTROLS CONTROLS
COMFORT COMFORT

SUBSTANTIVE AUDIT EVIDENCE

MAINLY SUBSTANTIVE MAINLY TESTS


ANALYTICAL OF DETAILS
PROCEDURES

OTHER AUDIT PROCEDURES


FINANCIAL STATEMENTS
COMPLETION

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Other Audit Procedures:
More Connecting the Dots

• Link management information to financial statements


• Review adjustments necessary to reconcile
management information to the financial statements
• Review non-standard journal entries and other
adjustments to ascertain whether entries may be
indicative of fraud based upon the risk of management
override on controls
• Perform ongoing analytical procedures, including
updating analytical procedures related to revenue

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Audit Committee Communications
Framework: Objectives

• Promote effective and candid communications

• Enhance timely reporting, dialogue and sharing


views
– Service approach
– Risk and Control
– Financial Reporting
– Governance
• Provide consistency in our deliverables through
recommended templates and practice aids

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Audit Committee Communications Plan
Getting started Understanding the audit Staying informed Resolution and completion

[Indicate timing] [Indicate timing] [Indicate timing] [Indicate timing]

Our audit plan


PwC
– Reporting timetable
principles and
Service practices – Business unit
scope
approach Communications – Engagement team
plan Engagement – Other deliverables
letter and
independence
confirmation
Risk analysis Internal
Update on
control and
accounting/audit
business
issues and risk
Risk and Perspectives on
fraud risk
issues
analysis
Risk condition report
control alert
Other regulatory
requirements –
plan
Reporting
requirements

Quarterly Quarterly Quarterly


review – Internal control
Financial review review
deficiencies
Audit
reporting Best
– Accounting
opinion
Transparency policies
of corporate practices in
reporting corporate – Management
reporting judgments
– Quality of
earnings
– Independence
Corporate Assessing
Governance governance: – Transparency our
roles and performance
practices and yours

Ongoing assessment of needs & expectations

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The PwC Audit

• Global approach adaptable to all clients


• Designed for continuous improvement
• Performance metrics will play a larger role in future
audits
• Audit quality is at the core of our long term
business objectives.

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

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