Topic3 Engagement Planning

Topic 03
Engagement
Planning
Learning Objectives
1. List and describe the required pre-engagement activities that auditors undertake
before beginning an audit engagement.
2. Understand the importance of planning the audit engagement so that it is conducted
in accordance with professional standards
3. Define materiality and explain its importance in the audit planning process.
4. List and describe the eight general types of audit procedures for gathering evidence.
5. List and discuss matters of planning that auditors should consider related to the
client’s computer environment and describe how CAATs can be used to improve the
efficiency of the audit process.
6. Define what is meant by the proper form and content of audit documentation.
Pre-Engagement Activities
• Client Acceptance or Continuance
• Communication between predecessor and
prospective auditors
• Compliance with Independence and Ethical
Requirements
• Engagement Letters
• Termination Letter
Communication between Predecessor
and Prospective Auditors
• Attempt to communicate is required

• If the client permits, issues to discuss
–Disagreements about accounting principles or audit procedures.
–Communications the predecessor auditors gave the former client
about fraud, illegal acts, and internal control recommendations.
–The predecessor auditors’ understanding of the reasons for the
change of auditors (particularly about the predecessor auditors’
termination).
Compliance with Independence and
Ethical Requirements
• The responsibilities principle requires auditors to comply with appropriate
ethical requirements for each audit engagement
 integrity,
 objectivity,
 professional competence and due care,
 confidentiality,
 professional behaviour.
• Auditors must maintain independence in mental attitude and independence in
fact
• A lack of independence can result in disciplinary action by regulators and/or
professional organizations and litigation by those who relied on the financial
statements
Engagement Letters
• When a new client is accepted or when an audit engagement continues from
year to year, an engagement letter should be prepared.
• Acts as a contract between auditor and client.
• Serves as a means of reducing the risk of misunderstandings with the client

and as a means of avoiding legal liability for claims that the auditors did not
perform the work promised
• Should include:
– Objectives of the engagement
– Management’s responsibilities
– Auditors’ responsibilities
– Any limitations of the engagement
Audit Plan
• A comprehensive list of the specific audit procedures that the audit
team needs to perform to gather sufficient appropriate evidence on
which to base their opinion on the financial statements
• When planning the engagement, the auditor needs to develop and
document a plan that describes the procedures to be performed to
assess the risk of material misstatement at the financial statement and
assertion level
• The auditor must then carefully plan the nature, timing, and extent of
control tests and substantive tests that are designed to mitigate these
risks to an acceptable level
Staffing the Audit Engagement
• Teams usually consist of the:
‾ Audit engagement partner
‾ Audit manager
‾ IT audit specialist
‾ Tax partner
‾ Quality assurance partner
‾ Audit staff
• For new clients, companies with complex transactions and
public companies, more experienced staff members are typically
assigned.
Considering the Work of Internal
Auditors
• Must obtain an understanding of a client’s internal audit department and
its work
• Audit efficiency can be realized when the two groups work together
• Prior to using the work of internal auditors, external auditors should

consider internal auditors’ objectivity and competence
• Internal auditors should not be delegated tasks that require extensive

professional judgment
Use of Specialists
• Specialists are persons skilled in fields other than accounting and auditing who are
not members of the audit team
• Auditors must know about the specialist’s professional qualifications, experience,

and reputation
• Should be unrelated to the company being audited
• Auditors should obtain an understanding of the specialist’s methods and

assumptions
• Specialists are not referred to in the audit report unless the specialists’ findings
cause the auditors’ report to be modified
Use of IT Auditors
• Specialized skills are often needed to evaluate the effect of
computerized processing on the audit, to understand the flow of
transactions, or to design and perform audit procedures
• IT auditors are members of the audit team and are called in

when the need for their skills arises
• Audit managers and partners should possess sufficient

knowledge to know when to call on specialists and to supervise
their work
Time Budget
• Used to maintain control of the audit by identifying problem
areas early in the engagement, thereby ensuring that the
engagement is completed on a timely basis
• Interim audit work refers to procedures performed several

weeks or months before the balance sheet date
• Year-end audit work refers to procedures performed shortly

before and after the balance sheet date
Time Reports
• Everyone who works on the audit engagement is required to
report the time taken to perform procedures for each phase of
the audit
• Helps in evaluating the efficiency of the audit team members
• Compiling a record for billing the client
• Compiling a record for planning the next audit

Materiality
• Materiality refers to an amount (or transaction) that would influence the
decisions of users (i.e., an amount (or event) that would make a difference).
The emphasis is on the user, rather than on management or the audit team.
• Materiality Criteria:
Quantitative Criteria: Qualitative Criteria
– Absolute size – Nature of the item or issue
– Relative size – Circumstances
– Cumulative effects – Uncertainty
• Ultimately, materiality is a matter of professional judgment.

Using Materiality on the Audit
• As a guide to planning substantive procedures—directing
attention and audit work to those items or accounts that are
important, uncertain, or susceptible to errors or frauds.
• As a guide to the evaluation of the evidence. Auditors use

performance materiality to make sure that the aggregate of
uncorrected and undetected immaterial misstatements does not
exceed materiality for the financial statements as a whole.
• As a guide for making decisions about the audit report.

Use of Audit Procedures
• To gain an understanding of the client and the risks associated
with the client (risk assessment procedures)
• To test the operating effectiveness of client internal control

activities (test of controls)
• To produce evidence about management’s assertions related to

the amounts and disclosures in a client’s financial statements
(substantive procedures)
Substantive Audit Plan
• Should contain a list of audit procedures for gathering evidence
related to the relevant assertions identified for the significant
financial statement accounts and disclosures of an audit client
• Two ways to conduct substantive tests:

‾ Substantive analytical procedures
‾ Tests of details
Exhibit 3.2 Assertions, Evidence and
Audit Procedures
Types of Audit Procedures
1. Inspection of records and documents
 Vouching
 Tracing
 Scanning
2. Inspection of tangible assets
3. Observation
4. Inquiry
5. Confirmation
6. Recalculation
7. Reperformance
8. Analytical Procedures
Analytical Procedures
Planning in a Computerized
Environment
• Temporary transaction trails
• Uniform processing of transactions
• Potential for errors and fraud
• Potential for increased management supervision
• Initiation or subsequent execution of transactions by
computer
• Use of cloud computing applications
Computer Assisted Audit Tools
and Techniques (CAATs)
• With CAATS, the auditor is able to access and extract client information
without disrupting data processing.
• Some CAATs Procedures:
 Calculate field statistics (totals, high, low and average value)
 Perform complex recalculations
 Join and compare different data files
 Perform detailed analysis
‾ Stratification
‾ Gap and duplicate detection
‾ Sample selection
Audit Documentation
• Definition
 The written record of the basis for the auditor’s conclusions
that provides the support for the auditor's representations,
whether those representations are contained in the auditor's
report or otherwise.
• Objectives
 Improve audit quality
 Enhance public confidence
Purposes of Audit Documentation
• Integral part of audit quality
• Documents the nature, timing, and extent of work
performed
• Evidence of due care
• Basis for conclusion
• Facilitates planning, performance, and supervision
• Provides a basis for review
Audit Documentation
• Permanent files
 Information of continuing audit significance
 For example, key contracts, bylaws, organization chart,
royalty and bond agreements
• Current files
 Includes the entire engagement administration file for the
year under audit
 Includes all documentation that is sufficient to support all
conclusions on the audit
Audit Documentation Requirements
• Audit documentation should be prepared in sufficient detail to enable an
experienced auditor having no previous connection with the engagement to:
 Understand the nature timing, extent and results of procedures, evidence
obtained and conclusions reached.
 Determine who performed the work, date of work, reviewer and date of
review.
• Audit documentation should provide a clear link to significant findings or

issues and
 Demonstrate compliance with professional standards.
 Support basis for conclusions for each relevant assertion.
 Document that accounting records agree with financial statements
Documentation Retention
• Documentation must be retained seven years from report
release date.
If no report—from the last day of fieldwork
• Documentation to be retained include those documenting

discussion and subsequent resolution of differences in
professional judgments among team members
• All documentation must be finalized within 45 days of the audit

report’s release date
Documentation Retention
• Documentation must be retained seven years from report
release date.
If no report—from the last day of fieldwork
• Documentation to be retained include those documenting

discussion and subsequent resolution of differences in
professional judgments among team members
• All documentation must be finalized within 45 days of the audit

report’s release date
THANK
YOU!!!
Prepared by:
Danica Caluag & Eduardo Vilanueva Jr.

Topic3 Engagement Planning

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Topic 03

• Attempt to communicate is required

• Serves as a means of reducing the risk of misunderstandings with the client

• Prior to using the work of internal auditors, external auditors should

• Internal auditors should not be delegated tasks that require extensive

• Auditors must know about the specialist’s professional qualifications, experience,

• Should be unrelated to the company being audited

• Auditors should obtain an understanding of the specialist’s methods and

• IT auditors are members of the audit team and are called in

• Audit managers and partners should possess sufficient

• Interim audit work refers to procedures performed several

• Year-end audit work refers to procedures performed shortly

• Helps in evaluating the efficiency of the audit team members

• Compiling a record for billing the client

• Compiling a record for planning the next audit

• Ultimately, materiality is a matter of professional judgment.

• As a guide to the evaluation of the evidence. Auditors use

• As a guide for making decisions about the audit report.

• To test the operating effectiveness of client internal control

• To produce evidence about management’s assertions related to

• Two ways to conduct substantive tests:

• Audit documentation should provide a clear link to significant findings or

• Documentation to be retained include those documenting

• All documentation must be finalized within 45 days of the audit

• Documentation to be retained include those documenting

• All documentation must be finalized within 45 days of the audit

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