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Governance Committee” to reflect its responsibility for corporate governance issues.
d
The Executive Committee met twice and acted by unanimous written consent nineteen times during the
fiscal year.




To educate the directors effectively so that audit committee members can have
productive meetings and contribute to the board of directors, they should consider
the adoption of the audit director™s professional development program shown in
Exhibit 7.2. Such a program should be instituted on the basis that it will enhance
the audit director™s ability to serve effectively on the committee.



Exhibit 7.2 Professional Development Program

Presentation
Description (Estimated)

I. Industry Matters One day, group discussion
Discussions with executive management on the
external environmental matters, such as:
1. Competitive and economic conditions
2. Government regulations
3. Foreign operations
4. New technological advancements
5. Industry accounting practices
6. Changes in social attitudes
7. Management™s risk assessment process

II. Entity™s Business Matters Two days, group discussion
Discussions with key executives on the internal
environmental matters, such as:
1. Historical perspective of the business
a. Organizational structure
Developing an Integrated Planning Approach 223



b. Lines of business and product segments
2. Company objectives and policies, particularly
financial accounting policies, controls, and
procedures
3. Summary of the entity™s principles of operations*
4. Legal obligations of the enterprise
5. Significant documentation, such as the
corporate charter and bylaws
6. Management™s risk assessment process

III. Internal Auditing Matters One day, presentation and
Review and discuss with the internal auditing group discussion
executive such matters as:
1. The nature and functions of the internal
auditing group
2. Organizational characteristics of the staff
3. Representative audit programs and reports
4. The interface between the staff and the
independent auditors
5. The monitoring activities of the staff

IV. External Auditing Matters One day, presentation and
Review and discuss with the executive partner group discussion
matters such as:
1. The nature and overall purpose of the audit
2. Organizational characteristics of the firm
and biographical data regarding the auditing
personnel assigned to the audit, including
rotations of staff
3. Prior year™s annual reports, Form 10-K
report, interim financial reports (10Qs),
and any 8K reports
4. Key documentation, such as the engagement
letter, management letter, client representa-
tion letter, and the lawyer™s letter
5. Role of the CPA in matters such as:
a. Internal controls, audit risk assessment, fraud
risk assessment, business risk assessment,
materiality, computer security, and legal
compliance with the Foreign Corrupt
Practices Act
b. Internal auditing evaluation and peer reviews
c. Financial reporting disclosures, audited and
unaudited statements (e.g., management™s
discussion and analysis, environmental liabilities)
d. Conflicts of interest advisement
e. Filings with various regulatory agencies
6. Other services of the firm, such as tax
services


*Tour a selected plant location and/or sales location to understand the cost accounting system.
224 Audit Committee™s Role in Planning the Audit


Implementation of the program may be coordinated through an executive who
is responsible for the corporate human resources or the in-house development and
training programs. Clearly, each entity can establish a development program to
meet its own needs.
With respect to the adoption of the program, several key points should be noted:

• The duration of the program will vary since it is contingent on the size and
complexity of the entity. The directors should participate in the program for a
reasonable period of time each year.
• Each director should be required to complete a reasonable number of hours of
advance preparation.
• The coordinator of the program should be responsible for the necessary read-
ing materials and conference schedules. Therefore, he or she should consult
with the appropriate information sources, such as the internal and external au-
diting group, in order to obtain the necessary literature.
• The directors should be given an opportunity to critique the program in order
to enhance the quality and viability of the conference program.


Phase 1: Preaudit Planning Segment
During this segment of the auditing cycle, the committee should review and ap-
praise: (1) the goals and objectives of the audit function and (2) the resources
available for the audit processes. Subsequent to its review, the committee should
recommend that the goals and objectives developed are in accordance with the
charter for the audit committee, which is approved by the board of directors.6 The
major objective of the committee is to gain assurance that the goals and objectives
are well defined and explicit. Such a step is necessary because the objectives will
become the basis for the conduct of the entity™s auditing activities. Thus a general
statement of auditing policy will provide a course of action for the parties who are
responsible for the entity™s audit processes. Moreover, auditing policies not only
provide an established framework for the internal and external auditing activities
but also identify the type and quality of auditing services to be rendered.
In view of the audit committee™s oversight and advisory capacity, the auditing
objectives and resource requirements should be defined by the executive auditing
personnel. For example, the executive partner of the independent accounting firm
will formulate the audit objectives based on his or her discussion with the corpo-
rate management accounting executives. Generally speaking, the objectives will
relate to the annual financial audit, which includes the annual audit of the finan-
cial statements and SEC filings. However, the accounting firm may be requested
to render other services, such as tax and management advisory services. The ob-
jectives of the external audit ultimately will be spelled out in the independent au-
ditor™s engagement letter. Consequently, the audit committee should review and
discuss the engagement letter with the executive partner.

6
The overall audit plan refers to the charter for the audit committee, which requires full board ap-
proval. The annual audit plan does not require full board approval.
Developing an Integrated Planning Approach 225


Although the financial audit is a major part of the overall audit plan, there are
collateral objectives with respect to the operational and compliance audits. Accord-
ingly, the internal auditing executive should define the objectives for the entity™s op-
erational and compliance auditing plans. In particular, the broad objectives of such
plans should include a provision to maximize the organization™s economic resources
and minimize the causes of inefficiencies or uneconomical practices.
For example, the objectives may include a provision for performance auditing
as well as special-purpose audits. Obviously, such objectives vary with the size
and complexity of the entity and the professional judgment of the executive inter-
nal auditor. Accordingly, the audit committee should request a written general
statement of the corporate internal auditing objectives and should review and dis-
cuss this corporate document with the internal auditing executive. It is imperative
that the objective be documented in order to avoid any misunderstanding among
the committee members and the internal auditing group. Furthermore, to achieve
an effective review posture, the audit committee should also discuss the corporate
auditing goals with the chief financial officer and the controller. The major objec-
tive of this interview is to determine that the overall auditing goals satisfy the
needs of the organization.
In addition to the preceding approach, the audit committee should give con-
sideration to these points:

• Are the general auditing objectives for the entity well defined?
• Do the auditing goals appear to be workable or realistic in relation to the au-
diting resources? For example, is the structure and organization of the internal
audit staff conducive to the auditing needs and objectives of the entity?
• Do all the executives who participate in the audit process understand the over-
all goals and objectives?
• Do the independent auditors and the internal auditors have any conflicting
objectives?
• What is the independent auditor™s assessment of the objectives of the internal
audit staff?
• Do the objectives allow the entity to maximize on the auditing services at a rea-
sonable cost?

Although audit committee members are not accounting and auditing experts,
they should challenge the objectives and request possible modifications, if neces-
sary. Subsequent to their review, the general auditing objectives should be recom-
mended to the board of directors in order to establish a formal auditing policy
statement. Once approved, the auditing policy will serve as a blueprint of the en-
tity™s audit processes.

Phase 2: Preaudit Planning Segment
The major role of the audit committee members is to review the corporate audit
plan. Since the audit policy has been established, their task is to ensure that the en-
tity™s auditing plan is consistent with the audit policy. Thus the planning process
226 Audit Committee™s Role in Planning the Audit


of the audit requires the support of the independent auditors, internal auditors, and
senior accounting executives. The audit committee essentially reviews the coordi-
nation of the plans and schedules from the preceding parties. The parties involved
in the planning process should work together to ensure that they are working to-
ward their goals as indicated in the policy statement.
For example, the audit plan of the independent auditors may include such mat-
ters as:

• Background information on the client, general information disclosed in the
early sections of the SEC form 10-K report (e.g., organization data, business
operations and products, audit risk assessment, etc.).
• The purpose and objectives of the audit and the nature, extent, and timing of
the audit work, information disclosed in the auditor™s engagement letter.
• Assignment and scheduling of audit personnel.
• Preaudit work to be performed by the client™s staff. Obviously, the independent
auditors will modify their plan, if necessary, during the course of their audit ex-
amination.

In view of the working relationship between the work of the independent au-
ditors and the internal auditors, the external auditors may take an active role in for-
mulating the audit plan of the internal auditing group. However, each group has its
own auditing goals and responsibilities. The internal auditors cannot assume the
role of the external auditors. For example, the internal auditors are concerned pri-
marily with the operational and compliance auditing functions, whereas the inde-
pendent auditors are concerned with the financial audit activities. According to the
Auditing Standards Board:

Even though the internal auditors™ work may affect the auditor™s procedures, the au-
ditor should perform procedures to obtain sufficient, competent, evidential matter to
support the auditor™s report. Evidence obtained through the auditor™s direct personal
knowledge, including physical examination, observation, computation, and inspec-
tion, is generally more persuasive than information obtained indirectly.
The responsibility to report on the financial statements rests solely with the auditor.
Unlike the situation in which the auditor uses the work of other independent auditors,
this responsibility cannot be shared with the internal auditors. Because the auditor
has the ultimate responsibility to express an opinion on the financial statements,
judgments about assessments of inherent and control risks, the materiality of mis-
statements, the sufficiency of tests performed, the evaluation of significant account-
ing estimates, and other matters affecting the auditor™s report should always be those
of the auditor.7

Moreover, the independent auditor must not only assess the competence and
objectivity of the internal auditors but also supervise and test their work if they


7
Statement on Auditing Standards No. 65, “The Auditor™s Consideration of the Internal Audit Function
in an Audit of Financial Statements” (New York: AICPA, 1991), pars. 18 and 19.
Developing an Integrated Planning Approach 227


provide direct assistance in performing the independent auditor™s work.8 Thus
based on the independent auditor™s judgment, the internal auditing staff may offer
valuable assistance during the audit.
In order to appraise the corporate audit plan effectively, the audit committee
should give consideration to the following criteria9:

• The authority and responsibility for each segment of the corporate audit plan
should be clearly defined.
• The chief financial officer should acknowledge his or her general support for
the plan to avoid opposition during the course of the internal and external au-
diting engagements.
• The internal and external resources available for the audit function should be
adequate and properly allocated.
• The plan should be realistic against the conditions of the business and its in-
dustry.
• The plan should be realistic and consistent with the goals and objectives as ex-
pressed in the corporate audit policy statement.
• The scope of the audit plans should be defined and explicit to avoid any dupli-
cation of auditing effort.
• The general criteria used to identify areas subject to audit should be explicit
(e.g., What is the auditing firm™s policy on materiality?).
• The plan should incorporate any applicable resolutions as a result of the board
of directors™ and stockholders™ meetings as well as take into account related
matters of the other standing committees, such as the finance committee.
• The extent of auditing work should be reasonable in relationship to the quality

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