CHAPTER 9 AUDIT PLANNING, SUPERVISION AND MONITORING I.
Review Questions
1. Audit planning means planning means developing a general strategy and a detailed approach for the expected expected nature, nature, timing, timing, and extent extent of the audit. The auditor auditor plans plans to perform the audit in an efficient efficient and timely manner. manner. Adequate planning of the audit work accomplishes among others the following: (1) It ensures ensures that appropria appropriate te attention attention is devoted devoted to important important areas of the audit, (2) It enables enables the auditor auditor to identify identify potential potential problem problems, s, (3) It enhances enhances complet completion ion of audit audit expeditious expeditiously, ly, and (4) It assists assists in proper assignmen assignmentt of work to assistants assistants and in coordination coordination of work done by other auditors and experts. 2.
Signif Significa icant nt matters matters to be consid considere ered d by the auditor auditor in develo developin ping g the overal overalll audit plan include 1.
Know Knowle ledg dgee of the the Bus Busin ines esss
2.
Understa Understanding nding of the the Accounti Accounting ng and and Internal Internal Contro Controll System System
3.
Assess Assessmen mentt of Risk Risk and and Mater Material iality ity
4.
Natur Nature, e, Timin Timing g and Exte Extent nt of Audit Audit Proc Procedu edures res
5.
Coordinat Coordination, ion, Direction Direction,, Super Supervisio vision n and and Revie Review w
6.
Other Other matters, matters, such such as assess assessment ment of of the going going concern concern assumpti assumption, on, relate related d parties, nature and timing of reports and other communications with the entity.
3.
To obtain obtain informa informatio tion n about about the client’ client’ss busine business ss and industry industry,, an audito auditorr can review review prior-year prior-year working working papers, papers, review review current-ye current-year ar client client informati information, on, inquire of management and the audit committee, read PICPA, AICPA, industry audit and accounting guides relevant to the client, and read significant industry publications and manuals maintained maintained by the firm on the industry.
4.
Specif Specific ic audit proced procedure uress presen presented ted in the auditin auditing g stand standard ardss as methods methods of detecting related-party transactions are as follows:
9-2
Solutions Manual - Principles of Auditing and Other Assurance Services •
•
Examin Examinee compan company y proced procedure uress for ident identify ifying ing and accou accounti nting ng for related-party transactions. Inquire of management about related parties and any transactions that occurred during the period.
•
Review entity filings with the SEC and other regulatory authorities for named related parties and other entities in which officers and directors serve in management or directorship positions.
•
Determine the names of all pension and other employee benefit trusts and the names of officers and trustees.
•
Review Review stockhold stockholder er listings listings of closely closely held companies companies to identify identify principal shareholders. shareholders.
•
Review prior-year working papers for names of related parties.
•
Inquir Inquiree of audito auditors rs of relate related d entiti entities es regar regardin ding g manage managemen ment’ t’ss involvement in material transactions.
5.
Warning Warning signs that that materia materially lly question question managem management ent integrity integrity impact impact the the client acceptanc acceptancee decision. decision. The auditor auditor must determine determine whether whether the suspicions suspicions aroused by such warning signs have validity and, if so, whether, under the circumsta circumstances nces,, the auditor can continue continue to be associate associated d with with the financial financial statement statements. s. Additional Additionally, ly, the auditor has a responsib responsibilit ility y to communica communicate te known known illega illegall acts, acts, as well well as other other findings findings of this this nature nature,, to the audit committee of the client’s board of directors.
6.
Prelim Prelimina inary ry audit audit progra programs ms are designed designed on the the basis basis of the audito auditor’s r’s initia initiall assessment of inherent inherent risk and control risk. The preliminary preliminary programs may be modifi modified ed as a result result of audito auditorr testin testing g of contro controll proced procedure uress and revise revised d assessment of control risk. The preliminary programs, programs, as modified by the results of control testing, are referred to as final audit programs.
7.
The audit audit time budget budget facilit facilitate atess staff staff schedul scheduling ing and fee estimati estimating, ng, in that it displays the audit in terms of hours required to complete each phase and level of staff required for each sector. sector. A second purpose served, when actual actual times are reco record rded ed in the the time time budg budget et,, is that that vari varian ance cess are are isol isolat ated ed and and may may be investigated for cause. cause. This, in turn, facilitates facilitates preparation of next year’s year’s time budget, and also isolates added hours which may be chargeable to the client because of client-caused client-caused audit problems problems and delays.
8.
The preaud preaudit it confere conference nce conduct conducted ed by the audit audit manager manager and the in-char in-charge ge senior senior auditor auditor and comprising comprising the audit team assigned assigned to the engagemen engagement, t, increases audit effectiveness by: a.
Discussin Discussing g the result resultss of audit audit risk risk analysis analysis with the the audit audit team; team;
b.
Familiarizing Familiarizing the audit team members with the nature of the the client; and
Audit Planning, Planning, Supervision and Monitoring Monitoring c.
9.
9-3
Maki Making ng each each team team membe memberr awar awaree of how iden identi tifi fied ed warni warning ng signs signs impact the audit tasks assigned to him/her.
The three three primar primary y reasons reasons an audito auditorr should should obtain obtain a good good understand understanding ing of the the client’s industry are: •
to enable enable the audito auditorr to evalua evaluate te whethe whetherr the client client’s ’s financ financial ial statements are in accordance with GAAP, since many industries have unique accounting requirements.
•
to enable the auditor to identify risks in the industry that may affect the auditor’s assessment of acceptable audit risk.
•
to enable the auditor to assess the client’s areas of high inherent risk.
The auditor can obtain a sound understanding of the client’s industry through several means, including discussions with previous auditors and by reviewing the permanent permanent files files for the client; client; conferences conferences with with the client’s client’s personnel personnel;; studyi studying ng textbo textbooks oks,, techni technical cal magazi magazines nes and specia specializ lized ed journa journals; ls; and by participating in in industry associations associations and training programs. 10. Paragraph Paragraph 12 of PSA PSA 300 provides provides the follow following: ing: “The overall audit plan and the audit program should be revised as necessary during during the course course of the audit. audit. Plann Planning ing is contin continuou uouss throug throughou houtt the engagement because of changes in conditions or unexpected results of audit procedures. The reasons for significant changes changes would be recorded.” recorded.” 11. The purpose purpose of applying applying analytic analytical al procedure proceduress in planning in planning the the audit is to assist in understanding the business business and in identifying areas areas of potential risk. risk. It will therefore assist the auditor in planning the nature, time, and extent of auditing procedures that will be used to obtain evidential matter for specific account balances or classes of transactions. By identifying such things as the existence of unusual transactions and events, and amount ratios and trends, matters that have financial statement and audit planning ramifications might be brought to light. light. Likew Likewise ise,, relev relevant ant non-fi non-finan nancia ciall inform informati ation on such such as number number of employees, area of selling space, volume of goods produced may also contribute to the accomplishment of the purpose of the analytical procedures. 12. Refer Refer to page 372 372 (letter (letter a) of the the textbook. textbook. 13. Refer Refer to page 372 372 (letter (letter b) of the the textbook. textbook. 14. Refer Refer to page page 375 of of the textboo textbook. k.
9-4
Solutions Manual - Principles of Auditing and Other Assurance Services
II. Multiple Choice Questions 1. 2. 3. 4. 5.
b b a c b
6. 7. 8. 9. 10.
b a b c d
11. 12. 13. 14. 15.
b d a c a
16. 17. 18. 19. 20.
b c a c a
21. d 22. b
III. Comprehensive Cases Case 1.
a. CPAs CPAs should should not follow follow clien clients’ ts’ sugge suggesti stions ons about about the condu conduct ct of an audit unless the suggestions clearly do not conflict with his professional competence, judgment, judgment, honesty, independence, or ethical ethical standards. Where there there is no disagr disagreem eement ent about about the the result resultss to be accomp accomplis lished hed and the client’s client’s suggestio suggestion n represents represents a good idea a CPA can accept accept it. Within Within professional bounds, mutual agreement agreement with the client is all right. The CPA must never agree to any arrangement which violates generally accepted auditing standards or the Code of Ethics for Professional Accountants. Accountants.
b.
The reasons against dividing the assignment of audit work solely according to assets, liabilities and income and expenses include the following: 1.
2. 3.
4.
5. 6.
7.
Work should should be assigned assigned to staff staff member memberss by consider considering ing the the degree degree of difficulty in relation to the technical competence and experience of individual staff members. Sequ Sequeence nce of work ork per perform ormed on an exam xaminat inatiion shou shoulld be in accordance with an overall audit plan. It is impossi impossible ble to segreg segregate ate work work areas areas by major major captio captions ns becaus becausee often a close relationship exists among a number of accounts in more than one category, as for example where income is based on assets or expense is based on liabilities. Often Often a single single audit audit work paper paper is is desirable desirable to to substantia substantiate te balance balancess in accounts of various types, such as an insurance analysis supporting premium disbursements, disbursements, the expense expense portion and the prepaid balance. Duplicati Duplication on of staff staff effort effort would would be more more likely likely to occur occur if if assignme assignments nts were made on such a basis. Freq Freque uent ntly ly,, the the scop scopee of work work rega regard rdin ing g a sing single le acco accoun untt requ requir ires es simultaneous participation by the staff, such as in the observation of inventories. Many Many audit audit operati operations ons are not suscep susceptib tible le to division division by categor category, y, as for example example investiga investigating ting internal internal control, control, testing testing transact transactions ions and writing the report.
Audit Planning, Planning, Supervision and Monitoring Monitoring 8.
c.
9-5
The sugg sugges estted thr three-w ee-way ay spl split will usua usuall lly y not not result sult in an approximately equal allocation of audit hours since the examination of assets is usually the most time-consuming.
The CPA’ CPA’ss staff staff member member whose whose uncle uncle owns owns the advertisin advertising g agency agency should should not be assigned to examine Brilliant’s advertising advertising account. The CPA firm is responsible for avoiding relationships which might suggest a conflict of interest. Regardless of whether this this staff member could be independent and unbiased in such a situation, outsiders probably will be influenced in their thinking by the fact that his uncle is the owner of the advertising agency. Even if a problem of ethics were not involved, it would be unwise for the CPA to assign this staff member because the client’s attitude could change signif significa icantl ntly y and the the CPA CPA firm’s firm’s positi position on would would be jeopar jeopardiz dized ed if difficul difficulties ties later arose arose in connection connection with the contract. contract. Any situation situation in which bias exists or might arise should be avoided.
Case 2. Additional procedures to be performed prior to the beginning of audit field work are the following:
a. b. c. d. e. f.
g. h. i. j.
Review Review client client for conti continuanc nuance. e. Lack of managem management ent integ integrity rity may may be cause for rejecting the current year’s audit; Obtain copy of physical inventory instructions and examine for completeness. Request client to revise revise where necessary; Determine Determine work work to be be performe performed d by client’s client’s staff staff and and arrange arrange with with client client for for timely completion of these tasks; Prepare Prepare engage engagement ment letter letter and obtain obtain signed signed copy copy from from the client client;; Prepare Prepare time budget budget and and determ determine ine staff staff schedul scheduling; ing; Make a prelimin preliminary ary determ determinat ination ion (using (using last last year year as a basis) basis) of the timing timing of application of substantive audit procedures (e.g., interim v. final audit application); Inquire Inquire of client client as to change changess in internal internal control; control; Inquire Inquire of client client as as to related related party party transa transaction ctionss during during the curren currentt year, and and receivables from and/or payables to related parties; Perfo Perform rm the plannin planning g portion portion of analyti analytical cal proced procedure uress and invest investiga igate te any significant abnormalities; and Arrive at preliminary assessments of inherent risk and control risk and design substantive audit programs.
