Is Your Audit Team Forms-Dependent?

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In my live seminars, many practitioners have admitted to forms-dependency.  Depending on the content of practice aids has the obvious benefit of enabling auditors to comply with the volumes of pronouncements from standard-setters.  An equally obvious detriment is that relying totally on forms and checklists can detract from an auditor’s professional judgment.

The basic objective of quality control standards formulated by the AICPA was originally, and is now, to increase engagement quality and efficiency.  Exercising sound professional judgment based on engagement risks is the key to accomplishing this objective.

Using Form CX-2, Financial Statement Materiality Worksheet for Planning Purposes, from Practitioners Publishing Company Audit Guides for reference, here is a brief test that may illustrate forms dependency:

1)    The first section of the form includes a table that illustrates decreases in amounts considered material based on the volume of the base.  Is this form required by the standards?  What is its source?  Why and when should it be used?
2)    Planning materiality is calculated based on the higher of two bases, total revenue or total assets.  What is the definition of planning materiality? Do the standards require the calculation of materiality?  Why does the form instruct users to use the higher of the two bases?
3)    Tolerable misstatement is calculated by multiplying the dollar amount of planning materiality by a .75 factor.  What is the definition of tolerable misstatement?  Is the .75 factor required by the standards?  Should the factor be changed depending on financial statement risk?  What does the complement of the .75 factor represent?
4)    Individually significant items, the form indicates, can be any amount up to tolerable misstatement.  What factors determine the acceptable lower limits for individually significant items?  Can an auditor always use the full amount of tolerable misstatement? Why or why not?
5)    A section on the form indicates there may be factors that cause tolerable misstatement to be lower for certain financial statement classifications.  What are these factors?  Under what circumstances can tolerable misstatement be the same at the financial statement level and the assertion level?

How did you do?  Here’s the issue.  Understanding the concepts and theory underpinning audit practice aids is essential to performing effective and efficient engagements.  An engagement leader that doesn’t have this understanding can’t pass it along to engagement personnel.  Without proper guidance from engagement leaders, engagement personnel become forms-dependent!

My Small Audit Series of webcasts, self-study courses and small resource books are designed to provide understanding and application of the concepts, policies and procedures required by professional standards.  All of these products can be accessed on my website, www.cpafirmsupport.com .

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