Standards of Fieldwork PIE

1
Standards of Fieldwork (PIE)

• Planning Supervision
• The work is to be adequately planned and
  assistants, if any, are to be properly
  supervised.
• Internal control
• A sufficient understanding of internal control is
  to be obtained to plan the audit and to determine
  the nature, timing, and extent of tests to be
  performed.
• Evidential matter
• Sufficient competent evidential matter is to be
  obtained through inspection, observation,
  inquiries, and confirmations to afford a
  reasonable basis for the opinion regarding the
  F/S under audit.

2
SAS 47 Audit Risk ModelAgain and Again and
Again

• AR f (IR, CR, DR)
• Recall that DR f (N, T, E)
• If CR is high, then tighten down on DR (if
  control risk is assessed at the maximum, the
  audit approach is wholly substantive which
  means no reliance on I/C)
• If CR is less than the maximum, then DR can be
  allowed to go higher (note that the assessment of
  CR had better be right!!)

3
Inherent Limitations

• The design and implementation of I/C is a
  management responsibility!
• The costs of a control policy/procedure should
  not outweigh the benefits from it.
• Mistakes may occur due to misunderstandings,
  misjudgments, fatigue, etc.
• Breakdowns can occur due to collusion or
  management override

4
Consideration of I/C in a F/S Audit (SAS 78,
revised SAS 55)

• Definition of I/C a process (effected by an
  entitys board of directors, management, and
  other personnel) designed to provide reasonable
  assurance regarding the achievement of objectives
  in the following categories
• reliability of financial reporting
• effectiveness and efficiency of operations and
• compliance with laws and regulations.

5
System of I/C consists of 5 primary, interrelated
components

• Control environment - regarding the overall
  control consciousness of the organization (tone
  at the top)
• Risk assessment - regarding how the entity
  identifies, analyzes, prioritizes risks
• Control activities - policies procedures to
  provide reasonable assurance that specific
  objectives will be achieved (SCARE)

6
Control activities (SCARE)

• S Segregation of duties
• C Comparison of records to actual assets (or
  comparison of related documents)
• A Access to assets should be as authorized
• R Records documentation should be adequate
• E Execution of transactions should be as
  authorized by management

7
System of I/C consists of 5 primary, interrelated
components

• Information communication -- identifying,
  capturing, exchanging information (financial or
  otherwise) in a form and time frame that enables
  people to meet their responsibilities
• Monitoring -- must assess the quality of I/C over
  time (not a one-shot activity!)

8
Segregation of duties
Accounting (Record-keeping)
Authorization (Execution)
Access (Custody)
9
Communication of I/C Matters Noted in an Audit
(SAS 60)

• Basic responsibility - must communicate the
  reportable conditions identified (may choose to
  report other lesser matters, too)
• Definition significant deficiencies in the
  design or operation of I/C, which could adversely
  affect the F/S
• Material weaknesses a subset of reportable
  conditions (may map into material misstatements
  of the F/S)

10
Form content of the auditors communication
regarding I/C

• Can be written or verbal -- not required to be in
  writing, although thats clearly prudent!
• A written report should have limited
  distribution (to board, management, etc.) gt
  because the M/L is a by product report
• Material weaknesses do not have to be reported
  separately from other reportable conditions
  (although many CPAs do so)
• The report can include other lesser matters that
  are not necessarily required
• Never say No reportable conditions found