Section 6 – Audit Planning and Analytical Procedures

image source: Figure 13-9 from Arens, Elder, and Beasley, Auditing and Assurance Services: An Integrated Approach, 15th ed

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Section 6 – Audit Planning and Analytical Procedures

Planning the audit
 AICPA Principles of Performance:
“The auditor must adequately plan the work and must properly supervise any assistants”  Why plan?
1.
2.
3.

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Section 6 – Audit Planning and Analytical Procedures

Early Audit Planning Aids in Risk Assessment
 Acceptable audit risk (AAR): how willing the auditor is to unknowingly fail to appropriately modify his or her opinion on FS that are materially misstated
 Inherent risk (IR): the possibility of a material misstatement occurring in an assertion assuming no related internal controls

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Section 6 – Audit Planning and Analytical Procedures

Client Acceptance/Continuance
 Auditor needs to consider risk that the firm will suffer a loss as a result of association with a client
 Other factors the auditor needs to consider include: o Expertise and staffing o Independence o Company/management integrity o Accounting practices o Client’s reputation and image o Company’s financial status o Profitability of the engagement o Industry risks

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Section 6 – Audit Planning and Analytical Procedures

Client Acceptance - Discussions with predecessor auditors
 AS 84 (AU 315)
 Steps in communication
Step 1

Successor auditor Step 3 (can be limited response) Client

Predecessor auditor Step 2 (client must ok)  Focus of the Successor Auditor’s Inquiry: o the reason for the termination of the relationship o disagreements with management about accounting principles o identification of important risk are o the nature of communications with the client regarding fraud, illegal acts or internal control concerns o facts bearing on management's integrity o arrangements for gaining access to prior year’s workpapers

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Section 6 – Audit Planning and Analytical Procedures

SOX effects on acceptance/continuance
 Lower tolerance for risk
 Increased independence requirements
 Management communications re IC and business risks
 Company code of ethics
 Increased role of the AC in the audit process

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Section 6 – Audit Planning and Analytical Procedures

Client Acceptance/Continuance - Obtain an engagement letter
 SAS 108 (AU 310)
 ALL audits, not just initial engagements
 Public companies: o o o  Documents scope of services, limitations, expectations
 Identifies constraints and deadlines

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Section 6 – Audit Planning and Analytical Procedures

Develop Overall Audit Strategy
 A preliminary strategy aids in determining resources needed
 Engagement staffing, remember:
“Auditors are responsible for having appropriate competence and capabilities to perform the audit.”
 Assess need for outside specialists based on client’s business o evaluate specialist’s professional qualifications o understand the objectives and scope of specialist’s work o evaluate whether specialist is objective

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Section 6 – Audit Planning and Analytical Procedures

Preliminary planning process

image source: Figure 8-4 from