 In this presentation, we will discuss audit planning stages. You'll recall that we broke out the audit into support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website broken out by category further broken out by course, each course then organized in a logical reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Stages in prior presentations, those stages including client acceptance or continuance, preliminary engagement activities, plan the audit, consider and audit internal controls, audit business processes and related accounts, complete the audit and then evaluate results and issue audit report. We here are going to be focusing in on these top three items, these top three client acceptance or continuance, preliminary engagement activities and then of course the planning of the audit. This is all the stuff that oftentimes gets overlooked and which is very important. This is the stuff that usually the top management team or the top components of the audit staff including the partner and senior auditors are going to be involved in the planning process because that's going to set the stage for what's going to be happening going through the audit going forward. So the planning is going to be very important and then we're going to get into the actual process of course of conducting the audit after that planning stage takes place. What's going to happen within the planning stage? The accounting firm should determine the following items before accepting a new client. So first of all we want to think about should we accept a client as someone that we want to do business with because of course we are reviewing the clients but we were hoping to issue a clean report. Everybody wants to issue a clean report and in order to do that we want to be engaging with clients that we expect to be good clients and that they have integrity and what not so that we can issue a clean report. So it's very important very important for us to then be taking on clients and going through some type of process to vet them before we start the process of audit engagements so that we save ourselves any kind of time of wasted time in the auditing process because if we go through an audit with a client that does not have integrity and we put a lot of time into it they're probably not going to be very happy at all to have a report at the end of the day that is not a clean report or that if we decide that we have to remove ourselves from the audit we can't complete it because of scope limitations or an adverse report of course that's not going to be good for either party and it's not going to basically continue on with the auditing process. So really important and usually the people that are going to be involved here of course are the top level of the CPA firm including the partner in evaluating what type of clients they should be picking up. Do we have the ability to perform the engagement so first of all of course we want to be able to think do we have the ability to do the work you might think hey we're a CPA firm of course we have the ability to do the work but to consider this we might have different types of industries and whatnot that this company is in if we have never done say the construction industry or retail type of industry and we don't know the details of it those could be constraints now that we could look into those constraints get the research then the question is do we want to do the research in order to bring ourselves up to par in order to perform this engagement there also could be limitations in terms of what if they have locations outside of where we are at we're local firm what if they have locations and states that we don't have any presence in how can we get around those limitations do we can we get around those we could work with other firms possibly to get around those types of limitations as well but it's important for us to assess whether or not we have the ability and that's going to be dependent from client to client are we and the company in compliance with relevant ethical requirements so are we in compliance with any kind of ethical requirements that are going to be within the engagement process including the standards for the engagement process the normal business ethical standards as well as standards with regards for to us conducting the audit including things like independence and we'll talk about more about what those are in future presentations does the client have sufficient integrity to do business with and this is really important because again we don't want to be picking up clients that are going to be problem for clients we're not picking up a clients in order to say we're going to audit anyone will pick up any type of audit and if the audits good we issue a good opinion if the audits bad we issue a bad opinion that's not really how it works you would think kind of that would be how it works because you think audits is a type of regulation you would think that everybody should be audited and you should just basically issue whatever opinion is there but note who is hiring the auditor again the auditors being hired by in essence the board of directors in essence the business everybody with that is involved is expecting hoping to have basically a clean up opinion the CPA firm has to not give us a clean opinion if the evidence gives the fact that there is some kind of qualification or something like that but they don't they don't want to basically do that we would like to say hey we're dealing with someone with integrity they put the financial statements in accordance with the way they said they were the assertions that they told us that they made the financial statements are indeed the way they made the financial statements in and if clients don't have integrity if a company doesn't have integrity they're going to have problems getting a qualified or CPA firm with a good reputation to audit to audit their their financial statements and of course that's going to be a problem for the company so note that the job of the CPA firm isn't to pick up any client and basically you know audit audit the client and if it comes that it is what it is it comes out what it is and we issued the report if it's good it's good it's bad it's bad we want to be independent and issue the report if it's good it's good it's bad it's bad however we want to see as much as possible that if we see that there's going to be bad reports that need to be issued in the front side of things as we take on new clients we don't go forward with the audit it's not cost-effective for ourselves or the client to do so we say hey this isn't I don't think this is an audit we're gonna move forward with I'm not sure that the client has the integrity for us to want to pick up this engagement it's simply not worth our time to go through the engagement with a high risk possibly of a not a not a good result and we don't want continuing engagements with clients that are going to be difficult for us to work with so it's going to be very important again that's going to be one of the principal jobs of obviously the partners to deal with the new clients of what types of clients are going to be picking up do we have the ability to perform the engagement so that could be including things like do we have the technical skill and knowledge of industry and subject matter so a lot of CPA firms will be focusing in on certain niches especially if we're not in the in the largest CPA firms even large CPA firms are gonna have different departments that focus in on different industry niches smaller CPA firms often find a niche they do business by focusing in on a specific niche and so if we then see clients or have an opportunity to take clients outside of that niche then we want to say hey do I have the resources do I want to take on the resources you know get myself up to par to pick up whatever needs to be picked up in order to take on the engagement do we have employees with experience and relevant regulatory and reporting requirements of regulatory reporting requirements so note in different industries are gonna have different types of requirements and there's a lot of different types of audits we might be engaged in we might be auditing for example for a specific type of reason for example we might be auditing on a state level for like an HOA a homeowners association or something like that in accordance with requirements for that state that's necessary to have for those specific requirements which might need us then to know what those requirements are which which could differ than our other types of niches so we need to know do we have the people involved that that know these regulations and what is needed within the audit do we have the necessary personnel with competence and abilities do we have the people we need to finish and conduct the audit in accordance with whatever special needs that audit is do we do we have or can we get specialists as needed so we often might need specialists in different ways because if we're going to do things say evaluate the value of certain type of assets we might say have inventory that we don't know how to value we because obviously we're auditors and if we're trying to say is the inventory on the books at the correct value we can go out and count the inventory as auditors that's not hard we could say there's that many units of inventory but valuing the inventory not very not very easy to value like clothing or something like that if if we're an auditor it'd be so we might have need specialists and different types of areas are going to need specialists for certain types of reasons question is do we have those specialists are we willing to to find those specialists for as needed can we do the work on time obviously again there's going to be scope limitations with these things and and we want to make sure that when we take on the new engagement what's going to be the time frame of it and given all this this type of information can we do it within a reasonable time frame for both our purposes and the purposes of the client that we are doing business with are we and the company in compliance with relevant ethical requirements are we independent that's going to be one of the key components so when we think about ethical requirements and we'll talk more about independence as we go but one key thing is we want to be independent and notice what we're doing here we're we're giving our opinion on the financial statements in order for a a third party to business people to do business and be able to rely and trust on each other in order to do that we need to be independent and the best thing would be to be independent not not just in in in form and in substance we want to basically say hey we did our job it's not enough in other words for us to say look we did our job we're a cpa firm we did our job i'm a cpa and it were trust me i'm i'm independent even though in appearance i may not be so for example i might be on the board of directors if i if i was a cpa on the board of directors of the company that we audited it may well be that i was independent in my conduct that i perform the audit in an independent fashion and i didn't let that influence my opinion at all but the appearance doesn't look independent and of course the appearance matters when you're talking about a third party if i'm going to some third party and i say yeah i audited the financial statements of this company and on by the way i'm on the board of that company and i'm an auditor and i'm a substantial shareholder of it that i may have done a great job of the audit but the the other person is not going to help build their trust as much as as if i can say hey you know i'm an independent auditor and i have i'm not on the board i don't own any stock in this company i'm independent both in appearance and substance and i'm also regulated by you know the rules of being independent as a cpa firm then that's what's going to give more assurance so when the problem with independence oftentimes for most people's mind is to say hey that doesn't bias my opinion it doesn't bias my opinion that i know people on on the in the company or that i that i have you know siblings that work there or something like that it doesn't bother that i still give an opinion that's valid because i'm a truthful person but in appearance it doesn't look good and therefore that could still harm the the quality of the opinion and so then we also can we accept the client without violating any regulatory requirements or the code of professional conduct so we want to be able to obviously accept the clients without violating any kind of code of conduct does the client have sufficient integrity to do business with so some questions we might ask with regard to that and again any kind of client that doesn't have the sufficient integrity we really would like to weed them out before any type of transaction any type of engagement because they will take a lot of time and waste a lot of time we first need to determine and identify the reputation of the principal owners and top management so what's going to be the reputation understand the nature of the client's operation and business practices determine the attitude towards internal controls and interpretation of accounting standards and this is going to be a big one because when we start to sit down and think about with the top management what do you think about internal controls what do you think about accounting standards do you have internal controls how are they implemented this is it really important especially with larger type of companies because we're dependent on the internal controls as a major portion of our audit as is the financial statement process typically of a well-set-up organization that's large is going to need a good internal controls and it's possible to it's very possible for a good set of internal controls to have been set up yet not implemented and you can kind of get a feel for that about what people think about internal controls is it necessary to have internal controls how well are the internal controls one made what are the internal controls and how well are they actually followed and established and of course setting the establishment of following internal controls is something that's going to be set by the top management so you can kind of get a feel of what they think about those types of things when the discussion of top management happens to take on a new client determine if there are any indications of limitations on the scope of the work in other words when we start to think about and talk over what the engagement might look like we want to think about what the scope limitations will be and get a feel for if there are any scope limitations involved for example if we start to say hey there's just one particular department that's over in china or something like over in some other area you know we want to think about well how are we going to get access to that are there any problems with us getting getting access to that if the client then says you know you can't audit that particular department because they won't let us in or for whatever reason then we're going to have some scope limitations and we want to consider those upfront and and get an idea of them as soon as possible determine if there are any indications of fraud or money laundering obviously if we if we look into things and we we start to get a feel for the idea that there might be some type of fraud some type of illegal activity or money laundering that would go towards the integrity of the client and we probably wouldn't want to take on the engagement the reasons for a company leaving the previous firm note this is going to be a key question and it seems like one of those questions that you would think is like that's kind of a rude question like why did you leave the prior firm but it's it's a standard question that we have to ask it's basically standard type of practice and of course it makes sense to have this if you're talking about a publicly traded company or any other type of company that needs an audit from a year to year point and they're looking for a new CPA firm it's natural for us in the CPA firm profession to then say who was your prior you know why why are you leaving your prior CPA firm and what are the what are the conditions on which you left the prior CPA firm and possibly even you know can we contact the prior CPA firm just to see what the you know what the conditions are there and and again that's going to be typical type of thing because we want to know for our purposes and theirs what was the problem with the engagement so that we can both know what the engagement is if we want to take on the engagement and so that we can do hopefully a better job possibly with whatever kind of limitations there were within the prior engagement so hopefully you know they left the prior firm possibly they got too big and they grew and they left the the prior firm because the prior firm is small they don't have enough regional offices and whatnot and that would be you know a fine fine thing but it's going to be a common question for us to go to the prior firm and ask that or to ask about the the leading of the prior firm and the why you'd be looking for a new firm if it's a new engagement and they didn't have an audit in the prior year well that would be self-explanatory for their publicly traded company then they would need to have an audit if they were publicly traded in prior years if they're not publicly traded maybe they need an audit now and they didn't need one last year and that would be of course the reason they didn't have an auditor in the prior year continuing client retention periodically evaluate client retention now if we're talking about a client that's continuing then obviously we already know about the client we don't have to do as much evaluation but we do want to just keep in mind those key points that things could change and things change gradually with clients so it's easy for us to just after time things can deteriorate and we possibly don't know it right so we have to basically reevaluate especially when key things type type key things type happen so it's typical to evaluate near the close of the audit or if there's some significant event that happened if there's some type of event that happens we may want to reassess and say okay let's reevaluate this client so that we make sure that we're up to date on our evaluation of our business dealings with the client so if there's any arguments for for example over fees that could cause some tension with the the client it could be an indication of other things going on so we want to basically reevaluate our situation with the client at that point that means our fees our fees on the audit and conflicts over accounting and audit issues if there's any conflicts if the if we say hey there's an adjustment this doesn't seem to line up to generally accepted accounting principles and the client is saying no i don't believe that or i'm not going to make that adjustment or i believe you're right that doesn't line up but i still don't want to make the adjustment because of a b or c doesn't mean they're wrong necessarily but it does mean that we want to basically reevaluate the situation at that point and and make sure everything is is running smoothly and make sure that that doesn't or c if that's an indication of anything deeper