Audit Planning and Basic Auditing Concepts
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level of risk, the firm should staff the engagement with more experienced auditors. Simi- larly, if the audit involves a specialized industry (banking, insurance, and so on) or if the entity uses sophisticated IT processing or holds financial instruments, the firm must ensure that members of the audit team possess the requisite expertise. Generally, a time budget for planned work is prepared in order to assist with the staffing requirements and to schedule the fieldwork.
Stop and Think: Suppose an entity held financial instruments (i.e., derivatives) that are accounted for using fair value accounting. What type of expertise would the audit team need?
Assess Compliance with Ethical and Independence Requirements A public accounting firm should establish policies and procedures to ensure that persons at all organizational levels within the firm meet the profession’s ethical requirements (QC 10), including maintaining independence in accordance with the Code of Professional Conduct (see Chapter 19). A firm should document compliance with this policy by having all per- sonnel complete an annual independence questionnaire. This questionnaire requests infor- mation about the auditor’s financial or business relationships with the firm’s clients. Under certain circumstances, family members’ financial or business relationships are attributable to the auditor. For example, if the spouse of an auditor participating in an engagement were an accounting supervisor for the entity, independence would be considered impaired.
At the engagement level, the partner-in-charge should ensure that all individuals assigned to the engagement are independent of the entity. This can be accomplished by reviewing the annual independence reports for each member of the audit team or through the firm’s inde- pendent database.