<<

. 44
( 82 .)



>>

tivities of a certain function of the enterprise. For example, the internal auditors
may review the operating efficiency and the effectiveness of the internal controls
of a department. Such a review is essentially a service to management since the au-
ditors generally make recommendations for operational improvements. In addi-
tion, the internal auditors may be requested not only to evaluate the managerial
performance of the individual managers but to implement fraud prevention mea-
sures within the organization. Consequently, the internal auditing group is a criti-
cally important auditing resource since such a group can serve management on a
company-wide basis.
Although operational auditing is associated with the internal auditors, man-
agement may request the services of the management advisory staff of the inde-
pendent accounting firm. This particular arrangement is known as a management
audit. For example, management may request an overall review of a particular
function, such as purchasing of materials. Obviously, before such professional
services are requested, management should weigh the costs against the benefits of
the audit.
The operational audit plan may be similar to the financial audit plan; however,
the functional units of the entity will be substituted for the financial accounts, as
shown in Exhibit 6.6. Furthermore, the plan should be modified to include nonfi-
nancial matters, such as conflicts of interests.

In contrast to operational audits, compliance audits are
Compliance Audits
oriented primarily not only toward internal adherence to managerial policies but
toward the entity™s compliance with the various rules and regulations of the regu-
latory agencies. (See Chapter 4.) For example, the internal auditors may be re-
quested to review the policies and procedures with the traffic and transportation
department to determine whether their personnel are adhering to the entity™s poli-
cies. Conversely, the chief financial officer or legal counsel may be involved with
a compliance audit regarding an SEC or internal revenue service review.
The internal compliance audit plan may be structured on the same basis as the
operational audit plan. However, the external compliance audit segment should
disclose the status of legal compliance matters. Such a status should be a summary
of the committee™s discussions with the independent auditors and legal counsel.
For example, the summary may include abstracts of the lawyer™s letter as well as
any other correspondence concerning legal compliance. The major objective is to
review and inquire about the significance and implications of the entity™s legal re-
quirements and contractual obligations.


SOURCES AND SUGGESTED READINGS
Albrecht, William S. “Toward Better and More Efficient Audits.” Journal of Accountancy
144, No. 6 (December 1977), pp. 48“50.
American Institute of Certified Public Accountants, Audit Committees, Answers to Typical
Questions About Their Organization and Operations (New York: AICPA, 1978).
218 An Overview of Audit Planning


American Institute of Certified Public Accountants, Professional Standards, U.S. Auditing
Standards/Attestation Standards, Vol. 1 (New York: AICPA, 2003).
American Institute of Certified Public Accountants, Audit Guide, Consideration of Internal
Control in a Financial Statement Audit (New York: AICPA, 1996).
Callahan, Patrick S., Henry R. Jaenicke, and Donald L. Neebes, “SAS 56 and 57: Increas-
ing Audit Effectiveness.” Journal of Accountancy 165, No. 10 (October 1988), pp. 56“68.
Hardy, John W., and Larry A. Deppe, “Client Acceptance: What to Look For and Why.”
CPA Journal 62, No. 5 (May 1992), pp. 20“27.
Kunitake, Walter K., Andrew D. Luzi, and William G. Glezen, “Analytical Review in Audit
and Review Engagements.” CPA Journal 55, No. 4 (April 1985), pp. 18“26.
Loebbecke, James K., “Audit Planning and Company Assistance.” CPA Journal 47, No. 11
(November 1977), pp. 31“34.
McAllister, John P., and Mark W. Dirsmith, “How the Client™s Business Environment Af-
fects the Audit.” Journal of Accountancy 59, No. 2 (February 1982), pp. 68“74.
McCauley, Daniel J., and John C. Burton, Audit Committees 49 (Washington, DC: CPS Bu-
reau of National Affairs, 1986).
Securities and Exchange Commission, Accounting and Auditing Enforcement Release No.
215, SEC v. Donald D. Sheelen, et al. (February 8, 1989), 42 SEC Docket 1562.
Securities and Exchange Commission, Litigation Release No. 12579, SEC v. Barry J.
Minkow (August 15, 1990), 46 SEC Docket 1777.
Statement on Auditing Standards No. 22, “Planning and Supervision” (New York: AICPA,
1978).
Statement on Auditing Standards No. 56, “Analytical Procedures” (New York: AICPA,
1988).
Statement on Auditing Standards No. 61, “Communication with Audit Committees” (New
York: AICPA, 1988).
Statement on Auditing Standards No. 99, “Consideration of Fraud in a Financial Statement
Audit” (New York: AICPA, 2002).
Sumners, Glenn E., and Barbara Apostolou, “Preparation Can Cut Audit Fees.” Financial
Manager 3, No. 1 (January/February 1990), pp. 46“49.
U.S. General Accounting Office, Government Auditing Standards, Standards for Audit of
Government Organizations, Programs, Activities and Functions (Washington, DC: U.S.
Government Printing Office, 2003).
Walker, Robert, “Know Your Client™s Business.” CA Magazine 124, No. 6 (June 1991), pp.
49“52.
Wolfe, Donald N., and Gerald Smith, “Planning the Audit in a Distressed Industry.” CPA
Journal 58, No. 10 (October 1988), pp. 46“50.


Video
American Institute of Certified Public Accountants, Fraud and the Financial Statement Au-
dits: Auditor Responsibilities Under SAS No. 99. (New York: 2003). Length of video: 135
minutes
Chapter 7
Audit Committee™s Role
in Planning the Audit

Chapter 6 discussed the meaning and benefits of audit planning as well as the
overall segments of the corporate audit plan. This chapter will enhance the audit
committee members™ skills and ability to appraise the entity™s audit plan effec-
tively. In particular, they will learn the basic steps of planning a strategy toward
their review of the audit plan. Such steps will serve as a practical guide to review
the coordination of the overall audit plan by the internal and external auditors.


THE COMMITTEE™S PLANNING FUNCTION
Introduction
The planning function of the committee centers on the purpose for which it was or-
ganized. The primary purpose of the committee is to provide assurance to the full
board of directors that the internal and external resources allocated to the audit
function are used effectively to accomplish the goals and objectives of the overall
audit plan. To allocate resources to the audit processes effectively, the committee
should adopt its own plan of action. In formulating the plan for accomplishing its
objective, the committee should consider an integrated approach. Such an ap-
proach should be oriented toward the segments of the auditing cycle, which are:
(1) initial planning segments, (2) preaudit segment, and (3) postaudit segment. The
four steps in planning the committee™s approach may be summarized as follows1:

1. Develop an understanding of the entity™s business and its industry.
2. Review the overall purpose, objectives, and resources available for the corpo-
rate audit plan and recommend the auditing goals and objectives for approval
by the full board of directors.
3. Review the audit plans of the internal and external auditing groups.
4. Appraise the corporate audit plan annually.




1
The reader may wish to review the highlights of these steps in Chapter 6. It should be reemphasized
that the audit committee is not responsible for the preparation of the comprehensive audit plan, since
this is done by the internal and external auditing groups.



219
220 Audit Committee™s Role in Planning the Audit


DEVELOPING AN INTEGRATED PLANNING APPROACH
Initial Planning Segment
Although the audit committee is removed from the entity™s day-to-day operating
activities, it should be oriented primarily toward the qualitative characteristics of
the enterprise and its industry through a macroapproach. This approach is de-
signed to give the audit committee a sense of the entity™s existence and how it must
interact with its environment. The underlying rationale for this approach may be
stated in this way. If the audit committee members have not only a basic under-
standing of the entity™s position in the industry as well as other environmental con-
siderations, such as the economic conditions, but also an understanding of the
operational characteristics of the business, then they can discharge their commit-
tee responsibilities more effectively. Thus before focusing their attention on the
major aspects of the audit plan, the directors should engage in a study and review
of the functional aspects of the enterprise. In obtaining this effective overview of
the business, the directors should:

[o]btain a knowledge of matters that relate to the nature of the entity™s business, its
organization, and its operating characteristics. . . . For example, the type of business,
type of products and services, capital structure, related parties, locations, and pro-
duction, distribution, and compensation methods. . . . Also, consider matters affect-
ing the industry in which the entity operates, such as economic conditions,
government regulations, and changes in technology. . . . Accounting practices com-
mon to the industry, competitive conditions, and, if available, financial trends and ra-
tios should also be considered.2

Obviously, their orientation toward the entity is a substantial undertaking since
the directors have limited time to contribute. An example of board and committee
meetings is that of the Wal-Mart Stores, Inc.3 (see Exhibit 7.1). Korn/Ferry Inter-
national reported in its annual survey of 327 companies that 48 percent of the di-
rectors in 1992 spent annually 40 to 100 hours on board matters, including review
and preparation time, meeting attendance, and travel.4
Although the audit committee members may be oriented toward the corpora-
tion through management presentations and plant visits, it may be advisable to for-
malize a program for educating them. In light of an action-oriented SEC, the
enactment of the Foreign Corrupt Practices Act, the Sarbanes-Oxley Act, SROs
listing standard litigation against directors, the Treadway report, and the COSO re-
port,5 such a program is desirable in meeting the dynamic changes in corporate
governance and accountability.


2
Statement on Auditing Standards No. 22, “Planning and Supervision” (New York: AICPA, 1978), par. 7.
3
Wal-Mart Stores, Inc., Notice of 2003 Annual Meeting of Shareholders Proxy Statement, p. 4.
4
Korn/Ferry International, Twentieth Annual Board of Directors Study (New York: Korn/Ferry Inter-
national, 1993), p. 19. Subsequently, Korn/Ferry International reported in its survey of 903 companies
(1,020 directors) that “[t]he average number of hours required annually to serve on a board continues
to run about 150, a serious limit for busy people” (p. 7). See Korn/Ferry International, 25th Annual
Board of Directors Study (New York: Korn/Ferry International, 1998).
5
See Appendix I on this book™s website.
Developing an Integrated Planning Approach 221


Exhibit 7.1 Sample of Board Committee Functions and Meetings

Board Committees
Number
Functions and of
Additional Informationb
Committee Members Meetings
Audit Stanley C. Gault • Reviews financial reporting, 8
Roland A. Hernandeza policies, procedures, and
J. Paul Reason internal controls of Wal-Mart
• Recommends appointment of
outside auditors
• Reviews related party
transactions
• The Board has determined
that the members are “inde-
pendent” as defined by the
current listing standards of the
New York Stock Exchange
and
• The Board has adopted a
written charter for the Audit
Committee
Compensation, James W. Breyer • Administers Wal-Mart™s 6
Nominating and Dawn G. Lepore Stock Incentive Plan of 1998
Governancec Elizabeth A. Sanders for executive officers
Jose H. Villarreala • Sets interest rate applicable to
Wal-Mart™s Officer Deferred
Compensation Plan
• Sets and verifies attainment
of goals under Wal-Mart™s
Management
Incentive Plan, as amended
• Reviews salary and benefits
issues
• Reviews and provides
guidance regarding the
Company™s image
• Responsible for corporate
governance issues
and
• Recommends candidates to
the Board for Nomination
to the Board
Executive Thomas M. Coughlin • Implements policy decisions 2 (4)
David D. Glassa of the Board
H. Lee Scott, Jr. and
S. Robson Walton • Acts on the Board™s behalf
between Board meetings
• Administers Wal-Mart™s Stock
Incentive Plan of 1998 for
associates who are not

(continued)
222 Audit Committee™s Role in Planning the Audit



Exhibit 7.1 (Continued)

Stock Option Thomas M. Coughlin directors or officers subject to 4
David D. Glass subsection 16(a) of the
H. Lee Scott, J.a Securities and Exchange
S. Robson Walton Act of 1934, as amended
Strategic Planning John T. Chambers • Reviews important financial
Jack C. Shewmakera
and Finance decisions 4
John T. Walton and
• Advises regarding
long-range strategic
planning
a
Committee Chairperson
b
On March 6, 2003, the Board adopted revised written charters for each Board Committee. The revised
charters are available at www.walmartstores.com.
c
On March 6, 2003, the Board changed this Committee™s name to the “Compensation, Nominating and

<<

. 44
( 82 .)



>>