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Clarified Auditing Standards: Audits of Financial Statements Prepared in Accordance with Special-Purpose Frameworks – Part 2

Jan 21st 2016
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In the first part of this article, I discussed pre-engagement planning audit procedures under AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special-Purpose Frameworks. The planning and completions phases of the audit will be discussed in this article.

General Planning Phase Procedures

1. Complete or update basic documentation necessary to demonstrate an understanding of the client's business and environment, financial reporting framework, and internal control.

  • Client Acceptance and Continuance Form
  • General Ledger Analysis Worksheet
  • Internal-control flowcharts, internal-control questionnaire, and systems walk-through memo or other documentation
  • Documentation of any and all inquiries of management or client personnel

2. Assess control risk by financial statement classifications, combine with inherent risk documentation, and assess level of risk of material misstatement.

3. Use assessed risk at financial statement level from Client Acceptance and Continuance Form and other documentation to establish planning materiality, tolerable misstatement, and the lower limit for individually significant items at the financial statement level.

4. Use assessed risk of material misstatement at the assertion (financial statement classification) level to establish tolerable misstatement and the lower limit for individually significant items at the financial statement classification level.

5. Design a sampling or nonsampling plan using materiality levels for financial statement classifications.

6. Document planning activities and decisions in a Planning Document.

7. Hold meeting with in-charge accountant and engagement leader to discuss planning results and finalize audit strategy.

8. Tailor the audit program.

9. Make work assignments and provide necessary training for staff personnel.

10. Hold planning and brainstorming meeting with all engagement personnel.

11. Prepare planning communication with persons charged with governance.

Special-Purpose Framework Planning Phase Audit Procedures

The accounting policies and procedures applicable to financial statements prepared under a special-purpose framework must be documented in engagement files. The documentation should include both the basic policies and procedures of the framework applicable to the entity's financial statements, as well as options management may have elected under the applicable financial reporting framework.

All engagement personnel must be familiar with the general and specific policies and procedures of the applicable reporting framework prior to the engagement team's brainstorming/planning meeting to properly identify and consider potential risks of material misstatement due to error or fraud. Engagement files should contain documentation of each engagement team member's understanding of the applicable reporting framework.

For the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), the resource material made available by the American Institute of CPAs that was mentioned in the first part of this article should be read, discussed among team members, and applied to the financial reporting system of the entity subjected to audit. Documentation of an internal CPA firm training meeting for special-purpose frameworks is one way to evidence the understanding of special-purpose frameworks by engagement team members.

General Performance Phase Procedures

1. Perform the maximum amount of interim work that is practical before client's fiscal year-end.

  • Risk assessment procedures
  • Reading minutes of meetings of board of governance
  • Substantive tests for property, plant, and equipment; debt; and expenses
  • Interim analytical procedures – reading general ledger
  • Cycle counts of perpetual inventories
  • Receivables confirmations
  • Loan files exams – banks
  • Site inspections – contractors
  • Other planning activities
  • Oversee client working paper preparation
  • Block out or replicate audit documentation
  • Other work

2. Perform highly effective analytical procedures whenever possible that can generate evidence for evaluating all financial statement assertions for accounts, such as sales and revenues, certain salaries and wages, payroll taxes, depreciation, interest income and expense, etc.

3. Complete audit program procedures and prepare supporting audit documentation.

General Completion (Wrap-Up) Phase Procedures

1. Complete in-charge accountant's review of assistant's work as soon as it is completed, and clear review points as soon as possible.

2. Plan to clear open items early (do not leave items to last minute).

3. Draft audit report, financial statements, and footnotes (finalize if client prepares).

4. Prepare a list to facilitate engagement leader's final review.

  • Identify any significant issues not discussed with the leader and their resolution.
  • Identify specific documentation prepared by the in-charge accountant that needs the leader's review.

5. Schedule leader's review (and all other required reviews) in the field whenever possible (otherwise, schedule staff time to complete in-office wrap-up and review).

6. Obtain leader's final review of working papers, audit report, and financial statements and footnotes, and clear review points and open items as soon as possible.

7. Prepare internal-control communication letter and obtain leader's review.

8. Obtain client's approval of a draft of the financial statements, present a draft of the internal-control communication letter, and get management's representation letter signed.

9. Meet and communicate with persons charged with governance.

10. Perform the administrative wrap-up procedures.

  • Furnishing clients with proposed adjustments, discussing their content, and documenting client responses.
  • Obtaining all signed correspondence.
  • Making sure all review notes and open items lists are cleared and destroyed.
  • Preparing a list of time-saving issues for next year.
  • Preparing, reviewing, and completing all necessary tax returns.
  • Completing final time-accumulation schedules and comparing with budgets (if required by firm policy).

11. Hold post-engagement training meeting with engagement personnel.

12. Complete final quality-control procedures, document report release date, and lock or secure audit documentation.

13. Evaluate the CPA firm's client service.

14. Identify, discuss, and communicate to the client any additional services that could help the client accomplish its operational objectives.

As can be seen by the procedures summarized above, audits of special-purpose frameworks are performed essentially the same as audits of GAAP frameworks. Primary differences include the requirements for engagement teams to have adequate knowledge of the special-purpose framework's principles, the appropriateness of the applicable reporting framework for use by the reporting entity, and the appropriateness of management's applications of the applicable framework's principles.

For more resources, visit my website. I've recently released a Small Audit Case Study with illustrative practice aids and working papers. This is an excellent training tool for new in-charge accountants and engagement leaders. Upon completion of the case study, the results can be emailed to me for feedback.

Related article:

Clarified Auditing Standards: Audits of Financial Statements Prepared in Accordance with Special-Purpose Frameworks – Part 1


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