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8540”Audit of Accounting Estimates
8545”Auditing Fair Value Measurements and Disclosures
8550”Related Parties
8560”Subsequent Events
8570”Going Concern
8580”Management Representations
8600”Using the Work of Another Auditor
8610”Considering the Work of Internal Auditing
8620”Using the Work of an Expert
8700”The Auditor™s Report on Financial Statements
8700A”The Auditor™s Report on Financial Statements
8720”Other Information in Documents Containing Audited Financial
8800”The Auditor™s Report on Special Purpose Audit Engagements
8810”The Examination of Prospective Financial Information
8910”Engagements to Review Financial Statements
International Auditing Standards 195

Exhibit 5.6 (Continued)

8920”Engagements to Perform Agreed-upon Procedures Regarding
Financial Information
8930”Engagements to Compile Financial Information

International Auditing Practice Statements
AU 10,000 International Auditing Practice Statements
10,001”Inter-Bank Confirmation Procedures
10,010”IT Environments”Stand-Alone Microcomputers
10,020”IT Environments”On-Line Computer Systems
10,030”IT Environments”Database Systems
10,040”The Relationship Between Banking Supervisors and Bank™s
External Auditors
10,050”The Special Considerations in the Audit of Small Entities
10,060”Audits of the Financial Statements of Banks
10,080”Risk Assessments and Internal Control”CIS Characteristics
and Considerations
10,090”Computer-Assisted Audit Techniques
10,100”The Consideration of Environmental Matters in the Audit of
Financial Statements
10,120”Auditing Derivative Financial Instruments
10,130”Electronic Commerce”Effect on the Audit of Financial

Source: Reprinted with permission from the American Institute of Certified Public Accountants,
Professional Standards International Auditing, Vol. 2 (Copyright © 2003 by the AICPA).

these international organizations and boards is to foster harmonized standards on
an international basis. Given the audit committee™s oversight responsibility for fi-
nancial reporting, these standards may have an impact on companies at home and
abroad. More recently, the IAASB issued an International Standard on Auditing
(ISA) entitled “Communications to Those Charged with Governance.” In short,
the IAPC, the board™s predecessor, indicated that such an ISA is needed for these

It recognizes the need to provide standards and guidance on the auditor™s responsi-
bility to communicate matters of governance interest, arising from the audit of fi-
nancial statements, to those charged with governance of an entity. Although the
structures of governance vary from country to country reflecting cultural and legal
background, in many jurisdictions the auditor is required to communicate matters of
governance interest, arising from the audit of financial statements, to those charged
with governance of an entity. Furthermore, the communication of these matters is
part of a mechanism by which the external auditors can add value to the role of those
responsible for the governance of the entity.24

International Auditing Practices Committee, “Communications to Those Charged with Gover-
nance,” Exposure Draft (New York: IFA, August 1998), pp. 2“3.
196 Rules of the Road”Auditing and Related Accounting Standards

Thus the IAASB has recognized the benefits of a corporate governance approach
to the audit process as a requisite for harmonizing the international accounting and
auditing standards. The Public Oversight Board has argued that the auditing pro-
fession shift its focus from a compliance and rule-oriented audit to a corporate
governance approach.

American Institute of Certified Public Accountants, Rules of Conduct of the Code of Pro-
fessional Ethics (New York: AICPA, 1997).
American Institute of Certified Public Accountants, Professional Standards, International
Auditing, Vol. 2 (New York: AICPA, 2003).
American Institute of Certified Public Accountants, Professional Standards, U.S. Auditing
Standards/Attestation Standards, Vol. 1 (New York: AICPA, 2003).
Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 2,
“Qualitative Characteristics of Accounting Information” (Stamford, CT: FASB, 1980).
Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 5,
“Recognition and Measurement in Financial Statements of Business Enterprises” (Stam-
ford, CT: FASB, 1984).
International Auditing Practices Committee, “Communications to Those Charged with
Governance,” Exposure Draft (New York: IFA, 1998).
International Federation of Accountants, 1992 Annual Report (New York: IFA, 1992).
Opinions of the Accounting Principles Board, No. 20, “Accounting Changes” (New York:
AICPA, 1971).
Opinions of Accounting Principles Board No. 22, “Disclosure of Accounting Policies”
(New York: AICPA, 1972).
Securities and Exchange Commission, 1999 Annual Report (Washington, DC: U.S. Gov-
ernment Printing Office).
Securities and Exchange Commission, “Materiality,” Staff Accounting Bulletin No. 99
(Washington, DC: SEC, August 12, 1999).
Securities and Exchange Commission, “Restructuring Charges and Asset Impairment,”
Staff Accounting Bulletin No. 100 (Washington, DC: SEC, November 24, 1999).
Securities and Exchange Commission, “Revenue Recognition,” Staff Accounting Bulletin
No. 101 (Washington, DC: SEC, December 3, 1999).
Statement of the Accounting Principles Board, No. 4, “Basic Concepts and Accounting Prin-
ciples Underlying Financial Statements of Business Enterprises” (New York: AICPA, 1970).
Statement on Auditing Standards No. 22, “Planning and Supervision” (New York: AICPA,
Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles in the Independent Auditor™s Report” (New
York: AICPA, 1992).
Statement on Auditing Standards No. 89, “Audit Adjustments” (New York: AICPA, 1999).
Statement on Auditing Standards No. 99, “Audit Committee Communications” (New York:
AICPA, 1999).
Statement on Standards of Attestation Engagements No. 9 “Amendments to Statement on
Standards for Attestation Engagements Nos. 1, 2, and 3” (New York: AICPA, 1999).
Part Two
The Planning
Function of the Audit
Chapter 6
An Overview of
Audit Planning
The auditing needs and goals of the enterprise are dynamic since they change as
the responsibilities of the corporate directors become more complex. Thus the de-
mands on the quality and quantity of auditing services change. To achieve an ef-
fective and efficient auditing process, audit planning is essential to meet the
fluctuating auditing needs of the enterprise.
Since the audit committee has an oversight responsibility for the overall audit
plan, it is essential that it understand not only the purpose of audit planning but
also its usefulness in ensuring an effective and efficient auditing process. Although
the process of audit planning is an amalgamation of the internal managerial talents
as well as the external auditing talents, the audit committee should review the
overall audit plan and recommend it to the board of directors for its approval.1
Therefore, the purpose of this chapter is to introduce the meaning and benefits of
audit planning and the broad segments of the overall audit plan. The role of the
audit committee in overseeing the entity™s audit plan is discussed in Chapter 7.

As discussed in the preceding chapter, adequate audit planning is one of the tenets
of the generally accepted auditing standards of fieldwork. To indicate its signifi-
cance, the Auditing Standards Executive Committee™s definition is restated:
Audit planning involves developing an overall strategy for the expected conduct and
scope of the examination. The nature, extent, and timing of planning vary with the
size and complexity of the entity, experience with the entity, and knowledge of the
entity™s business.2

Furthermore, “ ˜materiality™ and ˜audit risk™ underlie the application of all the
standards, particularly the standards of field work and reporting.”3 Thus implicit in
the auditors™ planning efforts is their concern with particular financial accounts and
locations, such as subsidiaries or divisions that are subject to a high exposure of
risk. For example, since “cash transactions are more susceptible to fraud than in-
ventories,” the audit work should be “more conclusive.”4 Moreover, the quality of
Such board approval is desirable in order to establish a formal corporate audit policy statement in ac-
cordance with the charter for the audit committee.
Statement on Auditing Standards No. 22, “Planning and Supervision” (New York: AICPA, 1978), par. 3.
American Institute of Certified Public Accountants, Professional Standards, U.S. Auditing Stan-
dards/Attestation Standards, Vol. 1 (New York: AICPA, 2003), AU Sec. 150.03.
Ibid., AU Sec. 150.05.

200 An Overview of Audit Planning

the system of internal control is important because “of the influence on auditing
procedures of a greater or lesser degree of misstatement; i.e., the more effective the
internal control, the less degree of control risk.”5 A summary by the AICPA Con-
trol Risk Audit Guide Revision Task Force of some examples of both inherent and
control risk attributes that the auditor might consider and the audit decisions that
might be affected is presented in Exhibit 6.1. (See Chapter 8.)
Although the definition of audit planning applies to the independent auditors,
it correlates closely with the audit committee™s planning efforts. An analysis of the
definition will be useful to the audit committee regarding its responsibilities in the
audit planning function.

Overview of the Audit Committee™s Strategy6
To review the entity™s audit plan effectively, the audit committee members need their
own plan of action. Their plan should be integrated with the annual auditing cycle,
which consists of: (1) initial planning segment, (2) preaudit segment, and (3) postau-
dit segment. Thus they will engage in audit planning at several different times during
the auditing cycle. The typical steps in the auditing cycle are illustrated in Exhibit 6.2.
For example, during the preaudit segment, James K. Loebbecke, former part-
ner of Touche Ross (now Deloitte & Touche), points out:
Experience suggests . . . that both auditors and their clients”either management
and/or audit committee members”should formally discuss not only the auditor™s
general methodology but also his specific approach in the client™s own situation.
This, indeed, should be a regular and early part of every audit examination.7

The reader may wish to review the list of auditing pronouncements mentioned in Chapter 5. For exam-
ple, SAS Nos. 22, 47, 84, and 50 are all relative to the initial planning segment and SAS Nos. 22, 45, 47,
55, 56, 60, 61, 73, 90, 93, 94, 97, and 99 are applicable to the preaudit segment. Of course, the audit com-
mittee should review and discuss the decision factors regarding the acceptance and continuance with the
independent auditors as well as the engagement letter with the independent auditors. (See SAS No. 83.)
James K. Loebbecke, “Audit Planning and Company Assistance,” CPA Journal 47, No. 11 (November
1977), p. 34. Also see Douglas R. Carmichael, “The Annual Audit Tune-up,” CPA Journal 67, No. 12
(December 1997), pp. 24“29. Moreover, independent accounting firms have implemented a new ap-
proach to the annual audit engagement in order to provide more value by identifying performance im-
provement opportunities for clients. For example, KPMG Peat Marwick (1995) has a Business
Measurement Process for identifying and assessing the client™s business risk through the audit process.
This process has drawn the attention of CEOs and audit committee members. In particular, Kathryn D.
Wriston responds to the question of what the board of directors and its audit committee expect and con-
cludes: “The financial vitality of the organization and its long-term strategies to enhance shareholder
value includes an assessment of various risks the company faces. Audit involvement in these areas has
struck me as being potentially very beneficial to directors” (p. 18). See Kathryn Wriston, “The CPA Jour-
nal Symposium on the Future of Assurance Services,” CPA Journal 66, No. 5 (May 1996), pp. 15“18.
Auditors explicitly address certain business risks in a financial statement audit. For example, environ-
mental risks, such as legal and regulatory risks, are addressed in the annual audit, whereas competitor and
sovereign/political risks are not addressed by the auditors. For further discussion, see KPMG Peat
Marwick, Business Measurement Process (New York: Montvale, NJ: KPMG Peat Marwick, 1995);
PricewaterhouseCoopers, ABAS Audit Approach Team Asset (New York: PricewaterhouseCoopers, 1999).
Exhibit 6.1 Illustration of the Audit Risk Concept
Example Attributes Considered by the Auditor Responses by the Auditor
Inherent Risk Control Risk Detection Risk
Matters Pervasive to • Profitability relative to the industry • Business planning, budgeting, and • Overall audit strategy
Many Account Balances • Sensitivity of operating results to monitoring of performance • Number of locations
or Transaction Classes economic factors • Management attitude and actions • Significant balances or transaction
• Going concern problems regarding financial reporting classes
• Nature, cause, and number of known • Management consultation with auditors • Degree of professional skepticism
and likely misstatements detected in • Management concern about external • Staffing
the prior audit influences • Levels of supervision and review
• Management turnover • Audit committee
• Management reputation • Internal audit function
• Management accounting skills • Personnel policies and practices

Matters Pertaining • Difficult to audit accounts or transactions • Effectiveness of the accounting system • Substantive analytical procedures
to Specific Account • Contentious or difficult accounting issues • Personnel policies and practices and tests of details
Balances or Transaction • Susceptibility to misappropriation • Adequacy of accounting records • Nature of tests
Analysis of Audit Planning and the Committee

Classes • Complexity of calculations • Segregation of duties • Timing of tests
• Extent of judgment related to assertions • Adequacy of safeguards over assets and • Extent of tests
• Sensitivity of valuations to economic records (including software)
• Nature, cause, and number of known
and likely misstatements detected in the
prior audit
Auditors consider the types of factors presented above; however, it is not necessary to categorize such factors by type of risk.
Source: AICPA, Audit Guide for Consideration of Internal Control in a Financial Statement Audit (1996), p. 223. Reprinted with permission from the American Institute of Certified
Public Accountants, Inc.
202 An Overview of Audit Planning

Exhibit 6.2 Example: Auditing Cycle

Example: Auditing Cycle (12/31/03 year end)

Pre-Audit Meeting Audit scope


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