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Engagement Planning

Go, Kah, Kwok, Luna, Manuel

Audit Process (A6)
1.
2.
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Accepting Engagement
To determine whether to accept a client for audit services (competence,
independence, ability to serve, integrity of management)
Major Client for 5 Years; Client acceptance procedure is done and the
engagement letter is given
Audit Planning
To determine the scope of audit to be done
Nature of Business => Real Estate Business
Completed two condominiums and started constructing another project (Fort
Bonifacio, Taguig)
Sales increase by 25%; Net Income increase by 15%
To plan and supervise the fieldwork

To check whether the entity’s financial statements are presented correctly according to standards or not .Aggressive on tax matters 4. Performing Substantive Tests . Considering Internal Control .Computerized Accounting System (Same with Prior Years) .Audit Process (A6) 3.Has internal audit committee .To know the condition of the entity's internal control which affects the Financial Statements of the entity .

Overall analysis and obtaining written representations from client’s management 6. contingencies.Perform additional audit procedures to have a firm evidence. etc. Completing Audit . Issuing a Report .Review of subsequent events. a conclusion is made regarding the financial statements. .Conclusion must be an opinion and must be expressed through audit report . . .Audit Process (A6) 5.Gather enough evidence to support the conclusion .With all the audit evidences.

60) a. Analysis v. Discuss the sources of information and the types of inquiries that you and the firm’s partners may make in connection with accepting Hitech as a new client.Client Selection (L3. Sources and Types of Information i. Predecessor auditor. Internal search for relationships that would compromise independence . communication regarding iv. Financial information prepared by the prospective client ii. Inquiries directed to the prospect’s business associates iii. if any.

while Mr. c.60) b.Client Selection (L3. in order to mitigate the business risk of being associated with potentially problematic clients. Shine’s new multi-million dollar business poses larger potential risks. it is important to note that such fraud was committed in a simple hamburger franchise. . Do you think the partner in charge of the audit practice should accept Hitech as a new client? We would choose to not accept Hitech because of the recent information gathered which points to the possibility of fraud. Furthermore. Do professional audit standards require any investigation of prospective clients? Yes.

W&R succeeded the firm of Canby and Company (C&C). . was recently hired to audit the 2014 financial statements. and Chris Canby started the work.59) The firm of Wells & Ratley (W&R). Does W&H firm need to initiate communications with C&C and A&H? Wells & Ratley (W&R) must initiate communications with both predecessor auditors . Canby was fired and W&R was hired to complete the audit. A&H audited the 2013 financial statements and rendered a report that contained an additional paragraph explaining an uncertainty about Allpurpose Loan Company’s loan loss reserve. but before the audit could be completed. The president then hired C&C to audit the 2014 financial statements.Canby and Company (C&C) and Albrecht & Hubbard (A&H). W&H also needs to obtain complete information from all predecessors involved since the last audit (2013 financial statements) as stated in Section A8 PSA 220.Predecessor and Successor Auditors (L3. C&C did not issue an audit report because the audit was not finished. CPAs. which had obtained the audit after Albrecht & Hubbard (A&H) had been fired.

. It is also important that a professional accountant in public practice who is asked to replace another professional accountant in public practice has the opportunity to ascertain if there are any professional reasons why the appointment should not be accepted.Predecessor and Successor Auditors (L3.59) Section A8. and when considering acceptance of a new engagement with an existing client. PSA 220: PSQC 1 (Redrafted) requires the firm to obtain information considered necessary in the circumstances before accepting an engagement with a new client. when deciding whether to continue an existing engagement.

57) Audit Manager: Kelly Griffin Client: Majestic Hotel Objective: Obtain an understanding of the hotel’s business in order to draft a preliminary audit plan. Required: Write a memorandum describing Majestic’s operating characteristics compared to the industry average insofar as you can tell from the statistics.Understanding the Client’s Business and Its Environment (L4. Do these analytical procedures identify any areas that could represent potential misstatements in the audit? .

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It may not be recorder properly. may be indicative of areas in the accounts where potential errors or frauds or other matters of audit concern may exist. ● ● ● The room sales revenue is lower than the industry average ratio. (Expenses may be misclassified or a related party transaction may be involved) Utilities. (Some capitalizable expenditures may have been improperly classified as current expenses) . Repairs.Majestic Hotel Preliminary Plan Memorandum Analysis of Statistics For the year ended 3/31/14 Analysis of the operating statistics indicates that the ff. (Either not recorded or misclassified as food and beverage sales) The management fees appear to be higher than the industry average. and Maintenance also appear to be higher than the industry average.

Majestic Hotel Preliminary Plan Memorandum Analysis of Statistics For the year ended 3/31/14 ● ● Salaries and Wages Expense for both rooms department and the food and beverages department is seem to be high. ( There may be more employees than average. the use of larger quantities per serving. ( Could be due to higher per unit prices. or may be because of erroneous inventory counts and pricing) . or wage rates higher than the average) The costs of the food and beverage sold appears to be higher than the industry average.

000.000 Equity 13.600.800.000 Total revenues 29.000 Net income 1.600.900.000 P2.700. Tyler Co.Audit Planning Materiality (A7) Franklin Co. P34.500.000 1.000 4.000 90.000 Total assets .

. .000 (29600000 x 0. is a.05) 5% of Profit before tax P296. Materiality Calculation Rule of Thumb* Profit-oriented entity P80.000 (1600000 x 0.01) 1% of Total revenue/ expenses Not-for-profit entity *Based on PSA 320 (Revised and Redrafted) A7 Determining a percentage to be applied to a chosen benchmark involves the exercise of professional judgment..Audit Planning Materiality (A7) Develop an estimate of the appropriate amount of planning materiality for Franklin Co. and describe how you arrived at the estimate If Franklin Co.

. .05) 5% of Profit before tax P45. and describe how you arrived at the estimate If Tyler Co..000 (4500000 x 0. is a.Audit Planning Materiality (A7) Develop an estimate of the appropriate amount of planning materiality for Tyler Co.01) 1% of Total revenue/ expenses Not-for-profit entity *Based on PSA 320 (Revised and Redrafted) A7 Determining a percentage to be applied to a chosen benchmark involves the exercise of professional judgment.500 (90000 x 0. Materiality Calculation Rule of Thumb* Profit-oriented entity P4..

(PSA 450.Audit Planning Materiality (A7) Describe five characteristics of a small misstatement that might render it qualitatively material. A16) 1) 2) 3) 4) 5) Affect a company's compliance with a contractual agreement.org.pdf . Cause a company not to make the consensus earnings per share. Changes a loss into income.ph/downloads/psa/publications/PDFs/PSA-320-Revised-and-Redrafted. Arise from an item capable of precise measurement. Reverse a trend of earnings (or other trends).aasc. or vice versa Source: http://www.

Audit Planning Materiality (A7) Explain why auditors typically decide to allocate planning materiality to individual financial statement accounts If auditors were to aggregate the planning materiality. and leaves no margin for possible undetected misstatements” (PSA 320 Par. they might not be able to discover material errors. 12) . These errors are usually overlooked when they are combined with other undiscovered errors which could exceed overall materiality “Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate of individually immaterial misstatements may cause the financial statements to be materially misstated.

describe why the total amount of planning materiality allocated to individual accounts may exceed overall materiality 1) Double entry bookkeeping system allows detection of misstatements in an account by auditing a related account 2) There are misstatements of various accounts that tend to counterbalance each other .Audit Planning Materiality (A7) In relation to (d).

61) Internal Auditing is an independent. . control.Using the Work of Internal Auditor (L3. objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic. and governance processes. disciplined approach to evaluate and improve the effectiveness of risk management.

the external auditor must not solely rely on the processes and procedures of the internal auditor. . In what ways can the internal auditor’s work be relevant to North.61) a.External auditors may seek the help of internal auditors in planning and performing the substantive procedures. the independent auditor? Control Risk Assessment . given that one of the principles of auditing is independence. Substantive Auditing . However.Relevant information regarding the company’s internal control policies may be obtained through the internal auditor who is responsible for developing these systems and policies.Using the Work of Internal Auditor (L3. and must therefore conduct his or her own tests.

What factors should North consider and what inquiries should North make in deciding whether to use Tyler’s internal audit work? Objectivity . Background checks on the certifications and performance of these internal auditors would be helpful in determining their reliability and credibility. .This is factor refers to the qualifications of the internal auditor. Competence .61) b.Independent auditors such as North should consider the background and organizational status of internal auditors like Tyler.Using the Work of Internal Auditor (L3. This is done in order to make sure that the interests of the internal auditor is aligned with that of the company or firm.

The auditor with responsibility for reporting on the financial statements of an entity when those financial statements include financial information of one or more components audited by another auditor.Hersheys & Co. as well as unrelated auditors. . whether using the same name or not.) Principal Auditor . other than the principal auditor.Almonds. with responsibility for reporting on the financial information of a component which is included in the financial statements audited by the principal auditor. Other Auditors . Cashew & Associates An auditor.Work Performed by Other Auditors A. Other auditors include affiliated firms. and correspondents.

Independence of the principal auditor. 2.) What factors should be considered when determining which public accounting firm should serve as the principal auditor? 1. .Competence of the principal auditor.Degree of knowledge regarding the business of the components. 3.Work Performed by Other Auditors B.

before accepting as a principal auditor of Homerun. The materiality of the portion of the financial statements which the principal auditor audits.? The auditor should consider whether the auditor’s own participation is sufficient to be able to act as the principal auditor. . 1. 2. Inc.Work Performed by Other Auditors C. The principal auditor’s degree of knowledge regarding the business of the components.) What factors should be considered by Hersheys & Co.

Inc. 3. before accepting as a principal auditor of Homerun. . The risk of material misstatements in the financial statements of the components audited by the other auditor.) What factors should be considered by Hersheys & Co. 4.Work Performed by Other Auditors C.? The auditor should consider whether the auditor’s own participation is sufficient to be able to act as the principal auditor. The performance of additional procedures as set out in this PSA regarding the components audited by the other auditor resulting in the principal auditor having significant participation in such audit.

Performing procedures to obtain sufficient appropriate audit evidence. in the context of the specific assignment. The professional competence of the other auditor in the context of the specific assignment.) How will the work of Almonds. should consider: 1.Work Performed by Other Auditors D. Cashew & Associates affect the audit procedures of Hersheys & Co. . that the work of the other auditor is adequate for the principal auditor’s purposes. 2.? Hersheys & Co.

What audit problems does Majors face when observing Lewiston.s chemical inventory? ● Determining the actual type of chemical ● Determining the correct value of chemicals ● Measuring the actual volume of chemicals in tanks and pipelines ● Verification of existence of the underground tanks and pipelines b. which specialists are uniquely positioned for what potential audit problems? ● Chemical Engineers ● Structural Engineers ● Civil Engineers . What specialists should Majors consider engaging to assist in the physical inventory observation? For example.Using the Work of Specialists (A9) a.