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Improving Your Audit Process, Part 9: Planning for Finishing the Engagement

Jun 28th 2016
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Imagine the following scenario: The in-charge accountant is almost done with engagement fieldwork when the CFO calls to say the room the engagement staff has been working in is needed for the next three weeks, starting tomorrow.

The in-charge accountant then asks the CFO about the information the in-charge has on his “open items” list and she explains she has not had time to gather the requested information, but should complete it the first part of next week.

Upon arriving at the CPA firm’s office the next day, the in-charge accountant has hopes of finishing his review of assistants’ working papers and working on the draft of the financial statements and footnotes. Unfortunately, his inbox has three client requests for information and a note from another firm partner requesting a meeting midmorning.

The partner explains she has a “crisis” job for a large firm client that must be completed in the next three days and the in-charge is the only person who can do the work. For the next two weeks, the in-charge is unable to get back to complete his audit.

When he can get back to the audit, time is wasted returning to the client’s office for more information and finding the engagement staff personnel to clear review notes. More time is wasted trying to obtain information from the CFO. More work is necessary to resolve the problems the late information causes and the in-charge accountant is already over budget!

As many CPAs have learned, the bulk of wasted time and budget overruns occur in the completion phase of an engagement. A close look at the reasons for this often indicates failures to perform engagement activities at proper times.

In short, failure to effectively plan an engagement pushes problems into the performance phase and usually into the completion phase. Planning for finishing an audit engagement requires a realistic look forward at its inception and then completing procedures and activities in the most opportune order and times.

The practical, chronological checklist included below is separated into engagement phases and can help in-charge accountants and engagement leaders to eliminate wasted time and improve their audit process.

Preplanning Phase

1. Obtain the prior year’s permanent, tax, correspondence, and current files.

a. Become familiar with the auditor’s report, financial statements, and footnotes.
b. Determine that the reporting framework is appropriate given the nature, size, and complexity of the reporting entity.
c. Review the prior year’s risk assessment procedures, levels of assessed risk, audit strategy, and audit plan (program) to determine if there are opportunities for changes that will improve the audit process in the current year.
d. Review the key forms, practice aids, working papers, and other documentation in last year’s current file to determine any client documents, unnecessary working papers, or correspondence that can be eliminated this year.
e. Determine if it is possible to use the prior year’s control risk assessment in the current year and if doing so can reduce the current year’s risk assessment procedures and other substantive tests.
f. Read the internal control communication letter and investigate the current status of significant deficiencies and material weaknesses and their effects on the current-year auditing procedures.
g. Prepare a list of procedures and activities that can be performed during interim work, make staffing requests, and schedule the interim work
h. Determine if specialists will be needed (e.g., IT persons, attorneys, valuation experts, or actuaries).
i. Prepare and deliver a list of schedules and other assistance from the client at least 30 days before the reporting date.

2. Hold preplanning meeting with in-charge accountant and engagement leader.

a. Discuss client changes in business, organization, accounting, internal control, personnel, and current events that may affect this year’s audit.
b. Discuss any effects of the current economic climate, any going-concern issues, and the need for management to develop plans to overcome potential threats to the continuing existence of the entity.
c. Schedule due dates, interim and year-end fieldwork, and assign engagement personnel.
d. Discuss fees, billing policies, budgets, and other administrative issues.

3. Schedule time for engagement leader to deliver the engagement letter to management or governance personnel.

a. Reach an understanding about the nature of the engagement, as well as client and CPA firm responsibilities.
b. Discuss current client issues, including any effects of economic climate.
c. Make fraud inquiries.
d. Arrange for proper workspace.
e. Arrange for client assistance.
f. Finalize dates for interim and year-end fieldwork.
g. Discuss target dates.
h. Discuss range of audit fees and effects of variables (problems, no client assistance, etc.).

Planning Phase

1. Complete or update basic documentation necessary to demonstrate an understanding of the client’s business and environment, including internal control.

a. Client Acceptance and Continuance Form.
b. Unusual matters documentation.
c. Internal control flowcharts and systems walk-through procedures memo or other documentation.
d. Documentation of any and all inquiries of management or accounting 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 the financial statement level from a Client Acceptance and/or Continuance Form and other documentation to establish overall materiality, tolerable misstatement/performance materiality, and the lower limit for individually significant items at the financial statement level.
4. Use assessed risk of material misstatement at the assertion level (financial statement classification) to establish tolerable misstatement/performance materiality and the lower limit for individually significant items at the financial statement classification level.
5. Design a sampling or nonsampling plan using calculated materiality levels for financial statement classifications.
6. Document planning activities and decisions.
7. Modify the audit program.
8. Make work assignments and provide necessary training for staff personnel.
9. Hold planning and brainstorming meeting with all engagement personnel.
10. Prepare planning communication for governance persons.

Performance Phase

1. Perform the maximum amount of interim work that is practical before client’s fiscal year-end.
2. Design and perform highly effective analytical procedures whenever possible that can generate evidence for evaluating relevant financial statement assertions. 
3. Complete audit program and supporting audit documentation.

Wrap-Up Phase

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. Draft audit report, financial statements, and footnotes (finalize if client prepares).
3. 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).
4. 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.
5. Prepare internal control communication letter and obtain leader’s review.
6. 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.
7. Meet and communicate with persons charged with governance.
8. Perform the administrative wrap-up procedures.
9. Complete final quality control procedures, document report release date, and lock or secure audit documentation.

The Capstone for Engagement Profitability: Efficient Wrap-Up
Efficient engagement completion is always a product of effective engagement planning and performing procedures in their optimum order and times. Failure to plan properly and to perform procedures in their proper order throughout the engagement pushes problems into the completion phase.

Open items are usually more difficult to close, and certainly more costly, during wrap-up than during the performance phase of an engagement. Adopting a do-it-now policy for disposing of loose ends will relieve considerable pressure during the completion phase.

Learning to anticipate common problems and to achieve their resolution early will also help to speed the wrap-up process. Preventing loss of control during wrap-up requires planning for finishing!

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