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Ach Guides Planning External Audit Web Essay

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Planning the
external audit
The audit committee guide series

“Effective audit
committees are critical
to the quality of financial
reporting and the proper
conduct of business. This
guide is one of a series
that is meant to help audit
committees meet their
oversight and fiduciary
– Trent Gazzaway, National Managing Partner
of Audit Services

2 Role of the external auditor
3 Audit planning
4 Financial statement assertions
6 Designing audits
7 Judging materiality
9 Assessing audit risk
10 Evaluating risk of
material misstatement
11 Overseeing plan and team
12 Performing audit tests
13 Using the work of others

The audit committee guide series
has been adapted from The Audit
Committee Handbook, Fifth Edition,
published by John Wiley & Sons
and available for purchase at www.
and through major online booksellers
and bookstores nationwide.

14 Evaluating the audit plan
15 More guidance
17 Grant Thornton’s audit services
20 Suggested reading
21 Offices of Grant Thornton LLP

When it comes to an external audit, the audit committee has responsibility to ensure auditors’ work is done right and with integrity.
In the U.S., the audit committee is charged with overseeing the integrity of the financial reporting process and the external auditor. To fulfill these responsibilities, audit committee members must be prepared to evaluate and oversee both the external audit plan and the external auditor. That responsibility extends to appointing, compensating and overseeing the work of any registered public accounting firm employed by the company. During the audit engagement, external auditors report directly to the audit committee.

To fulfill their duty to oversee the external audit function, audit committee members must be familiar with how auditors consider management assertions contained in the financial statements, and the planning process auditors go through prior to issuing an opinion. The remainder of this issue of the audit committee guide series summarizes the audit planning process and provides some attributes that audit committee members may look for in an effective audit plan.

How will financial reform impact your company?
The regulatory landscape is changing for companies and their audit committees. Visit to read about the Dodd-Frank Act and how it may affect your company.

Planning the external audit 1

Role of the external auditor

External auditors are independent audit professionals who audit the financial statements of a company, legal entity or organization. They are expected to express an opinion on whether an entity’s financial statements are free of material misstatements and are a true and fair representation of actual financial position. The external auditor’s primary responsibilities are to:

1. identify items that have a reasonable possibility of causing the financial statements to be materially misstated;
2. design and execute tests to determine whether such misstatements have occurred; and
3. in certain public company audits, test the effectiveness of internal control over financial reporting.1


Applicable to companies subject to Section 404(b) of the Sarbanes-Oxley Act of 2002.

2 Planning the external audit

Audit planning

Audit planning is a three-step iterative process undertaken by the external auditor, and evaluated by the audit committee, each audit cycle. Audit planning, as defined in International Standards on Auditing (ISA) No. 300, includes: 1. obtaining an understanding of the entity, its environment and its internal control system;

2. assessing the risk of material misstatement in the financial statements; and 3. designing audit procedures commensurate with the assessed level of risk. Audit Process Flow

Planning the external audit 3

Financial statement assertions

When management issues financial statements, it makes assertions regarding the recognition, measurement, presentation and disclosure of information in those financial statements. Assertions identify the most important elements of a given financial reporting line item or disclosure.

In the planning phase, when the auditor is designing the tests that will be used during the audit, assertions allow the auditor to focus on what is most important to financial statement users. For example, an auditor will focus on the “existence” of cash rather than the “valuation” of cash. Likewise, an auditor will focus on items that potentially could be understated rather than those that may be overstated. Although terminology may differ, auditors generally will consider the following assertions, separated into three categories:


1. Occurrence — Transactions took place.
2. Completeness — Transactions that should have been recorded have been recorded.
3. Accuracy — Transaction amounts and other data have been recorded appropriately.
4. Cutoff — Transactions have been recorded in correct accounting period. 5. Classification — Transactions have been recorded in proper accounts.

4 Planning the external audit

Account balances

1. Existence — Assets, liabilities and equity interests exist. 2. Rights and obligations — The entity has rights to assets and is obligated for liabilities.
3. Completeness — All assets, liabilities and equity interests that should have been recorded have been recorded.
4. Valuation and allocation — Assets, liabilities and equity interests are included and adjustments are recorded appropriately in the financial statements. Presentation and disclosure

1. Occurrence...

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