Audits of Special Purpose Frameworks: the Pre-engagement Planning Meeting
The purpose of the pre-engagement meeting is to create tentative plans for an audit. The engagement leader may communicate the following information to the in-charge accountant:
- Changes in the client's business operations, accounting systems, and internal control.
- The reporting entity's business environment and operations, including any going concern issues.
- The entity's applicable financial reporting framework, and if a special purpose framework is the most appropriate and reasonable presentation of financial position and results of operations.
- Questions from the review of the prior year's audit documentation, including whether financial statements in the first year of transition to a special purpose framework will be single period or comparative. (Restatements of prior period would be required.)
- Possible modifications of the prior year's audit strategy to increase efficiency.
- Suggestions for modifying the prior year's procedures and documentation to save time, particularly considering the use of a new special purpose framework.
- Staffing and on-the-job training suggestions.
- Administrative details such as timing, budgets, and billing arrangements.
If you fail to hold this initial meeting, you create an endless list of time-wasting possibilities. The in-charge accountant is often told to obtain last year's working papers, perform the same procedures, and prepare the same documentation ("Same As Last Year" or "SALY" method). While this may appear to save an engagement leader's time, some current issues and problems relating to the audit aren't discussed, or even discovered, until the engagement leader's final engagement review. Further, the SALY method occasionally becomes the "MILY" ("Missed It Last Year") method!
A participant in a staff training seminar shared that she was given in-charge responsibility on an audit shortly before the engagement partner left for a late December vacation. Her instructions were to review the working papers, plan the engagement and meet with the client to schedule the yearend inventory observation, arrange for client assistance, obtain an understanding of internal control, and schedule the fieldwork start date.
Arriving at the client's office for a day of interim work before yearend, she was shocked to learn that the client had upgraded its accounting software from an out-of-the-box system to a mid-tier system early in the year. As a result of the change, the client had eliminated three of its eight-person accounting staff and reassigned duties and control activities.
Shock then turned to great embarrassment when she learned her partner had assisted the client in acquiring the new software and redesigning duties and internal controls. Impairment of independence, the need to recreate internal control documentation, revision of the audit strategy and plan, and repairing the firm's image were just a few of the problems created by the failure to hold a pre-engagement planning meeting.
How to plan a useful meeting
While the length and content of a pre-engagement planning meeting will vary according to the size of an engagement, this meeting will always contribute to a higher quality and more efficient audit engagement. For audits of entities using special purpose frameworks such as the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), holding this meeting well in advance of other planning activities is critical.
In fact, any discussions an engagement leader holds with reporting entity management regarding a possible change in its reporting framework to a special purpose framework should be held several months in advance of the reporting date. Among other things, the following matters should be discussed at this meeting:
- Do the users of an entity's financial statements require U.S. GAAP?
- Are prescribed form financial statements required by the users?
- If neither of the above is required, is there a special purpose framework that will appropriately present the entity's financial position and results of operations?
- Will financial statement users accept the special purpose framework management would like to use? A joint meeting of reporting entity management personnel, representatives of financial statement users and the audit engagement leader will be necessary to provide information about the special purpose framework and to answer this question.
- Will management and financial statement users accept single-period statements in the year of transition or will restatement of a framework used in the prior period be necessary to present comparative statements?
- What are the specific policies in the special purpose framework that management may elect to use and what are management's elections? Will these elections be acceptable to users of the financial statements?
- Are management's policy elections all permissible under the special purpose framework they have selected, and will the policies result in the most appropriate presentation of financial position and results of operations, given engagement facts and circumstances?
- What calculations are necessary for the accounting changes required by a special purpose framework in the period of transition, and will auditor assistance be required to make the calculations and related adjustments? Note that this is a non-attest service under ET 101-3 requiring oversight and acceptance of an auditor's work by an employee of the reporting entity with suitable skill, knowledge and experience to avoid impairment of the auditor's independence.
Knowledge of all of the matters provide a solid foundation for performing an effective and efficient audit. Other pre-engagement planning activities for audits of special purpose frameworks will be discussed in future articles. For addition information, you can register for 12, two-hour webcasts in my Small Audit Series by clicking on the applicable box on the left side of my home page.