Audit Planning and Documentation PDF

Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE Module 7: Audit Planning and Documentation At the end of this module, you will learn: 1. Audit...

Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE Module 7: Audit Planning and Documentation At the end of this module, you will learn: 1. Audit planning; and 2. Audit documentation Audit Planning An effective and efficient audit relies on proper planning procedures. The planning process is covered in general terms by PSA 300 which states that the auditor shall plan the audit so that the engagement is performed in an effective manner. Audits are planned to: § Help the auditor devote appropriate attention to important areas of the audit § Help the auditor identify and resolve potential problems on a timely basis § Help the auditor properly organize and manage the audit so it is performed in an effective manner § Assist in the selection of appropriate team members and assignment of work to them § Facilitate the direction, supervision and review of work § Assist in coordination of work done by auditors of components and experts Audit procedures should be discussed with the client’s management, staff and/or audit committee in order to coordinate audit work, including that of internal audit. However, all audit procedures remain the responsibility of the external auditors. A structured approach to planning will include: Step 1 Ensuring that ethical requirements are met, including independence Step 2 Ensuring the terms of the engagement are understood Step 3 Establishing the overall audit strategy that sets the scope, timing and direction of the audit and guides the development of the audit plan § Identify the characteristics of the engagement that define its scope. § Ascertain the reporting objectives to plan the timing of the audit and nature of communications required. § Consider significant factors in directing the team’s efforts. § Consider results of preliminary engagement activities. § Ascertain nature, timing and extent of resources necessary to perform the engagement. Step 4 Developing an audit plan that includes the nature, timing and extent of planned risk assessment procedures and further audit procedures. The Overall Audit Strategy and the Audit Plan Audit Strategy. The overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan. The Overall Audit Strategy: Matters to Consider Characteristics of the engagement § Financial reporting framework § Industry-specific reporting requirements 1 Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE § Expected audit coverage § Nature of business segments § Availability of internal audit framework § Use of service organizations § Effect of information technology on audit procedures § Availability of client personnel and data Reporting objectives, timing of the audit § Entity’s timetable for reporting and nature of communications § Organization of meetings with management and those charged with governance § Discussions with management and those charged with governance § Expected communications with third parties Significant factors, preliminary § Determination of materiality engagement activities, and knowledge § Areas identified with higher risk of material misstatement gained on other engagement § Results of previous audits § Need to maintain professional skepticism § Evidence of management’s commitment to design, implementation and maintenance of sound internal control § Volume of transactions § Significant business developments § Significant industry developments § Significant changes in financial reporting framework § Other significant recent developments Nature, timing and extent of resources § Selection of engagement team § Assignment of work to team members § Engagement budgeting The audit plan converts the audit strategy into a more detailed plan and includes the nature, timing and extent of audit procedures to be performed by engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. The audit plan shall include the following: § A description of the nature, timing and extent of planned risk assessment procedures § A description of the nature, timing and extent of planned further audit procedures at the assertion level § Other planned audit procedures required to be carried out for the engagement to comply with PSAs The planning for these procedures occurs over the course of the audit as the audit plan develops. § Timetable of planned audit work § Allocation of work to audit team members § Audit procedures for each major account (e.g., inventory, receivables, cash, etc) § Materiality for the financial statements as a whole and performance materiality The following financial statement disclosures must be considered in the planning stage: § Changes in the entity’s environment, financial conditions or activities § Changes in the applicable financial reporting framework § The need to involve an auditor’s expert (e.g., for disclosures related to financial instruments, fair value of fixed assets, pensions, etc.) 2 Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE § The need to discuss matters with those charged with management Any changes made during the audit engagement to the overall audit strategy or audit plan, and the reasons for such changes, shall be included in the audit documentation. Interim and Final Audits The interim audit is carried out during the period of review and the final audit take place after the year end. The purpose of the interim audit is to carry out procedures that would be difficult to perform at the year end because of time constraints. Work at this time tends to focus on risk assessment and on documenting and testing internal controls. Some substantive procedures can also be carried out but these are limited because statement of financial position figures will not be the ones to be reported on. The final audit will focus on the audit of the financial statements. It concludes with the auditor issuing a report which contains the opinion expressed on the financial statements covering the entire year being audited. The final audit opinion will take account of conclusions reached at both audit visits (i.e., interim and final). PSA 330 states that the higher the risk of material misstatement, the more likely it is that the auditor will decide that it is more effective to undertake substantive procedures nearer to, or at, the period end rather than earlier. Some audit procedures can only be performed at the final audit, such as agreeing the financial statements to the accounting records and examining adjustments made during the process of preparing the financial statements. Interim audit procedures may include: Final audit procedures include: § Inherent risk assessment and gaining an § Substantive procedures involving verification of understanding of the entity statement of financial position balances and § Recording the entity’s system of internal control amounts in the statement of profit or loss § Evaluating the design of internal controls § Obtaining third-party confirmations § Carrying out tests of control on the company’s § Analytical procedures relating to figures in the internal controls to ensure they are operating as financial statements expected § Subsequent events review § Performing substantive testing of § Agreeing the financial statements to the accounting transactions/balances to gain evidence that the records books and records are a reliable basis for the § Examining adjustments made during the process of preparation of financial statements preparing the financial statements § Identification of issues that may have an impact on § Considering of the going concern status of the work to take place at the final audit entity § Performing tests to ensure that the conclusions formed at the interim audit are still valid § Obtaining written representations Impact of Interim Audit Work on the Final Audit in General The benefit of spreading audit procedures over an interim and final audit is that it is possible to provide shareholders and other users of the financial statements with the audited accounts sooner than if all audit procedures were carried out at a final audit taking place after the year end. 3 Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE Performing audit procedures before the period end can assist in identifying matters at an early stage of the audit and help resolve them with management’s assistance or develop an effective audit approach to address them. This reduces the time taken at the final audit to gain the remaining sufficient appropriate audit evidence needed. Impact of Interim Audit Work Relating to Internal Controls on the Final Audit If the auditors are to place reliance on internal controls they must obtain evidence that controls have operated effectively throughout the period. If the auditor obtains audit evidence about the operating effectiveness of controls at the interim audit, when it comes to the final audit, instead of having to gain evidence over controls covering the whole year the auditor can focus on: § Obtaining audit evidence about significant changes to those controls subsequent to the interim period § Determining the additional audit evidence to be obtained for the remaining period While at the final audit, the amount of work needed to gain additional evidence about controls that were operating during the period between the interim audit and the year will depend on: § The significance of the assessed risks of material misstatement at the assertion level § The specific controls that were tested during the interim period, and significant changes to them since they were tested, including changes in the information system, processes and personnel § The degree to which audit evidence about the operating effectiveness of those controls was obtained § The length of the remaining period § The extent to which the auditor intends to reduce further substantive procedures based on the reliance of controls § The control environment Impact of Substantive Procedures Performed During the Interim Audit on the Final Audit If substantive procedures are performed at an interim date, the auditor must cover the remaining period by performing substantive procedures, or substantive procedures combined with tests of controls for the intervening period. Conclusions will have been reached on the testing carried out at the interim audit and the auditors essentially has to carry out any procedures necessary to provide a reasonable basis for the extending the audit conclusions from the interim date to the period end. One approach an auditor who has carried out an interim audit can take is to compare and reconcile information concerning the balance at the period end with the comparable information at the interim date. Essentially, because the interim balance has been audited, the auditor can focus on auditing the movements in the balance between the interim date and the year end. A point to note is that when misstatements that the auditor did not expect when assessing the risks of material misstatement are detected at an interim date, the auditor many need to modify the planned nature, timing or extent of substantive procedures covering the remaining period. This may result in repeating procedures in full that were performed at the interim date. Therefore part of the expected benefit of carrying out the interim audit will have been lost. Audit Documentation The Objective of Audit Documentation 4 Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE Audit documentation is the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached. It is also known as working papers or work papers. All audit work must be documented: the working papers are the tangible evidence of the work done in support of the audit opinion. PSA 230 states that the auditor shall prepare audit documentation on a timely basis. Audit documentation is necessary for the following reasons: a. It provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objective. b. It provides that the audit was planned and performed in accordance with PSAs and other legal and regulatory requirements. c. It assists the engagement team to plan and perform the audit. d. It assists team members responsible for supervision to direct, supervise and review audit work. e. It enables the team to be accountable for its work. f. It allows a record of matters of continuing significance to be retained. g. It enables the conduct of quality control reviews and inspections (both internal and external). Form and Content of Working Papers The PSA requires working papers to be sufficiently complete and detailed to provide an overall understanding of the audit. Auditors cannot record everything they consider. Therefore judgement must be used as to the extent of working papers, based on the following general rule. What would be necessary to provide an experienced auditor, with no previous connection to the audit with an understanding of the work performed, the results of audit procedures, audit evidence obtained, significant matters arising during the audit and conclusions reached. The form and content of working papers are affected by matters such as: § The size and complexity of the entity § The nature of the audit procedures to be performed § The identified risks of material misstatement § The significance of the audit evidence obtained § The nature and extent of exceptions identified Examples of Working Papers § Information obtained in understanding the entity and its environment, including its internal control, such as the following: o Information concerning the legal documents, agreements and minutes o Extracts or copies of important legal documents, agreements and minutes o Information concerning the industry, economic environment and legislative environment within which the entity operates o Extracts from the entity’s internal control manual § Evidence of the planning process including audit programs and any changes thereto § Evidence of the auditor’s consideration of the work of internal audit and conclusions reached § Analyses of transactions and balances § Analyses of significant risks of material misstatements § A record of the nature, timing, extent and results of audit procedures § Evidence that the work performed was supervised and reviewed 5 Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE § An indication as to who performed the audit procedures and when they were performed § Details of audit procedures applied regarding components whose financial statements are audited by another auditor § Copies of communications with other auditors, experts and other third parties § Copies of letters or notes concerning audit matters communicated to or discussed with management or those charged with governance, including the terms of the engagement and significant deficiencies in internal control § Written representations received from management of the entity § Conclusions reached by the auditor concerning significant aspects of the audit, including how exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or treated § Copies of the financial statements and auditors’ reports § Notes of discussions about significant matters with management and others § In exceptional circumstances, the reasons for departing from a basic principle or essential procedure of a PSA and how the alternative procedure performed achieved the audit objective The following is an illustration of a typical audit working paper. The auditor should record the identifying characteristics of specific items or matters being tested. Firms should have standard referencing and filing procedures for working papers, to facilitate their review. Audit Files For recurring audits, working papers may be split between: Permanent audit files (containing information of continuing importance to the audit). These contain: § Engagement letters § New client questionnaire § The memorandum and articles § Other legal documents such as prospectuses, leases, sales agreement § Details of the history of the client’s business § Board minutes of continuing relevance 6 Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE § Previous years’ signed accounts, analytical review and reports to management § Accounting systems notes, previous years’ control questionnaires Current audit files (containing information of relevance to the current year’s audit). This should be compiled on a timely basis after the completion of the audit and should contain: § Financial statements § Accounts checklists § Management accounts details § Reconciliations of management § A summary of unadjusted errors § Report to partner including details of significant events and errors § Review notes § Audit planning memorandum § Time budgets and summaries § Written representations § Report to management § Notes of board minutes § Communications with third parties such as experts or other auditors They also contain working papers covering each audit area. These should include the following: § A lead schedule including details of the figures to be included in the accounts § Problems encountered and conclusions drawn § Audit programs § Risk assessments § Sampling plans § Analytical review § Details of substantive tests and tests of control If it is necessary to modify/add new audit documentation to a file after it has been assembled, the auditor should document: § Who made the changes, and when, and by whom they were reviewed § The reasons for making changes § The effect of changes on the auditors’ conclusions If, in exceptional circumstances, changes are made to an audit file after the audit report has been signed, the auditor should document: § The circumstances § The audit procedures performed, evidence obtained, conclusions drawn § When and by whom changes to audit documents were made and reviewed. Standardized and Automated Working Papers The use of standardized working papers, for example, checklists and specimen letters, may improve the efficiency of audit work but they can be dangerous because they may lead to auditors’ mechanically following an approach without using audit judgment. 7 Auditing and Assurance Principles Module 7: Audit Planning and Documentation Lex Daniel S. Quequegan, CPA, CFE Automated working paper packages have been developed which can make the documentation of audit work much easier. Such programs aid preparation of working papers, lead schedules, the trial balance and the financial statements themselves. These are automatically cross-referenced, adjusted and balanced by the computer. The advantages of automated working papers are as follows: § The risk of errors is reduced § The working papers will be neater and easier to review § The time saved will be substantial, as adjustments can easily be made to all working papers, including those summarizing the key analytical information. § Standard forms do not have to be carried to audit locations § Audit working papers can be transmitted for review via a modem or tax facilities Safe Custody and Retention of Working Papers Judgment may have to be used in deciding the length of holding working papers, and further consideration should be given to the matter before their destruction. According to Revenue Regulations No. 5-2014, the working papers should be retained for a period of five (5) years from the due date of filing the annual income tax return or the actual date of filing thereof, whichever comes later.1 Working papers are the property of the auditors. They are not substitute for, nor part of, the entity’s accounting records. Auditors must follow ethical guidance on the confidentiality of audit working papers. They may, at their discretion, release parts of or whole working papers to the entity, as long as disclosure does not undermine the independence or validity of the audit process. Information should not be made available to third parties without the permission of the entity. 1 Revenue Regulations (RR) 5-2014, Section 4(A)(5) 8