Solution manual auditing theory by cabrera chapter 09

CHAPTER 9
AUDIT PLANNING, SUPERVISION
AND MONITORING
I.

Review Questions
1.

Audit planning means developing a general strategy and a detailed approach for
the expected nature, timing, and extent of the audit. The auditor plans to
perform the audit in an efficient and timely manner.
Adequate planning of the audit work accomplishes among others the following:
(1) It ensures that appropriate attention is devoted to important areas of the
audit,
(2) It enables the auditor to identify potential problems,
(3) It enhances completion of audit expeditiously, and
(4) It assists in proper assignment of work to assistants and in coordination of
work done by other auditors and experts.

2.

Significant matters to be considered by the auditor in developing the overall
audit plan include
1.
2.
3.
4.
5.
6.

Knowledge of the Business

Understanding of the Accounting and Internal Control System
Assessment of Risk and Materiality
Nature, Timing and Extent of Audit Procedures
Coordination, Direction, Supervision and Review
Other matters, such as assessment of the going concern assumption, related
parties, nature and timing of reports and other communications with the
entity.

3.

To obtain information about the client’s business and industry, an auditor can
review prior-year working papers, review current-year client information,
inquire of management and the audit committee, read PICPA, AICPA, industry
audit and accounting guides relevant to the client, and read significant industry
publications and manuals maintained by the firm on the industry.

4.

Specific audit procedures presented in the auditing standards as methods of
detecting related-party transactions are as follows:


Examine company procedures for identifying and accounting for
related-party transactions.


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Solutions Manual - Principles of Auditing and Other Assurance Services


Inquire of management about related parties and any transactions that
occurred during the period.



Review entity filings with the SEC and other regulatory authorities for
named related parties and other entities in which officers and directors
serve in management or directorship positions.



Determine the names of all pension and other employee benefit trusts
and the names of officers and trustees.



Review stockholder listings of closely held companies to identify
principal shareholders.



Review prior-year working papers for names of related parties.



Inquire of auditors of related entities regarding management’s
involvement in material transactions.

5.

Warning signs that materially question management integrity impact the client
acceptance decision. The auditor must determine whether the suspicions
aroused by such warning signs have validity and, if so, whether, under the
circumstances, the auditor can continue to be associated with the financial
statements. Additionally, the auditor has a responsibility to communicate known
illegal acts, as well as other findings of this nature, to the audit committee of the
client’s board of directors.

6.

Preliminary audit programs are designed on the basis of the auditor’s initial
assessment of inherent risk and control risk. The preliminary programs may be
modified as a result of auditor testing of control procedures and revised
assessment of control risk. The preliminary programs, as modified by the results
of control testing, are referred to as final audit programs.

7.

The audit time budget facilitates staff scheduling and fee estimating, in that it
displays the audit in terms of hours required to complete each phase and level of
staff required for each sector. A second purpose served, when actual times are
recorded in the time budget, is that variances are isolated and may be
investigated for cause. This, in turn, facilitates preparation of next year’s time
budget, and also isolates added hours which may be chargeable to the client
because of client-caused audit problems and delays.

8.

The preaudit conference conducted by the audit manager and the in-charge

senior auditor and comprising the audit team assigned to the engagement,
increases audit effectiveness by:
a.
b.
c.

Discussing the results of audit risk analysis with the audit team;
Familiarizing the audit team members with the nature of the client; and
Making each team member aware of how identified warning signs
impact the audit tasks assigned to him/her.


Audit Planning, Supervision and Monitoring
9.

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The three primary reasons an auditor should obtain a good understanding of the
client’s industry are:


to enable the auditor to evaluate whether the client’s financial
statements are in accordance with GAAP, since many industries have
unique accounting requirements.



to enable the auditor to identify risks in the industry that may affect the
auditor’s assessment of acceptable audit risk.



to enable the auditor to assess the client’s areas of high inherent risk.

The auditor can obtain a sound understanding of the client’s industry through
several means, including discussions with previous auditors and by reviewing
the permanent files for the client; conferences with the client’s personnel;
studying textbooks, technical magazines and specialized journals; and by
participating in industry associations and training programs.
10. Paragraph 12 of PSA 300 provides the following:
“The overall audit plan and the audit program should be revised as necessary
during the course of the audit. Planning is continuous throughout the
engagement because of changes in conditions or unexpected results of audit
procedures. The reasons for significant changes would be recorded.”
11. The purpose of applying analytical procedures in planning the audit is to assist
in understanding the business and in identifying areas of potential risk. It will
therefore assist the auditor in planning the nature, time, and extent of auditing
procedures that will be used to obtain evidential matter for specific account
balances or classes of transactions. By identifying such things as the existence
of unusual transactions and events, and amount ratios and trends, matters that
have financial statement and audit planning ramifications might be brought to
light. Likewise, relevant non-financial information such as number of
employees, area of selling space, volume of goods produced may also contribute
to the accomplishment of the purpose of the analytical procedures.
12. Refer to page 372 (letter a) of the textbook.
13. Refer to page 372 (letter b) of the textbook.
14. Refer to page 375 of the textbook.


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Solutions Manual - Principles of Auditing and Other Assurance Services

II. Multiple Choice Questions
1.
2.
3.
4.
5.

b
b
a
c
b

6.
7.
8.
9.
10.

b
a
b
c
d

11.
12.

13.
14.
15.

b
d
a
c
a

16.
17.
18.
19.
20.

b
c
a
c
a

21. d
22. b

III. Comprehensive Cases
Case 1. a.

CPAs should not follow clients’ suggestions about the conduct of an audit
unless the suggestions clearly do not conflict with his professional

competence, judgment, honesty, independence, or ethical standards. Where
there is no disagreement about the results to be accomplished and the
client’s suggestion represents a good idea a CPA can accept it. Within
professional bounds, mutual agreement with the client is all right. The CPA
must never agree to any arrangement which violates generally accepted
auditing standards or the Code of Ethics for Professional Accountants.

b.

The reasons against dividing the assignment of audit work solely according
to assets, liabilities and income and expenses include the following:
1.
2.
3.

4.
5.
6.
7.
8.

Work should be assigned to staff members by considering the degree of
difficulty in relation to the technical competence and experience of
individual staff members.
Sequence of work performed on an examination should be in
accordance with an overall audit plan.
It is impossible to segregate work areas by major captions because
often a close relationship exists among a number of accounts in more
than one category, as for example where income is based on assets or
expense is based on liabilities.

Often a single audit work paper is desirable to substantiate balances in
accounts of various types, such as an insurance analysis supporting
premium disbursements, the expense portion and the prepaid balance.
Duplication of staff effort would be more likely to occur if assignments
were made on such a basis.
Frequently, the scope of work regarding a single account requires
simultaneous participation by the staff, such as in the observation of
inventories.
Many audit operations are not susceptible to division by category, as
for example investigating internal control, testing transactions and
writing the report.
The suggested three-way split will usually not result in an
approximately equal allocation of audit hours since the examination of
assets is usually the most time-consuming.


Audit Planning, Supervision and Monitoring
c.

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The CPA’s staff member whose uncle owns the advertising agency should
not be assigned to examine Brilliant’s advertising account. The CPA firm is
responsible for avoiding relationships which might suggest a conflict of
interest. Regardless of whether this staff member could be independent and
unbiased in such a situation, outsiders probably will be influenced in their
thinking by the fact that his uncle is the owner of the advertising agency.
Even if a problem of ethics were not involved, it would be unwise for the
CPA to assign this staff member because the client’s attitude could change
significantly and the CPA firm’s position would be jeopardized if

difficulties later arose in connection with the contract. Any situation in
which bias exists or might arise should be avoided.

Case 2. Additional procedures to be performed prior to the beginning of audit field work
are the following:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Review client for continuance. Lack of management integrity may be cause
for rejecting the current year’s audit;
Obtain copy of physical inventory instructions and examine for
completeness. Request client to revise where necessary;
Determine work to be performed by client’s staff and arrange with client for
timely completion of these tasks;
Prepare engagement letter and obtain signed copy from the client;
Prepare time budget and determine staff scheduling;
Make a preliminary determination (using last year as a basis) of the timing
of application of substantive audit procedures (e.g., interim v. final audit
application);
Inquire of client as to changes in internal control;
Inquire of client as to related party transactions during the current year, and
receivables from and/or payables to related parties;

Perform the planning portion of analytical procedures and investigate any
significant abnormalities; and
Arrive at preliminary assessments of inherent risk and control risk and
design substantive audit programs.