TQ3) Spencer PLC has had its accounts audited by BBR & Co, a firm of chartered c
ID: 2328421 • Letter: T
Question
TQ3) Spencer PLC has had its accounts audited by BBR & Co, a firm of chartered certified accountants, for the last 2 years. The Company is engaged in manufacturing, mining and the construction of machinery. For the current year's audit, as in the previous years, BBR & Co has engaged 2 senior managers, Lionel and Anthony and 3 assistants. In the current year, Spencer has established a new company Diane PLC, to manufacture motor vehicle bodies. Spencer wants BBR & Co to audit the books of this new company. However. the firm does not possess the necessary knowledge in this area. Required: Discuss the quality measures that the audit managers should consider before starting the audit of Spencer.Explanation / Answer
All audit projects should begin with the team clearly understanding why the project was put on the audit plan. Answers to the following questions should be answered and approved before fieldwork begins:
Why was the audit project approved to be on the internal audit plan?
How does the process support the organization in achieving its goals and objectives?
What enterprise risk(s) does the audit address?
INITIAL DOCUMENT REQUEST LIST
Requesting and obtaining documentation on how the process works is an obvious next step in preparing an audit. Besides asking for access to process master data to analyze for trend highlights, the following requests should be made before the start of audit planning:
All policies, procedure documents, and org charts Key reports used to manage the effectiveness, efficiency, and process success Access to key applications used in the process Description and inventory of process master data, including all data fields and attributes
RISK AND PROCESS SUBJECT MATTER EXPERTISE
Performing an audit based solely on internal company information is helpful to assess the operating effectiveness of the process’ controls. However, for internal audit to keep pace with the business’ changing landscape and to ensure key processes and controls are also designed correctly, seeking out external expertise is becoming more of a requirement.
At least one of the following should be used to evaluate the design of the process audited:
Subject Matter Expert (SME) from a Big 4 or other consulting firm
Membership to the most relevant trade association
Recent articles from WSJ.com, HBR.com, or other leading business periodicals
Relevant blog posts from The Protiviti View, RSM’s Blog, or the IIA’s blogs
COSO’S 2013 INTERNAL CONTROL - INTEGRATED FRAMEWORK
To create a more comprehensive audit program, view COSO’s 2013 Internal Control components, principles, and points of focus here.
PREPARING FOR A PLANNING MEETING
The objective of the pre-planning meeting is to obtain a high-level understanding of the goals and objectives of the process or department and the key steps to the process. The following steps should be performed while planning for an audit project:
Outline, by either narrative, flowchart, or both, key process steps, highlighting information inflows and outflows, and internal control components Validate draft narratives and flowcharts with subject matter expert used (if any)
Create an initial pre-planning questionnaire, with internal audit’s draft answers, to facilitate a pre-planning meeting with key audit customers
PREPARING THE AUDIT PROGRAM
Documenting the process details in a narrative or flowchart will make it much easier to determine audit procedures and to create an audit program. An auditor’s program should detail the following information:
AUDIT PROGRAM AND PLANNING REVIEW
Audit programs, especially those for processes that have never been audited before, should have multiple levels of review and buy-in before being finalized and allowing fieldwork to begin. The following individuals should review and approve the initial audit program and internal audit planning procedures before the start of fieldwork:
AUDIT MANAGEMENT TOOLS
Leveraging internal audit software will also help you streamline and organize your entire audit. In addition to must-have features like built-in workflow and real-time dashboards, ask yourself questions about usability and configurability. Some questions you should ask include:
Does the tool feel intuitive and easy to use, or do you have to click multiple times to get where you need to go?
Does implementation take a few weeks, several months, a year?
Speed: does the tool work and load quickly or does it lag at times?
Steps
The steps in planning an audit include (Planning Procedures):
1. Basic discussions with the client about the nature of the engagement and the client's business and industry are performed first, and the auditor meets the key employees, or new employees of a continuing client. The overall audit strategy or the timing of the audit may be discussed, but don't discuss specific audit procedures.
2. Review of audit documentation from previous audits performed by the accounting firm or a predecessor auditor (if the latter makes these audit documentation available) will assist in developing an outline of the audit program.
3. Ask about recent developments in the company such as mergers and new product lines which will cause the audit to differ from earlier years.
4. Interim financial statements are analyzed to identify accounts and transactions that differ from expectations (based on factors such as budgets or prior periods). The performance of such analytical procedures is mandatory in the planning of an audit to identify accounts that may be misstated and that deserve special emphasis in the audit program.
5. Non-audit personnel of the accounting firm who have provided services (such as tax preparation) to the client should be identified and consulted to learn more about the client.
6. Staffing for the audit should be determined and a meeting held to discuss the engagement.
7. Timing of the various audit procedures should be determined. For example, internal control testing needs to be performed early in the engagement, inventory counts need to be performed at or near the balance sheet date and the client representation letter cannot be obtained until the end of the audit fieldwork.
8. Outside assistance needs should be determined, including the use of a specialist as required (a tax practitioner or an information technology (IT) professional) and the determination of the extent of involvement of the internal auditors of the client.
9. Pronouncements on accounting principles and audit guides should be read or reviewed to assist in the development of complete audit programs fitting the unique needs of client's business and industry.
10. Scheduling with the client is needed to coordinate activities. For example, client-prepared schedules need to be ready when the auditor is expected to examine them, and the client needs to be informed of dates when they will be prohibited from accessing bank safe deposit boxes to ensure the integrity of counts of securities held at banks.
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