Standards of Fieldwork PIE

1
Standards of Fieldwork (PIE)

• Planning Supervision
• The work is to be adequately planned and
  assistants, if any, are to be properly
  supervised.
• Internal control
• A sufficient understanding of internal control is
  to be obtained to plan the audit and to determine
  the nature, timing, and extent of tests to be
  performed.
• Evidential matter
• Sufficient competent evidential matter is to be
  obtained through inspection, observation,
  inquiries, and confirmations to afford a
  reasonable basis for the opinion regarding the
  F/S under audit.

2
Statements on Quality Control Standards (See Ch
4)

• Issued by the Auditing Standards Board
• A CPA firm is required to have a system of
  quality control for its accounting and auditing
  practice (audit, attest, compilation review)
• System of quality control -- a process to
  provide the firm with reasonable assurance that
  its personnel comply with applicable professional
  standards and the firms standards
• Inherent limitations (similar to any I/C system)
• Nature scope will vary with the circumstances

3
System of Quality Control -- Consists of 5
Elements (P. 119)

• Independence, integrity, objectivity (Rule
  101)
• Personnel management -- includes initial hiring,
  assignment to engagements, professional
  development ( CPE), and promotion decisions
• Acceptance continuance of engagements
• Avoid association with management lacking
  integrity
• Take on an engagement only if competent in the
  area
• Consider risks associated with the professional
  service
• Engagement performance
• Monitoring

4
Required Communications Between Successor
Predecessor Auditors

• Successor has responsibility to initiate the
  communication with the predecessor
• Both parties must obtain the clients permission
  to have that discussion
• Successor may accept the engagement pending the
  outcome of that communication
• What if the client says NO to either party?

5
Nature of That Communication

• Required to inquire about the following
• Any facts bearing on managements integrity
• Any significant disagreements over accounting or
  auditing matters
• Any communications that predecessor had with the
  Audit Committee about sensitive matters (fraud,
  illegal acts, or internal control issues)
• Predecessors understanding for the reason(s)
  that client changed auditors

6
Nature of That Communication (Continued)

• May also choose to inquire about other matters
  (e.g., any problem areas encountered)
• May request access to predecessors audit working
  papers
• Usually permitted as a professional courtesy
• Predecessor may have valid reasons to refuse
  (e.g., pending litigation)
• Q What if successor believes the F/S audited by
  predecessor require revision? A Try to arrange
  a 3-way meeting and beware of an uncooperative
  client!

7
Risk-based Audit Approaches

• Examples Business Measurement Process (BMP)
  of KPMG and Business Process Analysis (BPA) for
  EY
• These focus on clients business processes and
  the risks (strategic and otherwise) that
  ultimately impact the F/S under audit
• Such approaches are extensions of our traditional
  emphasis on analytical procedures (i.e., focus
  our attention where risk of misstatement is
  highest)

8
The Use of Analytical ProceduresBy E. Blocher
G. Patterson

• See the definition of analytical procedures
• May include financial and/or non-financial data
• Key is developing ones expectation
• 3 Approaches for developing the expectation
• Trend analysis comparison with prior year(s)
• Ratio analysis comparison of ratios over time
  or relative to industry benchmarks
• Model-based methods comparison of clients
  balance with mathematical models prediction
  (e.g., regression)
• Investigate significant differences

9
Lagging v. Leading Indicators of Economic
Results

• Whats the issue?
• Tools to help management ( auditors)
• Client strategy templates links clients
  strategies to their business processes
• Balanced scorecards measures performance on
  multiple dimensions (includes some
  non-financial!)
• Reflects data used by senior management
• Dashboard view of managing the business
• Includes leading indicators of future financial
  results

10
Balanced Scorecards Fog Lights for the Road
Ahead

• Considers performance indicators of interest to a
  variety of stakeholders (includes financial
  non-financial metrics)
• Shareholders
• Customers
• Employees
• Community

11
SEC Chairman Arthur Levitt Remarks to the Panel
on Audit Effectiveness of the Public Oversight
Board (October 7, 1999)

• In an era that calls for greater risk
  management, the industry has migrated to what
  they call the risk-based model. It sounds
  right on target. Because of the challenges of
  executing these new standards well, I wonder if
  the public interest is being better served. We
  cannot permit thorough audits to be sacrificed
  for re-engineered approaches that are marginally
  more efficient, but significantly less effective.

12
Comment by Bob Elliott Regarding Audit Quality

• Research by COSO (a consortium of accountancy
  bodies including the AICPA) on fraudulent
  financial reporting has been published, and from
  its data on SEC disciplinary actions I derived an
  audit failure rate of .0001 for the firms
  auditing a large majority of public companies, a
  rate consistent with a high level of audit
  quality. The estimate covers the 11 years from
  1987 through 1997, a period running well into the
  current SEC chairman's tenure. (I defined an
  audit failure as an auditor's being named in an
  SEC accounting and auditing enforcement release
  for apparent involvement or a substandard
  audit.)
• From Chairs Corner in April 2000 The CPA
  letter

13
SEC Chairman Arthur Levitt Remarks to the Panel
on Audit Effectiveness of the Public Oversight
Board (October 7, 1999)

• As I look at some of the audit failures today,
  I cant help but wonder if the staff in the
  trenches of the profession have the training and
  supervision they need to ensure that audits are
  being done right. I wonder if the younger people
  in the profession those who have decided not to
  become Internet entrepreneurs are receiving the
  necessary guidance and lessons in value judgments
  from their older more experienced colleagues.
• Questioning compliance with 1st Standard of
  FW?!

14
Communicate With Audit Committee Before,
During, After Fieldwork

• General matters gt client v. CPAs respective
  responsibilities accounting policies and
  estimates/judgments by mgt.
• Difficulties encountered during the audit
• Disagreements over acctg/auditing matters
• Significant adjustments proposed by CPAs
• Instances where management requested second
  opinion from other CPAs

15
Are Engagement Letters Required?

• Technically speaking, no.
• However, we are required to establish an
  understanding with clients
• As to the parties respective responsibilities
  (see required communications with audit
  committees for public clients)
• A written engagement letter would certainly
  demonstrate such an understanding!