PCAOB 9: Audit Planning1

EFFECTIVE DATE AND APPLICABILITY

DEFINITIONS OF TERMS

Engagement Partner. The individual responsible for an audit engagement and its performance.

OBJECTIVES OF PCAOB STANDARD 9

Public Company Accounting Oversight Board (PCAOB) Auditing Standard 9 sets the objective of planning an audit so that it is conducted effectively.

FUNDAMENTAL REQUIREMENTS

Responsibility of the Engagement Partner

The audit partner is responsible for planning the audit. He or she may seek assistance from team members to fulfill this responsibility. Those individuals assisting the engagement partner with audit planning should also comply with those requirements of this standard pertaining to them.

Planning an Audit

The auditor should properly plan the audit. This includes establishing the overall audit strategy and developing an audit plan. The plan should include risk assessment procedures and planned responses to the risks of material misstatement. This is not a discrete phase of the audit, but rather a continual and iterative process. It may begin with the completion of the previous audit and continue through the current audit.

Preliminary Engagement Activities

The auditor should perform the following activities at the beginning of an audit:

• Perform procedures related to the continuance of the client relationship and the specific audit engagement.
• Ascertain compliance with independence and ethics requirements.

• Establish an understanding with the client regarding the services to be performed.

Planning Activities

The nature and extent of planning activities needed will depend on the size and complexity of the company, as well as the auditor’s previous experience with the entity and any changes in circumstances occurring during the audit. When developing the audit strategy and plan, the auditor should evaluate whether the following issues impact the company’s financial statements and internal control over financial reporting; if so, the auditor should determine how they will affect audit procedures. The issues are:

• Knowledge of the company’s internal control over financial reporting obtained during other engagements.
• Industry issues, such as financial reporting practices, economic conditions, laws and regulations, and technological changes.
• Matters relating the company’s business, such as its organization, operating characteristics, and capital structure.
• Recent changes in the company, its operations, or its internal control over financial reporting.
• Preliminary judgments about materiality, risk, and (in integrated audits) other factors relating to the determination of material weaknesses.
• Control deficiencies previously communicated either to the audit committee or management.
• Legal or regulatory matters of which the company has knowledge.
• The type and extent of evidence about the effectiveness of the company’s internal control over financial reporting.
• Preliminary judgments about the effectiveness of internal control over financial reporting.
• Publicly available information about the company that is relevant to the likelihood of material financial misstatements, as well as the effectiveness of its internal control over financial reporting.
• Knowledge of risks pertaining to the company that were evaluated as part of the client acceptance and retention evaluation.
• The complexity of the company’s operations.

Audit Strategy

The auditor should establish an audit strategy that sets the scope, timing, and direction of the audit, as well as guide the development of the audit plan. When creating the strategy, the auditor should take the following into account:

• Reporting objectives of the engagement and the nature of communications as required by PCAOB standards.
• Significant factors in directing the activities of the engagement team.
• Results of preliminary engagement activities, as well as the auditor’s evaluation of the planning activity issues noted earlier in this standard.
• Nature, timing, and extent of the resources needed to perform the engagement.

Audit Plan

The auditor should develop and document an audit plan that includes a description of the planned nature, timing, and extent of risk assessment procedures, as well as of the tests of controls and substantive procedures. The plan should also describe other audit procedures required so that the engagement conforms with PCAOB standards.

Multilocation Engagements

If the auditor is engaged in an audit of the financial statements of a company with operations in multiple locations or business units, he or she should ascertain the extent to which audit procedures should be performed at selected locations or business units in order to obtain sufficient appropriate evidence to obtain reasonable assurance as to whether the consolidated financial statements of the entity are free of material misstatement. This includes the determination of locations or business units at which to conduct audit procedures, as well as the timing, nature, and extent of the procedures to perform at those locations or business units.

The auditor should assess the risks of material misstatement to the consolidated financial statements that are associated with the location or business unit, and correlate the amount of audit attention assigned to the location or business unit with the degree of risk of material misstatement associated with it.

When assessing the risks of material misstatement associated with a particular location or business and related audit procedures, factors to consider include:

• The nature and amount of assets, liabilities, and transactions executed there, including significant transactions that are outside of the normal activities of the business, or that otherwise appear unusual in light of the auditor’s understanding of the company and its environment
• The materiality of the location or business unit
• The risks associated with the location or business unit that present a reasonable possibility of material misstatement of the company’s consolidated financial statements
• Whether these risks of material misstatement apply to other locations or business units such that, in combination, they present a reasonable possibility of material misstatement to the company’s consolidated financial statements
• The degree of centralization of records or information processing
• The effectiveness of the control environment, especially in view of management’s control over the exercise of authority delegated to others and its ability to effectively supervise activities at the location or business unit level
• The frequency, timing, and scope of monitoring activities by the company and others at the location or business unit

Changes During the Course of the Audit

The auditor should modify the overall audit strategy and the audit plan as needed if circumstances change significantly during the course of the audit; this modification may be triggered by changes due to a revised assessment of the risks of material misstatement or the discovery of a previously unidentified risk of material misstatement.

Persons with Specialized Skill or Knowledge

The auditor should ascertain whether specialized skill or knowledge is needed to perform the appropriate risk assessments, plan or perform audit procedures, or evaluate audit risks. If such a person participates in the audit, the auditor should have sufficient knowledge of the subject matter to be addressed by the specialist to enable the auditor to communicate the objectives of that person’s work, determine whether the specialist’s procedures meet the audit objectives, and evaluate the results of the specialist’s procedures as they relate to the timing, nature, and extent of other planned audit procedures and the effects on the auditor’s report.

Additional Considerations in Initial Audits

Before starting an initial audit, the auditor should perform procedures regarding the acceptance of the client relationship and the specific audit engagement, as well as communicate with the predecessor auditor in situations where there has been a change of auditors in accordance with AU 315, Communications Between Predecessor and Successor Auditors.

For an initial audit, the auditor should determine the additional planning activities needed to establish an appropriate audit strategy and audit plan. This should include determining the audit procedures needed to obtain sufficient appropriate audit evidence regarding opening balances.

1 Practitioners should reference the additional guidance listed in the section “Other PCAOB Guidance” in this volume’s chapter PCAOB 1.