Increasing Audit Profits Series No. 27—Summarizing Technical Decision Making in a Planning Document

Here is a brief outline of technical audit planning decision making that normally should be summarized in a planning document.  The Planning Document is a vehicle for guiding planning activities and the engagement team’s brainstorming meeting.  A standardized format ensures uniformity of the planning activities among engagements and provides engagement leaders assurance that the in-charge accountant has considered all aspects of planning.  Planning decisions can be summarized in the document or linked to other practice aids, memos or working papers.

The Planning Document can be presented to the engagement leader during or after the engagement team meeting or, to save time, a draft can be submitted in advance for the leader’s reading.  During the meeting, changes in information or approaches can be reflected in the document for the leader’s final approval before fieldwork begins.  Creating the planning document on a word-processing template will facilitate its revision and completion.

I.    TECHNICAL AUDIT PLANNING DECISIONS:

A.    Risk of misstatement at the financial statement level:

Use of Statements:
    High-risk uses of statements should be described.

Potential for Going-Concern Problems:
Continued losses, high debt and external situations that threaten the continued existence of the company should be described.

Integrity of Management:
Specific information that could cast doubt on management’s integrity, or lack thereof, should be discussed here.
        
An overall evaluation of risk at the financial statement level should be made and the subjective impact on engagement procedures should be recorded for use in audit program modification.

A1. The risk of misstatements evaluation at the assertion level, and the impact on the audit strategy, by major financial statement classification should be described here or referenced to other documentation.  

B.    Materiality Judgments:
A summary of the tolerable misstatement calculations and reasoning should be presented here or referenced to other documentation.

C.    Sampling Decisions:
This section should describe the reasons for making decisions to sample or not sample.  If decisions are made to sample, the rationale for sample size calculations should be explained.  Other documentation may also be referenced.

D.    Audit Strategies:
Detailed substantive tests of balances, risk assessment procedures, tests of controls and/or extensive analytical procedures are options for the general audit strategy and the individual financial statement classifications strategies.  This section could also be referenced to practice aids or other documentation.

E.    Nature of Procedures:
Descriptions of the nature, extent and timing of tests of balances procedures and analytical procedures for material financial statement classifications should be described here or referenced to other documentation.

F.    Significant Time-Savings Opportunities:
Opportunities to save time on the engagement not discussed elsewhere should be detailed here.

G.    Engagement Team Meeting:
This section should document the significant potential risks of misstatement due to error or fraud, planned audit responses and other matters discussed at the team meeting.  All engagement personnel, including partners or directors, are required to attend this meeting.

I.  Potential Risks of Misstatement due to Errors or Fraud and planned audit responses (this section may also be referenced to other documentation):

From risk assessment procedures:
Potential risks of misstatement discovered during the risk assessment procedures, and the planned audit responses, should be documented here.

From reading the general ledger account activity and performing other analytical procedures:
Unusual matters, variances or other potential risks, and the planned audit responses, should be documented here.

Factors discovered throughout the engagement, along with audit responses and their results:

From inquiries of management personnel:

From inquiries of staff personnel:

From communication with persons charged with governance:

From performing fieldwork and other auditing procedures:

For more information on effective engagement planning, my live webcasts and self-study courses can be accessed by clicking the applicable box on the left side of my home page, www.cpafirmsupport.com .

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by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

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