Speaker 1: So just like the planning phase of the audit engagement, a coach is going to put together a game plan before the big game. Defense wins championship. So the auditor is going to really have to focus on the nature, extent, and timing of the audit engagement that they're going to be performing. And then we're really going to drill down into the details and make sure that we're putting together the correct written audit plan. When studying for the audit exam it's just so critical to know where we are in the flow of the audit engagement. So if you like this video please make sure to like, comment, and subscribe. Okay, booyah. Now let's think about where we're at in the audit engagement. Now that we have accepted this audit engagement, we can start mapping out the work that needs to be performed. So this next module is specifically related to the audit planning, and what's important to note is that we have a high-level strategy, which is known as our audit strategy, and then the auditor is going to put together a more elaborate audit plan. So if we were to think about the world of sports, this is the equivalent to the game plan created by the coach, which is going to outline the strategy and tactics that will be used to win the game. So we're going to remember the audit trailblazers and their big game coming up. So Coach Daly is the head coach and it's his responsibility to map out what specific plays need to be called in order for them to expose their opponent. They want to make the right call so that they can achieve the desired outcome. Similarly, the audit plan outlines the audit strategy and tactics to achieve the desired outcome of an effective and efficient audit. plan is going to take into account the various risks and ... complexities of the client's business and identify specific ... auditing procedures that will be used to detect and address ... any material misstatements within these financial statements. If and when you are at the Prometric Center and you're ... trying to identify where is it that we are in the audit ... engagement, I want you to think about ... the audit trailblazers. Before we step onto the field ... and start calling plays, we want to know what it is we are ... Okay, so Detective Lucy is now responsible for planning the engagement and having the right strategy before she audits Max at a cruel world. So the key word to focus on throughout this module is going to be understand. We gotta understand this client. So how much planning is necessary? Well, it depends. It depends on the size and complexity of the client and the auditor's previous experience with the client. the client. In the same way that if the audit trailblazers were planning a big game, coach Daley would have to ask himself, how big of a game is this? How complicated is this opponent? Are they going to be out there running a bunch of trick plays on us? We got to be prepared. Have we ever played this team before? How do we match up against them? Okay, so the point I'm trying to make is that we want to understand where we are throughout this audit engagement. We want to know that this is the planning phase of the engagement, which is very different from other phases. Okay, so when you're at the parametric center, you got to always be aware of your surroundings. Okay, not literally, but specifically when we are thinking about the audit engagement, where are we throughout this process? Okay, so let's dive in to the details. We're going to talk about strategy and planning. So planning and audit involves establishing the overall audit strategy for the engagement. And like we said, subsequently developing a written audit plan. Okay, so it's important to note that this needs to be written. So when thinking about the high-level understanding that we're looking to obtain, we need to note the nature, extent, and timing of this audit engagement. Right, so these are three key buzzwords that this exam is always going to throw your way. Okay, so what are we thinking about when you see the buzzwords nature, extent, and timing? So when the audit exam talks about nature, extent, and timing, it's referring to three fundamental components of audit planning and execution that are used to ensure that sufficient appropriate audit evidence is obtained. So starting with the word nature, the nature of audit procedures refers to the types of audit procedures that the auditor is going to perform. In other words, we want to ask ourselves, what are we going to do? For example, substantive procedures such as analytical procedures or testing of details may be used to obtain evidence about the accuracy and completeness of the financial statements. So this might sound like a foreign language to you still, which is fine. We're going to talk more in detail about management's assertions and various substantive tests a little bit later on when we get into the obtaining audit evidence section of this course. Okay, so how about the word extent? The extent of audit procedures refers to the amount of audit evidence that will be gathered. We need to ask ourselves, how much are we going to need? And a lot of that is going to depend on risk. OK, so this includes determining the sample size for testing, the number of locations to be visited, and the amount of documentation that will be reviewed. And finally, we have timing. The timing of the audit procedures refers to when the audit procedures will be performed. This includes determining the appropriate period for testing, such as year end or interim, and the sequence in which procedures will be performed. OK, so we want to ask ourselves, how fast do we need to get this done? OK, so together, the nature, extent, and timing of audit procedures help ensure that the auditor obtains sufficient appropriate audit evidence to support their conclusions. So they're going to consider things like the company's risk profile, the quality of the entity's controls, and things like materiality. OK, so I know the audit exam can feel a little bit redundant. So we're going to identify for you where it is you really need to draw your attention when it comes to audit planning. Okay, so at the end of the day, there are certain types of questions that they're going to ask. And because this is going to feel a little vague, while it is vague, the audit planning phase of the engagement is very important, mostly because we want to take a step back at the Prometric Center and think about where it is we are in this engagement. Audit planning is very different from performing the actual audit work. And when I say that, I mean it's very different from the phase in the engagement where the auditor is obtaining evidence by performing substantive tests. Okay, but as we said earlier, your buzzword for audit planning is understand. When thinking about audit planning, you need to ask yourself, what is it that the auditor is trying to understand during the planning phase of this engagement? So we're going to break this out into six categories. If you can know the finer details within each of these six categories, you're going to be in really good shape. Okay, so the auditor needs to gain an understanding of the client's business and industry, they need to identify areas of audit risk, they need to develop a written audit plan, they need to assign personnel, they need to establish materiality thresholds, and they need to assess internal controls. Okay, so the audit planning phase is generally going to require that all of these are conducted in order to understand this client. So we can't finalize the planning phase until this is all complete. So let's start by thinking about gaining an understanding of the client's business and industry. Okay, so whether this is a normal financial statement audit or an integrated audit, this is still something that the auditor must do when planning the engagement. Okay, so just like Coach Daly for the Audit Trailblazers needs to understand his opponent, we need to understand the strengths and weaknesses of the client. In order to have an opinion on the client, we need to understand the business and industry and any regulatory requirements that apply. If Coach Daly is just a general coach of all sports, he needs to first identify the rules for each sport that he's about to coach. Okay, so in other words, this is a very customized approach, and it's tailored to each client. So there are a few different things the auditor can do when understanding the client's business and industry. They can conduct interviews with management and key personnel. So this involves speaking with the client's management team, could be Max at Accrual World, or any other personnel, to gain insights into the client's operations, processes, and controls. Okay, so they can also review the client's financial statements and any other documents. So they can review the client's financial statements, could be their tax returns, could be any other documents to gain insights into the client's business operations. They can also research the client's industry, that would help. So the auditor can research the client's industry to gain insights into the industry-specific risks that can impact the client's business. Okay, so this can also include understanding any regulatory constraints, could be understanding various economic conditions. It can include any major events that might have occurred that will impact the client. It can also include performing site visits. Touring the client's facilities, visiting their premises, is going to help them observe the client's operations and controls that are set into place. When you're thinking about understanding the client's business and their industry, we want to make sure that we are using this to tailor our audit plan to the specific client's circumstances. At the end of the day, we're trying to understand, and we're trying to address the risks associated with the client's business. So a good example, if Max at Accrual World is the client, and he's operating in a highly regulated industry, maybe it's the liquor industry, the audit plan may include procedures to assess the client's compliance with regulatory requirements. If the client has a complex operation, maybe it's a hedge fund. The audit plan may include procedures to test the effectiveness of the client's internal controls. Okay, I don't know about you guys, you guys might understand the new world of Bitcoin. I don't understand Bitcoin. Okay, so to me that would be complex if I was the auditor. So the audit plan would need to include procedures to make sure that the client's internal controls are doing their job to prevent and detect potential misstatements so that it makes the external auditor's job a little bit easier. But at the end of the day, understanding the client's business and industry is a critical step in the planning phase of the audit. Next up we have identifying areas of audit risk. So in audit planning, the auditor needs to assess areas of audit risk that's associated with the client's business. So here are some key areas of audit risk that they should consider. statement misstatements. Okay, so obviously the auditor should consider the risk of material misstatements in the client's financial statements. Internal control weaknesses. Okay, so we talked about internal control weaknesses a little bit with integrated audits, but this is basically saying that the auditor should assess the adequacy and effectiveness of the client's internal controls, including the risk of control deficiencies that could result in material misstatements within the financial statements. How about fraud risk? Financial statement misstatement risk is thinking more so about audit risk, but there's also the risk that the client can be susceptible to fraud. The auditor should consider the risk of fraud, which includes the risk of management overriding controls, collusion with employees, as well as financial misappropriation of assets. Legal and regulatory compliance. The auditor should consider the risk of non-compliance with laws and regulations. Going concern risks. The auditor should assess the risk of the client's ability to continue as a going concern. This can include the risk of significant liquidity or solvency issues. Industry specific risks. The auditor should assess the risk specific to the the client's industry, such as changes in regulations, competition, or technology. Related party transactions. Okay, so the auditor should consider the risk of related party transactions. How is that going to impact material misstatements within the financial statements could heighten the risk. All right, so these are all some examples, but super important to remember that this is not the phase in the engagement where the auditor will be performing very specific risk assessment procedures. This is more so the phase in the engagement where the auditor is mapping out and planning the client's overall susceptibility to audit risk. A very common type of question that they're going to ask when it comes to audit planning might include something like this. Which of the following procedures would an auditor most likely include in the planning phase of an audit engagement? They're going to give you four options that all sound like they could potentially be correct, But there is a reason why three of them will be incorrect. And the answer choices that you're going to see will include specific procedures, very specific types of procedures that the auditor could perform. But it's also going to include a more broad strategy type answer choice. So they're going to include specific substantive procedures or specific tests of controls. But the correct answer choice is going to be the less specific overall answer that is just a better fit for the planning phase of this engagement, such as the auditor would most likely obtain an understanding of the entity's risk assessment processes. Okay, so that's not a specific procedure, but they are obtaining an overall understanding on the client's risk assessment processes. Perfect correct answer choice for a planning phase type question on this exam. Okay, so just keep this in mind as you're navigating through the answer choices when you're going through the practice questions. Okay, so we are now going to talk about actually developing the audit plan. So something that is important to note is that the audit plan is more of an elaborate written game plan that is put forth by Detective Lucy and the audit team. Okay, so this is different from the audit strategy in that the audit strategy is more of an outline of the nature, extent, and timing of this engagement, right? They are answering the high-level questions. What kind of work needs to be done? How much work do they need to do? And how quickly does this work need to get done? Whereas the audit plan, like we said, is more of an elaborate version of what is specifically going to be performed. So you need to know that the audit plan needs to be written. This is specific documentation of the auditing procedures that are going to be performed once this commences by Detective Lucy and her audit team. Okay, so there's no ifs, ands, or buts. This is required. So when you think about the audit strategy, think of this as the high-level components that we are going to drill down as we map out this audit plan. So what is the nature of this engagement? Right, what procedures are we going to perform? Okay, so we're going to talk specifically about various auditing procedures when we get into the actual obtaining of audit evidence. But a few examples of substantive procedures can be things like confirmations, reconciliations, analytical procedures. Okay, whereas detective Lucy is going to be calling plays such as risk assessment procedures. All right, but keep in mind risk assessment procedures alone are not going to be enough to have an audit opinion on the financial statements. All right, So Detective Lucy is going to need to go ahead and gather more evidence by doing things like testing internal controls and performing substantive procedures. But again, we're going to dive into all of that in much more detail as we continue on. Don't you worry. All right, circling back to risk assessment procedures, I want you to think of risk assessment procedures as helping guide the audit team in terms of the extent of the audit procedures that need to be performed. When you're thinking about the extent within the audit strategy, you're asking yourself how much audit work do we need to perform. So we can think about sample sizes. This could be 100 account receivable confirmations. Maybe it's 500 invoices or 2500 inventory units. So when it comes to the audit plan, we need to outline the extent of tests of controls and substantive procedures that are going to be performed once the engagement gets going. So when it comes to the nature, right, we're talking about the types of procedures. We have risk assessment procedures and further audit procedures. Again, risk assessment procedures are going to tell us the extent of further audit procedures that need to be performed. How much further testing are we going to need? Okay, when thinking about the extent, you're asking yourself how much testing needs to be performed by Detective Lucy and her team. Well this depends on the type of client. How complex are they? Do we have previous experience with this client? What are the effects on technology? So the auditor has to also consider the client's information processing and what their availability is to the data. So the world of auditing gets more complex as technology changes. And finally, the timing of the audit engagement. We need to outline the specific timing of these procedures. So during the planning phase, the auditor is going to determine the timing of the audit work. words, we need to know is this going to be performed at interim dates, or are we going to do this after year-end? Okay, so I want you to be mindful of the differences in the audit strategy and how this is a high-level question mark, and when we're determining the audit plan, this is going to be drilling down the specifics of the upcoming engagement, right? These are the plays in the playbook. All right, all right, so as we mentioned, the key word in planning the audit engagement is understanding. Detective Lucy is looking to understand a cruel world's business so that she can properly call the right plays in the playbook and develop an effective audit plan. The next important component of planning the audit engagement has to do with the involvement of team members. Okay, so thinking about different people that Detective Lucy is going to lean on when properly planning this upcoming engagement, the big game, if you will. So we're thinking about both external parties and internal parties. So the two external parties that the auditor will typically rely on consist of specialists and internal auditors. So sometimes they will also involve component auditors, and that would be if another outside auditor helped them with this engagement or auditing a specific component of the client's financial statements. But we're going to focus primarily on the involvement of specialists and internal auditors. So if the auditor were to use a specialist, they may bring on somebody from the outside to help them provide an expertise such as appraisers, engineers, IT professionals, things of that nature. So for example, if Accrual World is a hedge fund, their financial statements might be pretty complex, right? They might have complicated financial instruments that they're trading. And look, while Detective Lucy is a CPA and she has a thorough understanding of financial reporting and some level of understanding of finance, maybe she can even build a decent financial model. But at the end of the day, this isn't something that she does. She's an auditor, so the complications of this client might require a specialist to come in and help her understand how some of these financial statements are getting reported. She might bring in Mike, who is one of the cool finance kids and has an expertise in complex financial instruments. She calls up Mike and asks him to help her evaluate the fair value of the financial products that sit on Accrual World's books. Okay, let me give you another example. Maybe she's also auditing a client that works in cybersecurity, in which case she might need a specialist to provide insight on the company's cybersecurity measures. Okay, so that was external party number one. External party number two could be leaning on internal auditors. So what's the difference between an internal auditor and an external auditor? The internal auditor is generally employed by the client and provides valuable insight to the company's financial internal controls and processes. The internal auditor could be a CPA, and they are definitely doing accounting work, but they are not that independent external party that is coming in and opining on the financial statements. If Larry and Gary are the internal auditors at Accrual World, Detective Lucy might reach out to them and ask them to provide assistance in areas where the internal audit department has specific expertise that she might not be aware of. So it is essential that Detective Lucy communicates effectively with specialists and internal auditors to ensure that their work is properly integrated into the overall audit plan. Okay, so those were discussions with the external parties. What about discussions with their own audit team? So this is Detective Lucy's own audit team. And what's super important is that she provides proper supervision of their assistants. So this is a requirement for generally accepted auditing standards. All right. So what does supervision look like? Well, let's say that Detective Lucy is bringing in three team members from her own audit firm and they are going to help with the audit of the accrual world engagement. So Amelia, Riley, and Sarah, they are all staffed on this engagement. She needs to make sure that she is directing their efforts and communicating with them constantly and educating them about their responsibilities. She wants to help educate them on the overall objectives of the engagement, also what work they are going to be expected to perform. She also needs to give them that high-level understanding of the nature, extent, and timing of the engagement. If there's any aspects of the engagement that are deemed significant, then they need to to be brought up with Amelia, Riley, and Sarah. And something that the exam likes to test is a situation where there are disagreements between the engagement team members. Okay, so a question you might be asked is what happens if there is a disagreement between one audit team member and the senior level staff member? And if you see this scenario pop up, you need to remember that the staff member will be allowed to disassociate themselves from the resolution by documenting their agreement. Okay, they're basically saying, look, I don't want any part of this. I disagree with this and this should be documented.