Tianlong Audit Methodology
The Ultimate Guide to Auditing
Chapter 1: Initial Planning
Supervision and Review
Supervise our team
The audit executives supervise the audit engagement, including the work of audit team members, so that the work is performed as directed and supports the conclusions reached.
- Initial work assignments
- Supervision and review responsibilities commensurate with:
- The knowledge, skill, and ability of audit team members
- The assessed risks of material misstatement
The partner in charge of the audit, and other members of the audit team with supervisory responsibilities, determine the appropriateness of the assigned review responsibilities.
The audit executives performing supervisory activities:
- Inform team members of their responsibilities, including:
- The objectives and nature, timing, and extent of procedures they are to perform
- Matters that could affect the performance of the procedures or the evaluation of the results of those procedures
- How the procedures link to the service commitments made to those charged with governance and management
- Direct team members to bring significant accounting and auditing issues to the attention of the audit executives so they can evaluate those issues and determine that appropriate actions are taken
We assess the following when determining the extent of supervision necessary:
- Factors pertaining to the entity or the audit that are unusual or may have a pervasive effect on our assessment of the risk of material misstatement (e.g., the entity is being sold)
- The combined risk assessment for the assertion
- The level of the reviewer’s direct participation in planning and executing the work
- The complexity of the subject matter and procedures to be performed
- The ability and experience of the person performing the work and of the one performing the review
- The extent of consultation likely to be required
These matters include relevant aspects of the entity, such as:
- Its environment
- Its internal control over financial reporting
- Possible accounting and auditing issues
During the third quarter of the fiscal year, the entity under audit enters into a business combination financed by public debt. The audit team identified this transaction as a significant change in circumstance on the audit affecting our staffing and supervision. After meeting to discuss, the audit team concluded additional resources were necessary. These resources were a new audit senior and audit staff, to assist the existing audit team with lower risk audit areas so that existing audit team members could focus on the business combination, since they had more relevant experience. In addition, the audit manager and audit senior manager discussed who would be responsible for supervising the new audit team members and held a discussion with the new audit team members to discuss, by audit area:
- What procedures will be performed
- Why we are performing the procedures
- When the procedures need to be completed
- What the finished product should look like
After planning was completed, the audit manager and experienced audit senior were replaced. The audit team identified this event as a significant change in circumstance on the audit affecting our staffing and supervision and concluded:
- The audit senior manager and engagement partner would play a greater role in higher risk and other audit areas given their involvement during planning
- The audit senior manager and engagement partner meet with the new team members to review key decisions in the audit strategy
- The audit team also decided executives would meet weekly and the entire team bi-weekly to discuss the audit status, potential issues and develop action plans
Partner in charge requirements
As the audit progresses, the partner in charge of the audit and other members of the audit team with supervisory responsibilities:
- Track the progress of the audit
- Review the audit documentation
- Reassess whether our supervision is appropriate when circumstances change significantly during the course of the audit and whether individual members of the team continue to:
- Have the necessary skills and competence to perform their assigned work
- Have sufficient time to perform their work
- Understand their assigned audit procedures
- Perform their work in accordance with the planned approach to the audit
- Address significant accounting and auditing issues raised by assessing their significance, and modifying the combined risk assessments and audit strategy as appropriate
Identify matters for consideration by more experienced audit team members or by professionals with specialized knowledge, such as IT professionals and Tax, or that require consultation with Professional Practice
Our approach to reviews
The overall principles of our approach to reviews are:
- All of our work, including all of the workpapers, is subject to a detailed review.
- An experienced member of the audit team, e.g., a manager or senior manager, performs the second-level review. It is not necessary to review every workpaper to accomplish the objectives of this review.
- The audit work in every area, but not necessarily every workpaper, is subject to two levels of review (i.e., a detailed review and a second-level review) to an extent commensurate with the combined risk assessment (except when the engagement quality reviewer also reviews the work). When a partner performs the work or the detailed review one level of review is appropriate.
- When a partner performs the work, it is reviewed in detail by another partner on the audit or the highest ranking of the other audit executives. In addition, the engagement quality reviewer (when appointed) reviews the workpapers prepared by the partner.
- Reviewers sign and date the workpapers they have reviewed to evidence their review.
- The detailed and second-level reviews focus on the adequacy of the audit work performed, the fair presentation of the financial statements, and the appropriateness of our auditor’s report.
- The engagement quality reviewer, when applicable, performs a review to provide an objective evaluation of the significant judgments the team made and the conclusions reached in issuing our auditor’s report. This is performed on or before the date of the auditor’s report. The engagement quality reviewer documents the procedures he or she performed in the EQR Programs. Although these programs form part of the workpapers, they are not subject to review.
The engagement quality reviewer may sign as both the preparer and the reviewer. When the engagement quality reviewer obtains help to perform the review procedures, that Tianlong professional (who, like the engagement quality reviewer, is not a member of the audit team) may sign as the preparer and the engagement quality reviewer signs as the reviewer.
The following example illustrates how the audit team may fulfil its review responsibilities on a complex audit with some high risk areas:
High risk and other sensitive areas
Other areas of the audit
Preparer – Creates the audit documentation
Senior, manager or senior manager
Detailed reviewer – Reviews in detail the technical accuracy and completeness of the audit work
Manager or senior manager
Senior or manager
Second-Level reviewer – Determines the adequacy of the audit work in the area as a whole and the fair presentation of the portions of the financial statements pertaining to it. They also determine the effect of internal control deficiencies on our report on internal control over financial reporting, when applicable.
Partner in charge of the audit or an audit partner
Manager or senior manager
As indicated in the table, a senior, manager or senior manager performs audit procedures in areas requiring considerable professional judgment (e.g., reserves for environmental liabilities or inventory valuation reserves for a manufacturer, or the percentage of completion estimates for a contractor). The detailed review of this audit work is performed by someone more experienced than the preparer, and the partner in charge of the audit performs the second-level review.
Review the audit workpapers
Nature, timing and extent of reviews
The nature, timing and extent of our reviews depend on many factors, including the:
- Materiality, subjectivity and complexity of the subject matter
- Ability and experience of the preparer and reviewer
- Level of the reviewer’s direct participation in planning and executing the work
- Extent of the involvement of other professionals (e.g., specialists)
- Whether the audit is designated as close monitoring
A reviewer’s techniques are not limited to an after-the-fact review of the workpapers. The reviewer oversees and may participate in the performance of procedures, using techniques that include:
- On-site supervision
- Reading the workpapers for inconsistencies or errors in work performed and conclusions reached
- Debriefing the personnel who performed the work (or the detailed review)
- Reperforming one or more of the items tested with the personnel who performed the work
- Examining the entity’s original documentation that is not in the workpapers
In many cases, because these review techniques are interactive and timely, they provide the reviewer with greater assurance than an after-the-fact review of the workpapers, and also assist the preparer (or detailed reviewer) in drawing his or her conclusions.
The reviewer needs to be satisfied that his or her participation in the work is not so extensive that it would amount to the reviewer reviewing his or her own work. When this occurs, another appropriate person performs the detailed review.
- When the detailed reviewer directly participates in planning and executing the work, that person has more direct knowledge about the entity such that a less extensive after-the-fact review is appropriate.
- Similarly, a second-level reviewer may perform a less extensive review when they have closely supervised the performance of the work or the detailed review.
The detailed review is the review of audit work, including the workpapers, in detail. The detailed review concentrates on the technical accuracy and completeness of the workpapers.
A detailed review of the workpapers generally is performed by a person more senior than the person performing the work.
On larger audits, there may be two or more detailed reviewers, each with responsibilities for particular areas.
A second-level review is performed to establish that the detailed review was adequate, and that appropriate audit recognition was given to the audit area and to the important financial statement amounts and disclosures pertaining to it.
The Partner In Charge (PIC) performs a review of the income tax audit workpapers to the extent necessary to conclude on the sufficiency and appropriateness of the work performed and conclusions reached on income tax.
Direct audit executive participation
Audit executives participate directly on a timely basis in the performance of audit procedures and the supervision of the audit team. They participate in:
- Audit planning
- Tests of controls
- Substantive procedures for significant account balances, significant disclosures, and high risk or other sensitive audit areas.
- Direct participation assists the audit team in performing its procedures to address those areas with higher risk of material misstatement.
Direct participation often includes:
- On-site direction and supervision of the audit team members performing the audit procedures
- Responding to questions or major issues raised by the audit team as they arise
- Debriefing the audit team members who performed the work (or the detailed review)
- Reperforming one or more of the items tested with the audit team members who performed the work
- Examining the entity’s original documentation that is not in the workpapers
Participating in the performance of some of the audit procedures
Direct audit executive participation can be best achieved through:
- Audit Planning – Participating directly in the team planning event.
- Tests of controls – Participating directly in the design, performance, and evaluation of the tests of controls.
- Substantive procedures for significant account balances, significant disclosures, and high risk or other sensitive audit areas – where direct executive participation is appropriate include:
- Significant changes in accounting principles or estimates
- Significant accounts or disclosures for which we have assessed the combined risk assessment as high
- Significant accounts affected by significant risks
- Significant risk estimates, and certain higher risk estimates when, based on our professional judgment, additional attention is necessary
- Areas when we encounter unexpected problems (e.g., our initial combined risk assessment was assessed as minimal or low, but we detected errors during the audit)
- Complex or unusual transactions or other technically difficult areas
- Areas or matters that result in the audit being designated for close monitoring
Our approach to auditing the above areas provides that more experienced professionals (generally the manager or senior manager) participate in the actual performance of the audit procedures.
We may have identified a problem related to the production process that raised concerns about inventory obsolescence. After obtaining an understanding of the entity’s process that raised concerns about inventory obsolescence (which we had identified as a significant class of transactions), we conclude that additional tests of details are required.
Therefore, the manager or senior manager likely will take part, along with the senior and staff, in the discussions with management about the provision for obsolescence and examine related documentation supporting the provision, rather than just reading the memo on file.
These procedures are completed as the work is performed rather than as an after the fact review. The extent of the manager’s or senior manager’s involvement requires judgment, taking into consideration the complexity of the area and the experience of the senior or staff.
Reviewers sign and date the workpapers they have reviewed to evidence their review.
Topics under chapter 1: Initial Planning
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