Ch 6 Planning the Audit Linking Audit Procedures to Risk

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Ch 6 Planning the Audit Linking Audit
Procedures to Risk
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Introduction

• The first standard of field work
• The work is to be adequately planned
• and assistants are to be properly supervised

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Audit Planning
Proposal
Decide whether or not to accept prospective
client
Obtain knowledge of clients business and
industry
Make preliminary Arrangements prepare
engagement letter
Develop audit strategy and audit plan
Design audit programs
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Client Acceptance

• The key to success for a CPA Firm
• Investigate prospective client
• Personal integrity, business ethics, financial
  strength, credit rating
• Communicate with predecessor auditor--SAS 7
• Does CPA Firm have staffing and knowledge of
  client industry, etc.

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Understanding the Clients Industry

• Special industry characteristics
• Special industry risks
• Products and markets
• Financial data and ratios
• Regulation

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Understanding the Clients Business--

• Organization and personnel
• Systems and procedures
• Accounting policies and issues
• Capital structure
• Product lines and processes
• Marketing and sales structure and procedures
• Tax structure

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Engagement Letter

• Establish a written understanding with the client
  regarding
• Services
• Objectives
• Responsibilities of management
• Responsibilities of auditor
• Limitations of audit
• Audit schedule, fees, etc.
• See sample engagement letter

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Engagement Letter
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Develop an Audit Strategy

• Audit risk vs. and efficient audit
• Materiality--quantify at the planning stage
• Assess the risk of fraud
• FTT audit procedures
• Use of clients staff
• Arrange for specialists

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Audit Plan

• Documentation of the planning process
• Description of the client
• Objective of the audit
• Extent of other services
• Timing of work
• Use of client staff

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Audit Plan

• Audit firm staffing personnel
• Special audit risks
• Assessment of risk of material fraud
• Preliminary assessment of materiality

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Designing Audit Programs

• Detailed list of audit procedures by financial
  statement classification or transaction cycle,
  etc.
• Geared to audit trail in clients system and
  records
• Tests audit assertions

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Direction of Audit Testing
Test for Existence
Finish
Start
Test for Completeness
Start
Finish
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Organization of Audit Programs--Systems

• Often organized by transaction cycle to test or
  walk through transactions
• Revenue/cash receipts
• Purchases/disbursements
• Production
• Payroll
• Investing
• Financing

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Organization of Audit Programs-- Substantive

• Audit programs address the audit assertions with
  the appropriate audit procedures
• Existence
• Completeness
• Verifying cut off
• Rights and obligations
• Valuation or allocation
• Presentation and disclosure
• See sample audit program

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Client _________________________ Audit Date
_____________________ CASH IN BANKS AND ON
HAND 1. Obtain or prepare reconciliations of
all bank accounts foot reconciliations trace
the book balance to the trial balance and the
bank balance to the cut-off bank statement and to
the bank confirmation. 2. Confirm the bank
balances using a standard bank confirmation
form. 3. Request cut-off bank statements from
banks approximately two weeks after year-end.
. 4. Upon receipt of the cut-off bank statements,
prove reconciling items by comparing paid checks
with the outstanding check list, tracing deposits
in transit to deposits on the bank statement
tracing bank errors listed on the reconciliation
to the correction by the bank on the cut-off
statement. 5. By use of cut-off statements,
review the adequacy of cut-off of cash
transactions by noting time-Iag for .checks and
deposits on the reconciliation to clear the
bank. 6. Review all Debit and Credit Memos
clearing with the cut-off bank statement for
items applicable to the year under audit. 7.
Schedule interbank transfers of cash for 3-5 days
before and after year-end to determine possible
errors in cash cut-off.
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CASH IN BANKS AND ON HAND 8. In presence of
custodian, count cash funds listing cash, checks,
and disbursement vouchers included as a part of
the fund and agree the amount to the trial
balance account. 9. By use of unreimbursed
disbursement vouchers determine the correct fund
balance as of year-end. 10. If cash funds are
counted at other than year-end, reconcile to the
year-end balance. 11. Prepare and prove a
"proof-of-cash H transactions form for a selected
test month. 12. Obtain data necessary for
disclosme in the report such as bank overdrafts,
cash withdrawal restrictions. Completed by
and date ______________________ Reviewed by
and date _______________________
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Recap of the Audit Process

• Obtain understanding of the client and its
  environment
• Identify assess inherent risks of material
  misstatement, including risks of fraud
• Obtain a sufficient understanding of internal
  control to plan the audit
• Determine planned assessed level of control risk
  and design additional tests of controls planned
  substantive tests.
• Perform additional tests of controls
• Reassess control risk modify planned
  substantive tests
• Perform substantive tests complete audit
• Form an opinion issue audit report