Auditing Special Purpose Frameworks: Modifying Audit Programs

Larry Perry
CPA Firm Support Services, LLC
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Quality control practice aids purchased from major publishers are excellent tools to support the engagement performance element of a CPA firm's quality control system. Typically however, these practice aids are designed to be "one-size-fits-all." Since these practice aids can be applied to small, medium and large-size engagements, they often contain documentation that may be unnecessary for smaller engagements. Some practitioners have modified these purchased practice aids for smaller engagements and for engagements in specialized industries. Other CPA firms have created proprietary practice aids for their accounting and auditing engagements. In each of these circumstances, CPA firms may be responsible for developing and documenting a system of quality control for developing quality control materials. A quality control materials review, Section PRP 8100 of the AICPA Professional Standards, may be required in these circumstances.

There are two types of modifications that may be made to practice aids purchased from major publishers, including audit program aids:

  • First, the audit risk assessment standards require tailoring practice aids for audit responses to potential errors and/or frauds that are identified as a result of performing risk assessment procedures. Also, practice aids should be modified to properly describe documents, data, and records unique to each individual engagement. These required modifications do not fall under the requirements of PRP Section 8100.
  • Second, significant modifications to purchased practice aids, or the creation of proprietary practice aids, require the development and maintenance of a system of quality control for developing quality control materials and obtaining a review of these materials in accordance with PRP Section 8100.

Because compliance with the requirements for a system of quality control for developing quality control materials may not be practical for some smaller CPA firms, purchasing quality control materials to guide engagement performance and making modifications required by accounting and auditing standards may still be the most efficient approach to performing and documenting some smaller accounting and auditing engagements. Additionally, the efficiencies that may be attained by making significant modifications to purchased practice aids, or by creating proprietary practice aids, may more than offset the cost of establishing a quality control system for developing and maintaining quality control materials.

Audit Program Modification Considerations

Audit program modification normally should begin with an all-inclusive, worst-case, high-risk, standard program. Following are some considerations for the audit program modification process:

  1. Identify relevant assertions (objectives) for each financial statement classification.
  2. Depending on the nature, size and complexity of the reporting entity, determine if risks should be considered separately for each relevant assertion or for account classifications as a whole.
  3. Review the documented assessed level of risk of material misstatement for each significant classification on a risk assessment summary form or other documentation.
  4. Consider planned analytical procedures and their contributions of substantive evidence for evaluating the appropriateness and reasonableness of relevant financial statement assertions in applicable account classifications.
  5. Determine the specific nature, extent, and timing of tests-of-balances procedures necessary to provide substantive evidence commensurate with the planned audit strategies for each material financial statement classification.
  6. After calculating materiality levels based on the assessed risk of material misstatement in significant financial statement classifications, determine the extent (number of items, days, balances, transactions, etc.) of the planned auditing procedures.

I've provided a table summarizing tests of balances procedures at various assessed levels of risk of material misstatement. Both types of audit program modification discussed above will result in procedures that are tailored to the nature, size, and complexity of a reporting entity.

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By Scott Spradling
Jun 26th 2015 01:11

Great article Larry and we definitely agree that
tailoring of audit programs is critical.
Something missing here though are all of the fantastic audit tools
available today to make this tailoring so much more efficient and effective
than in the past. For example, SMART
Practice Aids provide very robust functionality to make this easy, including a "SMART Audit Program Design" function that allows the auditor to tailor programs
based on specific risks identified and specific assertions
affected. This has been widely embraced
by many users of SMART Practice Aids

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