Software tools for audit planning and supervision. (Software Review) (evaluation)by Blundell, L. Steven
The CPA in practice is still drying out from the recent deluge of pronouncements from the Auditing Standards Board. The flood included the nine new "expectation gap" statements, an omnibus opinion, a statement on special reports, and a statement on compliance auditing. These statements focus on the "big picture" to an extent greater than ever before. Many practitioners are being pulled, kicking and screaming, to better planning, more thorough supervision and more skepticism in the performance of their engagements.
Recognizing that many CPAs have not developed or acquired sufficient practice tolls to cope with their responsibilities, the AICPA has developed software programs that make it easier and less time consuming to comply with the new standards. This development has been made possible by the great increase in the use of microcomputers in auditors' work in a relatively short time. Sotware provides the audit manager with up-to-the-minute information on the timeliness, profitability and the pattern of supervision of the engagement. This article principally discusses use of the software as it can assist the auditor in the planning and supervision phases of the audit.
Overview of Software and Hardware Required
The usual package of AICPA software the auditor would use includes the following three items:
1. Audit Program Generator (APG). The APG basic package consists of a library of audit prorams and checklists for disclosures, tax law compliance, and internal firm review. Additional volumes are available and provide an audit planning checklist, internal control structure questionnaires (one for small clients and a second version for medium and large clients), accounting disclosure checklists and industry specific questionnaires, programs and checklists.
2. Accountant's Trial Balance (ATB). The ATB is a working trial balance and analysis package. It begins with the entry of the client's trial balance, proceeds with the production of lead schedules and the entry of audit or client initiated adjustments, and finishes with a final adjusted trial balance and analytical review. It also accepts tax entries for both federal and state purposes and can lead to a tax trial balance as well.
3. Engagement Manager (EM). EM relateds to the business and efficiency aspects of an engagement through effective control over time and progress towards completion.
Earlier this year the AICPA released Version 2.0 of both the ATB(ATB2) and the APG(APG2). EM was released for the first time in 1989. The hardware requirements for the AICPA software are commonplace: IBM PC, AT, XT, PS/2 or compatibles, with 640K, using DOS 3.1 or higher. A CPE version of ATB is available from the AICPA. It will not only result in credit for eight CPE hours, but also will get the first time user off to a rousing start.
Planning and Supervision of an Audit Planning
Hours, dollars, people, qualifications, due-dates, all of these elements must be considered when the audit team is formulating the audit plan. The first step in planning the audit would be the preparation of an audit planning checklist.
APG2 allows the team to prepare its own planning checklist or to use one provided through the AICPA. APG2 allows the team to add, delete, or modify individual items in hte AICPA planning checklist to fit the auditor's and the client's needs.
The AICPA planning checklist of APG2 includes items to consider under the following broad headings:
* Understanding the assignment;
* Assigning personnel to the engagement;
* Knowledge of the entity's business;
* Assessing auditability;
* Engagement letter;
* Assessing audit risk and materially;
* Assessment of control risk;
* Errors and irregularities;
* Illegal acts;
* Analytical procedures; and
* Audit strategies and the audit program.
The checklist is a document to be completed in stages as the planning and program development functions are completed. For illustrative purposes, the first page of the AICPA planning check list produced by APG2 is provided in Figure 1.
Pre-engagement budgeting is the sound business and technical formulation upon which an organized, planned and profitable engagement is built. This is where EM, the AICPA's engagement planning and supervision module can assist.
EM was designed to be used in the field or in the office by audit seniors or managers in creating a budget by audit area and to assign staff and dates in a fast moving environment. EM allows the preparation of the budget with little effort. Changes in audit areas, staff and rates are added as the budget line items are entered; total hours, dollars, and expense are updated on the screen as the budget is prepared. Budget line items can be added, changed or deleted as needed as the engagement progresses. Prio year actual hours and dollars are stored and readily available by pressing a function key. If the engagement team wishes to track completion dates, EM alloww them to enter estimated completion dates for audit areas and provides on screen information on delayed areas.
Analytical Procedures--Required Planning
Another critical area of planning is financial analysis. SAS 56, AU Section 329--Analytical Procedures, states that analytical procedures should be applied to some extent to:
* Assist the auditor in planning the nature, timing, and extent of other auditing procedures; and
* Serve as an overall review of the financial information in final review stage of the audit.
It also suggests that analytical procedures should be considered as a substantive test to obtain evidence about particular assertions related to account balances or classes of transactions. Procedures will vary depending on the engagement and a firm's policies. There are, however, some basic procedures usually employed in the planning stages in determining the scope of the audit and identifying any troublesome areas that may require more testing. Comparing prior year audit balances with current year balances is common. Analyzing the variances and ratios are minimum procedures in determining the nature and extent of audit testing that should be performed. Features of the AICPA's ATB2 can provide the analytical tool that will enable the auditor not only to look at the big picture with little time and effort, but also to comply with the standards.
Up to five years of history can be stored using ATB2, and accounts may be grouped for reporting or analysis purposes. For example, the auditor may want to group the chart of accounts to compare departments and obtain a variance report of actual to budget to identify unusual deviations. ATB2 gives the auditor a wide array of options in inquiring into and reporting on trial balance information.
Ratio analysis is a key pre-engagement planning procedure that can alert the auditor to areas that will require additional field work and give satisfaction that a component of the financial statements is fairly stated. ATB has an analytical procedure section that provides actual, budget, prior period and even industry ratio comparison reports. (See Figure 2.)
Internal Control Structure
APG2 can assist in satisfying the requirements of SAS 55, Consideration of the Internal Control Structure in a Financial Statement Audit. That SAS requires that the auditor obtain an understanding of the three elements of the control structure and whether the relevant policies, procedures and records underlying such structure have been put in place. The SAS requires that auditors document their understanding and the procedures performed, albeit if only a walk-through, to determine that the procedures as understood have in fact been put into place.
The planning checklist acts as a control to ensure that all the internal control structure bases have been touched, and it should be the first of the APG2 tools to the referred to. Then a logical progression for the auditor using APG2 is to do the following for the client's significant operating cycles:
* Design a section of the audit program on internal control. Later in this article the approach and philosophy of audit program development is discussed at greater length. Let it suffice to say at this point, APG2 has a suggested internal control section.
* Design and prepare an "Internal Control Structure Questionnaire." To use the questionnaire most effectively, the auditor records responses to questions and the work done to see that procedures identified are actually in place. In some cases a reference to another workpaper where a walk-through or observation is recorded will be necessary.
* After completing the questionnaire, return to the internal control audit program part of APG2 and design audit steps based upon the decision of the auditor to either: 1) assess control risk at the maximum; or 2) reduce such risk assessment. In the latter case the auditor can then design specific tests within the internal control section of the program to provide assurance that the control being relied upon to reduce control risk below the maximum is actually functioning for the particular financial statement assertion. Excerpts from both the internal control section of APG2 and the internal control structure questionnaire are presented in Figures 3 and 4, respectively.
Thus, these two components of APG2 can help the auditor document that the new standard has been complied with. This is a valuable practice aide in carrying out perhaps the most difficult of all the new standards.
Development of the Balance of the Audit Program
After having developed a budget for the audit, gained an understanding of the control structure, made an assessment of control risk, and performed some preliminary financial analysis, the auditor is ready to tackle the balance of audit planning, the substantive audit program.
Audit programs should be tailored for every engagement. Each engagement is different and requires auditors to use their professional judgment to formulate the audit steps necessary to provide evidential matter for a basis of the audit opinion. Inherent and control risk assessments, the client's assertions, materiality and th auditor's objectives are the factors to be considered.
It is difficult and time consuming to develop audit programs from scratch for each new engagement. Considering the new standards and the increased incidence of litigation, it is crucial that time be spent considering each element of the audit approach to avoid missing important areas, to address objectives sufficiently and to scale back effort in areas of low risk. As was seen in the earlier discussion on internal control, APG2 can help in the design of audit programs from scratch or provide suggested steps for modification for particular conditions at the client.
APG2 was designed to start with the five assertions:
* Existence or occurrence;
* Rights and obligations;
* Valuation or allocation; and
* Presentation and disclosure.
These assertions may be printed at the beginning of the substantive testing aspects of the audit program. Objectives can be linked to individual audit program steps. Sec. 5400 of the AICPA's Audit and Accounting Manual contains sample audit programs and is included in its entirety in APG2. The AICPA has linked the audit steps to objectives and assertions. The auditor can tailor these software prorams to meet the engagement's specific requirements since much of the work has already been done.
When developing the test of details, the auditor should remember to consider reducing control risk assessment below the maximum. In small audits, assessing risk at the maximum and doing an all-substantive audit may be cost-effective. However, in certain circumstances it may be more efficient, and in some cases required (a compliance audit for example), that the internal control structure be tested to see that it is operating as designed. By so doing the auditor will be able to do less substantive testing. A trade-off is involved: the time to test the control procedures and policies to see that they are functioning versus the reduced time in performing substantive tests. APG2 allows the auditor to maintain a library of audit programs and to pick and choose which steps or entire programs are to be included in the current program based on the decisions reached.
Adequate supervision is required by SAS 22, Planning and Supervision and Other Standards. EM provides an easy-to-use interface to allow supervision and management of an audit engagement. EM is built on a database concept so that the auditor can review from the highest summarized level of information down to the individual detail time entry, just by the pressing of a function key.
Inquiry into audit performance can be made in the categories of time and expense, hours, staff, or audit area. There are 28 different pre- set inquiry menu items that present various levels of detail. Once at the inquiry screen, pressing a function key gives the auditor a different view of the same information. Pressing the appropriate function key at any time can send the information in report form to the screen, printer or disk file.
A key management function in an audit is to monitor supervision. EM provides an up-to-the-minute report entitled "Engagement at a Glance" that allows the in-charge to provide to the partner or manager "real time" statistics on percentages and hours spent on the audit by the assigned staff.
Time entries are easily entered into the system, and an export facility is provided to merge EM time entries into the firm's time and billing program.
EM is an excellent tool that will help:
* Identify variances, so that the auditor can investigate reasons for the variances, and react while there is still time;
* Identify gaps in supervision and take corrective action early in the engagement; and
* Increase timeliness in the delivery of the audit report.
Other Uses of Software
ATB2 can be used to perform analytical procedures as adjustments are made. Potential journal entries can be monitored and their effect reviewed. Analytical procedures should be performed not only in the planning phases, but also in the final review phase. After all audit adjustments are made and processed in ATB2, the ratios and comparisons can be rerun to see that the adjusted balances make sense in relation to all the audit evidence obtained and documented in the working papers.
The AICPA provides a partner's engagement review checklist that can be modified with APG2 to conform to a firm's policies and procedures regarding the review of engagements at the partner level. APG2 also includes a disclosure checklist and a tax law compliance checklist. These will help assure that financial statements contain all the required disclosures and that tax compliance work is properly attended to.
APG2, ATB2, and EM are excellent tools in the planning and supervision of audit engagements. These practice aids in no way subordinate professional judgment, but allow the auditor to comply with the standards and to document their application efficiently and effectively.
The objective of this article is to inform auditors of the tools available to them. This becomes increasingly important with the requirements fo Quality Review waiting in the wings of all auditors. APG2, ATB2, and EM are all available from: AICPA, Order Department, 1211 Avenue of the Americas, New York, NY 10036-8775.
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.
©2009 The New York State Society of CPAs. Legal Notices
Visit the new cpajournal.com.