Chapter 5 Planning understanding the entity and assessing business risk | Auditing and Assurance Services in Australia

lOMoAR cPSD| 47206071 Page 185 CHAPTER 5
Planning, understanding the entity and assessing business risk
LEARNING OBJECTIVES (LO) 5.1
Explain why the decision to accept a client is important, and describe
the primary features of client acceptance and continuance, including the
purpose and content of an audit engagement letter.
5.2Explain the importance of planning to the audit process.
5.3Identify the important aspects of the auditor’s understanding of an entity and its environment.
5.4Assess entity business risk.
5.5Explain how an auditor develops an overall audit strategy and prepares a
detailed audit plan or audit program.
5.6Describe the process of assigning and scheduling audit staff.
5.7Outline the types and uses of analytical procedures and distinguish
those that are useful in obtaining an understanding of an entity and assessing business risk. RELEVANT GUIDANCE ASA 210/ISA 210
Agreeing the Terms of Audit Engagements ASA 220/ISA 220
Quality Control for an Audit of a Financial Report and
Other Historical Financial Information
Planning an Audit of a Financial Report ASA 300/ISA 300 ASA 315/ISA 315
Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment
The Auditor’s Responses to Assessed Risks ASA 330/ISA 330
Initial Audit Engagements—Opening Balances ASA 510/ISA 510 lOMoAR cPSD| 47206071 ASA 520/ISA 520 Analytical Procedures ASA 710/ISA 710
Comparative Information—Corresponding Figures and
Comparative Financial Reports ASQC 1/ISQC 1
Quality Control for Firms that Perform Audits and Reviews of
Financial Reports and Other Financial Information, Other
Assurance Engagements and Related Services Engagements
Code of Ethics for Professional Accountants APES 110/IFAC Terms of Engagement APES 305
Quality Control for Firms APES 320 Page 186 lOMoAR cPSD| 47206071 CHAPTER OUTLINE
Before commencing an audit, the auditor must determine whether to accept the
client and undertake the audit. This requires an understanding of the entity and its
environment. After the audit commences, the planning and conduct of the audit are
influenced by the auditor’s understanding of the entity’s operations, trends within its
industry and the effects of economic and political influences on the entity. The auditor
uses this knowledge to identify existing or potential accounting and auditing problems
and to develop an overall audit strategy and a detailed audit plan or program for the
conduct and scope of the audit.
The major topics covered in this chapter are acceptance and continuance of audit
clients, including evaluation of potential clients, communications with a previous
auditor, engagement letters and preliminary conferences with the client; audit
planning, including obtaining an understanding of the entity’s organisational
structure, its operations and its industry; assessing client business risk; developing an
overall audit strategy and a detailed audit plan or program; assigning and scheduling
audit staff; and using analytical procedures for identifying and investigating unusual
changes in account balances or transaction totals, for planning purposes.
How this chapter fits into the overall financial report audit is illustrated in Figure 5.1
, which is an expansion of part of the overall flowchart provided in Chapter 1 . lOMoAR cPSD| 47206071 lOMoAR cPSD| 47206071
FIGURE 5.1 Flowchart of planning and risk-assessment stage of a financial report audit lOMoAR cPSD| 47206071 Page 187
LO 5.1 Client acceptance and continuance
The auditor’s need to understand the client starts when considering acceptance of an
engagement and continues throughout association with the client. The steps in accepting an audit client are shown in Figure 5.2
FIGURE 5.2 Steps in accepting an audit Obtaining clients
Since the services of public accounting firms are of a highly personal nature and involve
individual character traits such as competence and integrity, the auditor’s services cannot
be offered in the same manner that commercial goods and services are sold. The most
effective way of obtaining recommendations is to render services of a high quality. lOMoAR cPSD| 47206071
APES 110 section 250.2 permits advertising provided that its content and nature is not
false, misleading or deceptive and does not otherwise reflect adversely on the profession.
As a result, an auditor should not:
make exaggerated claims for services offered, qualifications possessed or experience
gained make disparaging references or unsubstantiated comparisons to the work of
another falsely advertise or mislead potential clients.
Potential clients may be approached personally or through direct mailing to make known
the range of services that the audit firm offers. However, follow-up communications must
be terminated when requested by the recipient or this will be considered harassment,
which is unprofessional conduct.
An issue that has been around for a number of years, but continues to occur frequently in
practice and has caused some concern within the audit profession, is the calling by
companies for competitive tenders for audit appointments, and the active involvement
by audit firms in the tendering process. This issue is symptomatic of the increased
competition for audit work. While acknowledging the right of companies to choose their
auditors in order to obtain the most cost-efficient audit, there is a major danger for Page
188 the profession in the potential loss of credibility that could result from a real or
perceived loss of independence of the auditor, by being placed in a position where there
may be an unreasonable threat of dismissal as a result of the auditor’s actions. An
example is the practice of opinion shopping . This may occur where an audit is put out
to tender following the issue of a modified opinion by the previous auditor or where a
new issue arises that may involve consideration of the issuing of a modified opinion and
the client seeking the views of potential new auditors as to how they would interpret the
client’s action in terms of the application of a certain accounting practice. APES 110
section 230.2 indicates that when an auditor is requested by an entity to give an opinion
on an actual or hypothetical accounting issue, they should consider the potential effect
on the professional responsibilities of the auditor, the purpose of the request and the
intended use of any response. The auditor whose opinion is requested is also required to
communicate with the existing auditor and provide a copy of the opinion to them.
Tendering may also subject an auditor to undue pressure because of the cost of the audit
examination and the ability to conduct the necessary audit procedures and the impact of
low-balling (discussed in Chapter 3 ), where firms bid an unreasonably low fee to win
the tender. While it is likely that the practice of audit tendering will continue, audit firms
must recognise that the tender they submit needs to reflect the level of professional skill, lOMoAR cPSD| 47206071
knowledge and responsibility required for the audit work. Auditors and management
should also be aware of the increased audit risk and hidden costs associated with
changes of client as a result of the tendering process—for example, the loss of audit
continuity and the extensive knowledge of a client’s business and personnel by the audit
firm, which are beneficial to an effective audit process. On the other hand, the tendering
process appears to have led to some increases in audit efficiency as auditors have
implemented more efficient and effective audit techniques.
As indicated in Chapter 3 , audit tendering received recent support in the European
Commission Green Paper, which recommended mandatory rotation of audit firms
accompanied by mandatory tendering with full transparency with regard to the criteria
according to which the auditor will be appointed. The Green Paper recommended that
quality and independence should be key selection criteria in any tendering procedure.
Subsequent legislation has provided for the rotation period for audit firms for European
Union companies to be extended if a public tender is held after 10 years.
Quality control policies and client evaluation procedures
APES 320 section 38 and ASQC 1.26–28 (ISQC 1.26–28) require an audit firm, as part of its
quality control, to establish policies and procedures for investigating potential clients and
acceptance of an engagement and for periodically reviewing continuance of clients.
Policies and procedures for client acceptance and continuance are important because an
audit firm needs to take precautions to avoid association with a client whose management
lacks integrity. This will include consideration of the identity and business reputation of
the client’s principal owners, key management, related parties and those charged with its
governance, as well as the nature of the client’s operations, including its business
practices. As discussed in Chapter 3 , care should also be exercised to avoid situations
where the auditor–client relationship lacks independence and where there are other
impediments to undertaking the audit function, such as an inability to serve the client
properly owing to a lack of competence, time or resources. In addition, an auditor needs
to consider the effect of a client’s reputation on its image in the financial community, as
well as the increased risk of litigation, which was discussed in Chapter 2 .
ASA 220.12 (ISA 220.12) requires that the engagement partner be satisfied that
appropriate procedures have been followed regarding the acceptance and continuance of lOMoAR cPSD| 47206071
clients. Procedures that may be used to establish the appropriateness of accepting clients include:
obtaining and reviewing available financial information concerning the prospective
client, such as annual reports, interim financial reports and income tax returns making
enquiries of third parties, such as the client’s bankers, legal advisers or investment
banker, concerning the integrity of the prospective client and its management
communicating with the previous auditor
considering circumstances in which the engagement would require special attention or present unusual risks
evaluating the firm’s independence and ability to serve the client, including Page 189
technical skills, knowledge of the industry and personnel
determining that acceptance of the client would not violate the Code of Ethics for
Professional Accountants.
APES 320 section 43 and ASQC 1.A21 (ISQC 1.A21) indicate that when deciding whether
to continue a client relationship, the auditor needs to consider significant matters that
have arisen during the current or previous period and their implications for continuing
the relationship. Examples of significant matters include:
a major change in ownership, directors, management, legal advisers, financial condition,
litigation status, scope of the engagement and/or nature of the client’s business the
existence of conditions that would have caused the auditor to reject the client had such
conditions existed at the time of the initial acceptance.
Much of the information relevant to this process should be available to the auditor
through the records and working papers of the audit itself.
Communication with a previous auditor
Normally, an auditor who accepts a new client is replacing another auditor. Therefore,
when approached by a potential client, an auditor should enquire about the client’s
present arrangements for accounting and auditing work. If the previous financial report
has been audited, the ethical rules of the Australian accounting profession, which were
discussed in Chapter 3 , require that the prospective auditor has the opportunity to
ascertain whether there are any professional reasons why the appointment should not be accepted. lOMoAR cPSD| 47206071
APES 110 sections 210.13–14 require that, before accepting a nomination, an auditor
must: request the prospective client’s permission to communicate with the previous auditor
if permission is refused, carefully consider such refusal when determining
whether to accept the engagement, or
on receipt of permission, ask the previous auditor in writing for all information necessary
to enable a decision as to whether the nomination should be accepted.
The auditor should treat the reply from the previous auditor in the strictest confidence
and judge whether the factors precipitating the proposed change are unusual, or whether
they indicate that the previous auditor is being treated unfairly.
APES 110 section 210.12 points out that the previous auditor is bound by a duty of
confidentiality, as discussed in APES 110 section 140. Therefore, in the absence of the
client’s permission to do so, the previous auditor should not volunteer information about
the client’s affairs. However, where the previous auditor does provide information, APES
110 section 210.13 requires that it should be provided honestly and unambiguously.
APES 110 section 210.13 requires that if the proposed auditor is unable to communicate
with the previous auditor, the proposed auditor should try to obtain information about
possible threats by other means, such as enquiries of third parties or background
investigations on senior management and those charged with the governance of the prospective client.
As a result of this process of communication, the interests of three groups are protected:
An auditor does not accept an appointment in circumstances of which they are not fully aware.
Shareholders are fully informed of the circumstances in which the change is proposed.
The existing auditor cannot be easily removed or interfered with in the conscientious
exercise of their duty as an independent professional.
While enquiries of the previous auditor about matters that bear on acceptance of the
client are required prior to acceptance, the auditor may also make enquiries of the
previous auditor after acceptance. For example, the auditor needs to consider the
relationship of the financial report of the previous period to the financial report of the
current period on which the auditor will express an opinion. Page 190 lOMoAR cPSD| 47206071 Engagement letters
After accepting an appointment, ASA 210.9 (ISA 210.9) and APES 305.3.1 require the
auditor and the entity to agree on the terms of engagement. ASA 210.10–11 (ISA 210.10–
11) require that the agreed terms of the engagement shall be recorded in an engagement
letter or other suitable form of written agreement, unless law or regulation prescribes
in sufficient detail the terms of the audit engagement. The auditor should document the
arrangements made with the client and clarify any matters that may be misunderstood.
This should help protect the audit firm and ensure that the client fully understands the auditor’s position.
The form and content of the audit engagement letter vary for each client. It should
generally include reference to the following matters set out in ASA 210.10 (ISA 210.10):
the objective and scope of the financial report
audit the auditor’s responsibilities management’s responsibilities
the identification of the applicable financial reporting framework
the form and contents of any reports, and a statement indicating that there may be
circumstances in which the form and content may differ.
An example of an audit engagement letter is contained in Appendix 1 to ASA 210 (ISA
210). A sample of an audit engagement letter prepared on this basis is presented in
Exhibit 5.1 . The letter may need to be modified in accordance with the circumstances.
Other matters that could be included are: specification of the schedules to be prepared
by the client; arrangements concerning the involvement of other auditors, experts or
internal auditors; and the method and frequency of billing of fees. EXHIBIT 5.1
SAMPLE AUDITOR’S ENGAGEMENT LETTER lOMoAR cPSD| 47206071
Jan Smith & Associates Chartered Accountants 30 Banks St Newtown The Managing Director ABC Ltd 15 Queen Street Newtown Dear Mr Spencer Scope
You have requested that we audit the financial report of ABC Ltd as of and for the
year ending 30 June 20X5. We are pleased to confirm our acceptance and our
understanding of this engagement by means of this letter. Our audit will be
conducted pursuant to the Corporations Act 2001 with the objective of expressing an
opinion on the financial report.
Responsibilities of the auditor
We will conduct our audit in accordance with the Australian auditing standards.
These standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the financial
report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial report. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of
the financial report, whether due to fraud or error. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall
presentation of the financial report.
Because of the inherent limitations of an audit, together with the inherent limitations
of internal control, there is an unavoidable risk that some material misstatements
may not be detected, even though the audit is properly planned and performed in
accordance with the Australian auditing standards.
In making our risk assessments, we consider internal control relevant to the Page 191
entity’s preparation of the financial report, in order to design audit lOMoAR cPSD| 47206071
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control.
However, we will communicate to you in writing concerning any significant deficiencies
in internal control relevant to the audit of the financial report that we identify during the audit.
Responsibilities of management
Our audit will be conducted on the basis that management and directors acknowledge
and understand that they have responsibility:
(a) for the preparation of the financial report that gives a true and fair view in
accordance with the Corporations Act 2001 and the Australian accounting standards
(b) for such internal control as management determines is necessary to enable the
preparation of the financial report that is free from material misstatement,
whether due to fraud or error (c) to provide us with: (i)
access to all information of which the directors and management are aware that
is relevant to the preparation of the financial report, such as records,
documentation and other matters (ii)
additional information that we may request from the directors and
management for the purpose of the audit (iii)
unrestricted access to persons within the entity from whom we determine it
necessary to obtain audit evidence.
As part of our audit process, we will request from management and, where
appropriate, directors written confirmation concerning representations made to us in connection with the audit.
Other matters under the Corporations Act 2001 Independence
We confirm that, to the best of our knowledge and belief, we currently meet the
independence requirements of the Corporations Act 2001 in relation to the audit of
the financial report. In conducting our audit of the financial report, should we become
aware that we have contravened the independence requirements of the Corporations
Act 2001, we shall notify you on a timely basis. As part of our audit process, we shall
also provide you with a written independence declaration as required by the Corporations Act 2001. lOMoAR cPSD| 47206071
The Corporations Act 2001 includes specific restrictions on the employment
relationships that can exist between the audited entity and its auditors. To assist us
in meeting the independence requirements of the Corporations Act 2001, and to
the extent permitted by law and regulation, we request you discuss with us:
the provision of services offered to you by Jan Smith & Associates prior to
engaging or accepting the service
the prospective employment opportunities of any current or former partner or
professional employee of Jan Smith & Associates prior to the commencement of
formal employment discussions with the current or former partner or professional employee.
Annual general meetings
The Corporations Act 2001 provides that shareholders can submit written
questions to the auditor before an annual general meeting, provided that they
relate to the auditor’s report or the conduct of the audit. To assist us in meeting
this requirement in the Corporations Act 2001 relating to annual general meetings,
we request that you provide to us written questions submitted to you by
shareholders as soon as practicable after the question(s) has been received and no
later than five business days before the annual general meeting, regardless of
whether you believe the questions(s) to be irrelevant.
Presentation of audited financial report on the internet
It is our understanding that the entity intends to publish a hard copy of the
audited financial report and auditor’s report for members, and to electronically
present the audited financial report and auditor’s report on its internet website.
When information is presented electronically on a website, the security and
Page 192 controls over information on the website should be addressed by the
entity to maintain the integrity of the data presented. The examination of the
controls over the electronic presentation of audited financial information on the
entity’s website is beyond the scope of the audit of the financial report.
Responsibility for the electronic presentation of the financial report on the entity’s
website is that of the governing body of the entity. Fees
We look forward to full cooperation with your staff and we trust that they will
make available to us whatever records, documentation and other information we
request in connection with our audit. Our fees, which will be billed as work
progresses, are based on the time required by the individuals assigned to the
engagement, plus outof-pocket expenses. Individual hourly rates vary according to
the degree of responsibility involved and the experience and skill required. lOMoAR cPSD| 47206071 Reporting
We will issue an auditor’s report expressing our opinion on the financial report of
ABC Ltd in accordance with the Australian auditing standards. The form and content
of our report may need to be amended in the light of our audit findings.
Please sign and return the attached copy of this letter to indicate that it is in
accordance with your understanding of the arrangements for our audit of the
financial report, including our respective responsibilities. Yours faithfully Jan Smith Partner 15 September 20X5
Acknowledged on behalf of ABC Ltd by Jim Spencer Managing Director 30 September 20X5
On recurring audits, ASA 210.13 (ISA 210.13) requires the auditor to assess whether
circumstances require the terms of the engagement to be revised and whether it is
necessary to remind the entity of the existing terms of the audit engagement.
Conferences with the client’s personnel
Soon after acceptance of an engagement, the auditor should meet with key client
personnel, including the principal administrative, financial and operating officers, the chief
internal auditor, and the IT (information technology) manager, to discuss matters expected
to have a significant effect on the financial report or on the conduct of the audit.
Good relations with client personnel are important. An audit usually causes considerable
inconvenience and disruption to some personnel, and their assistance is often needed to
obtain documents, records and explanations of various matters. Effective early
conferences establish a foundation for a good working relationship with all client personnel.
Effective communications with top management are particularly important. The auditor
should have an opportunity to consider the accounting implications of important planned
transactions, such as merger negotiations or lease or purchase decisions. The chief lOMoAR cPSD| 47206071
executive officer should be informed on a regular basis of new accounting and disclosure
requirements that may affect company plans. A good working relationship throughout
the engagement helps to avoid a crisis conference at year end over a potential
modification of the auditor’s report. Page 193 Initial engagements
ASA 510.6 (ISA 510.6) requires that for initial audit engagements, the auditor obtains
sufficient appropriate audit evidence that:
the opening balances do not contain material misstatements affecting the current period’s financial report
the previous period’s closing balances have been correctly brought forward to the
current period, or have been restated when appropriate
appropriate accounting policies are consistently applied or changes have been properly
accounted for and adequately disclosed.
In addition, the auditor needs to consider the impact of the opening balances on the
appropriateness of the comparative figures disclosed in the financial report in accordance
with ASA 710 (ISA 710), which will be discussed in Chapter 12 .
Obtaining sufficient appropriate audit evidence about opening balances could be
facilitated by reviewing the audit working papers of the previous auditor. However, ASA
510.A4 (ISA 510.A4) points out that in these circumstances the auditor also needs to
consider the independence and professional competence of the previous auditor.
The previous auditor is not obliged to provide information and advice to enable the
current auditor to substantiate the existence and value of assets and liabilities as at the
end of the previous financial year. However, the previous auditor may do so as a
professional courtesy, with the knowledge and consent of the client. The audit working
papers of the previous auditor are their property and they have no obligation to make
available any information contained therein.
Where the working papers of the previous audit are not available, the auditor applies
other audit procedures in order to form an opinion about the opening balances,
accounting policies and comparative figures. These could include: lOMoAR cPSD| 47206071
further consultation with management
review of the records and working papers of the client and the accounting and internal
control activities that relate to the previous period
analysis of the audit work of the current period to the extent that it relates to the
opening balances review of the minutes of the board of directors and other important
committees review of policy manuals.
If the previous financial report was not audited, the first examination needs to be even more extensive.
ASA 510.10–12 (ISA 510.10–12) state that the auditor needs to modify the auditor’s
report in the following situations:
the auditor is unable to obtain sufficient appropriate audit evidence concerning opening balances
the opening balances contain misstatements that materially affect the current period’s
financial report and these are not properly accounted for and adequately disclosed the
current period’s accounting policies have not been consistently applied in relation to
opening balances and the change has not been properly accounted for and adequately disclosed. QUICK REVIEW
Important steps in relation to accepting and continuing an audit engagement are as follows.
1. Obtain ethical clearance from previous auditor.
2. Evaluate management’s integrity, unusual risks and the auditor’s independence,
skills and competence to complete the audit.
3. Once the auditor has decided to accept or continue an engagement, issue an
engagement letter to confirm the terms of the engagement.
4. Arrange a conference with key client personnel soon after accepting the engagement.
5. For initial audit engagements, the auditor needs to consider whether they will
be able to obtain sufficient appropriate audit evidence for opening balances. Page 194 lOMoAR cPSD| 47206071
LO 5.2 Audit planning
The conduct of an efficient and effective audit requires adequate planning . ASA 300.2
(ISA 300.2) indicates that adequate planning benefits the audit by assisting the auditor to:
devote appropriate attention to important areas of the audit
identify and resolve potential problems on a timely basis
properly organise and manage the audit engagement so that it is performed effectively and efficiently
select engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks, and properly assign work to them direct
and supervise engagement team members and review their work coordinate work to
be done by auditors of components and experts.
ASA 300.5 (ISA 300.5) requires that the engagement partner and other key members of
the audit team be involved in planning the audit. This enables the audit to be performed in an effective manner. The nature of audit planning
The concept of adequate planning involves obtaining an understanding of the entity’s
business operations and risks, and developing an overall audit strategy and a detailed a
udit plan or audit program . ASA 300.7 (ISA 300.7) requires the auditor to establish an
overall audit strategy that sets the scope, direction and timing of the audit and guides the
more detailed audit plan. ASA 300.9 (ISA 300.9) requires the auditor to develop an audit
plan that sets out the nature, timing and extent of risk-assessment procedures and audit
procedures at the assertion level and any other audit procedures necessary to meet the
Australian auditing standards. In practice, audit plans are often referred to as audit
programs. The audit strategy and the audit plan or audit program often need to be
revised due to changes in conditions or the unexpected results of audit procedures. The
reasons for such changes need to be documented in the audit working papers. The
contents of the audit strategy and the audit plan or audit program will be discussed in
more detail later in this chapter.
The audit strategy helps to ensure that important and potential risk areas of the audit are
given appropriate attention, and that problems are identified and dealt with. Adequate
planning also helps to make the audit efficient and effective, by allocating the appropriate lOMoAR cPSD| 47206071
quality and quantity of audit staff to the engagement and coordinating resources and
work done by other auditors or experts.
The extent of planning for an engagement depends on the size and complexity of the
entity and whether the auditor has had previous experience with the entity. The
responsibility for the overall audit strategy is the auditor’s. However, discussion of
elements of the strategy and proposed audit procedures with the entity’s management
and staff enables the auditor to coordinate the work of the entity’s staff and the auditor’s staff.
As indicated in ASA 315.18 (ISA 315.18), in planning the audit the auditor also needs to
obtain an understanding of the methods the entity uses to process accounting
information, because such methods influence the design of the accounting system and the
nature of control activities. The extent to which the computer is used in significant
accounting applications, as well as the complexity of that processing, also influences the
nature, timing and extent of audit procedures.
Because most audit clients have accounting systems with both manual and IT portions, all
auditors need to be proficient at understanding the accounting system and internal
control (both manual and IT) and plan the audit to address both portions of the
accounting systems. As explained in Chapter 4 , computer audit specialists may still be
used, but the determination of the need for their skills and the evaluation of their results
and conclusions are the responsibility of the auditor who issues the opinion on the financial report. Overall timing of engagement
The timing of the audit can be viewed as comprising three stages: planning, interim and
final. Interim work is done before the date of the financial report, while final work is
done at or after that date. The three phases of the audit—planning, interim and final—
are normally related to the major steps in the audit in defined ways. Obtaining an
understanding of the entity and its environment and assessing inherent risk is part Page
195 of planning. The study and evaluation of internal control and assessment of control
risk span both the planning and interim phases. The review of the accounting system is a necessary part of planning. lOMoAR cPSD| 47206071
As will be discussed in Chapter 8 , tests of controls may be undertaken on an interim
basis or, where controls have not changed, testing from previous periods may be used.
However, the auditor must obtain evidence concerning the continuity of the controls. As
will be discussed in Chapter 9 , tests of transactions undertaken for substantive
purposes may be either interim or final work. In an extreme case, a small entity with few
controls and a relatively small volume of transactions might permit all audit tests to be
undertaken as final work with no tests of controls, although the auditor would still need
to understand internal control.
Interim work permits the audit firm to allocate its staff efficiently among clients, and
enables the auditor to identify potential accounting or auditing problems early so that
they can be resolved with the client on a timely basis. In addition, reporting deadlines
may not allow the auditor to perform extensive audit procedures after the balance date.
Some substantive tests can conveniently be performed at or near the balance date and
there is no particular advantage to doing them on an interim basis. For example, counts of
assets such as cash and marketable securities are usually performed at or near the
balance date. Similarly, the auditor is concerned with obtaining evidence that transactions
are recorded in the proper accounting period. These so-called cut-off tests must be
performed around the balance date.
Other substantive tests are done as close to the completion of the engagement as
possible, because they depend on evidence collected in the earlier steps in the audit.
These so-called completion and review procedures are always done as final work. Exhibit
5.2 shows the overall timing of an audit engagement, indicating the approximate date
when certain typical procedures might be performed. However, there is substantial
variation in practice on the timing of audit tests and the time between the date of the
financial report and the delivery of the auditor’s report.
EXAMPLE OF THE OVERALL TIMING OF AN AUDIT EXHIBIT 5.2 ENGAGEMENT