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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
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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
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Practice problem 7-19 (p. 205)
What do you do
before you begin
fieldwork?
What are your
resources?
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Preplanning
New client acceptance or client
continuance
Client’s reasons for audit
Independence threat analysis
Engagement letter
Staffing capabilities and meetings
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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
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Communication with predecessor
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Preplanning: Client’s reasons for
audit
Who are the users?
What are the intended uses of the financial
statements?
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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?
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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
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Copyright © 2007 Pearson Education Canada
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
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Copyright © 2007 Pearson Education Canada
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
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Copyright © 2007 Pearson Education Canada
Client risk profile: Obtain knowledge
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?
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Copyright © 2007 Pearson Education Canada
Client risk profile: Obtain knowledge
of client’s business
Finding out about
your client helps you
to decide what
questions to ask in the
balance of the
planning process
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Copyright © 2007 Pearson Education Canada
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
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Copyright © 2007 Pearson Education Canada
Practice problem 7-20 (p. 205)
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
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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?
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Practice problem 7-24 (p. 207)
Here’s an example of
a possible related
party situation
How does this affect
your audit opinion?
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Copyright © 2007 Pearson Education Canada
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
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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?
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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?
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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
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Primary purposes of audit planning
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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
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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
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Copyright © 2007 Pearson Education Canada
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
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Types of working paper files
Permanent
Current
– Risk assessment and materiality
– Audit program
– General information
– Working trial balance
– Adjusting and reclassification entries
– Supporting schedules
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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
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Copyright © 2007 Pearson Education Canada
Practice problem 7-21 (p. 206)
Let’s look at an example working paper
What have they done appropriately?
What is missing or what needs to be done
differently?
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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
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Copyright © 2007 Pearson Education Canada