The Pw C Audit A Continuous Improvement Approach

The Pw. C Audit A Continuous Improvement Approach to Audit Methodology pwc

Agenda • Governance of Pw. C Audit • Overview of recent evolution of Pw. C Audit • Overview key elements of Pw. C Audit – Acceptance and Continuance – Audit Comfort Cycle – Substantive Procedures – Other Audit Procedures – Audit Committee Communications Plan 1 Pricewaterhouse. Coopers

Pw. C Audit Governance Global Audit Policy Board Global R&Q Establish global overarching policy principles & goals and ratify policy statements. Ensure methodology is consistently implemented by providing feedback on practice issues. Global Audit Methodology Steering Group Drive execution of policy in practice through processes, tools, guidance, training content, etc. Implementation Partner Network 2 Pricewaterhouse. Coopers

Towards Performance Audit: a continuous improvement program Pw. C Audit 2003: 2002: 2001: • Audit Comfort Cycle • Management controls focus • Business analysis framework • Enhanced audit guides/ practices • Show me and Taking stock • Scaling up different client situations • Team redeployment • My. Client integration Historical Financial Statements Opinion 3 • Converged approach, enhanced testing guidance • Enhanced client communications, transparency focus • Application to small companies/ MNCs • Better use of specialists and knowledge sources Time Changes in Deliverables Pricewaterhouse. Coopers

Changing the Focus of the Audit Model Key Risk Business Risks 4 Key Risk Audit Risks Identified Pricewaterhouse. Coopers

Pw. C Audit in 2004 • Acceptance and Continuance (FRISK) • Audit Comfort Cycle – Scoping – Understanding – Evaluating – Validating • Substantive Testing • Other Audit Procedures • Audit Committee Communications Plan 5 Pricewaterhouse. Coopers

Pw. C Audit Approach Acceptance/Continuance Assessment Audit Comfort Cycle No / Limited controls comfort Significant controls comfort Other audit evidence Mainly tests of details Mainly substantive analytical procedures • Other audit procedures • Financial statements • Completion 6 Pricewaterhouse. Coopers

Pw. C Audit Approach – With Attestation Acceptance/Continuance Assessment Broader and deeper assessment of COSO controls over financial reporting, including management’s evaluation of those controls. e. g. , estimates, fraud, tax accrual, more locations. Audit Comfort Cycle No / Limited controls comfort Report on management’s assertions on internal controls over financial reporting Significant controls comfort Other audit evidence Mainly tests of details Mainly substantive analytical procedures • Other audit procedures • Financial statements • Completion 7 Additional procedures deemed necessary to provide independent assurance on financial statements, taking into consideration the internal controls assessment. Report on Financial Statements Pricewaterhouse. Coopers

Acceptance & Continuance Process • Governance and oversight of management • Past performance • Management’s expertise and skill • Adequacy of management resources • Audit relationship • Audit adjustments • Revenue recognition • Accounting control • Integrity and ethics • Management inclination for intentional misstatement in financial reporting • Reliability of estimates • Incentive for intentional misstatements in financial reporting • Risk of insolvency 8 Pricewaterhouse. Coopers

Acceptance & Continuance Process Risk Conditions (13) (defined within Acceptance & Continuance module) Engagement Leader and Team Manager apply professional judgment in describing specific Key Risks that relate to the broader Risk Conditions 1 Key Risks 2 Risk and Approach Schedule The Risk and Approach Schedule is populated by the Key Risks selected and completed by the Engagement Leader and Team Manager Audit Comfort 3 9 (user defined or selected from Master Data) Matrix My. Client File Pricewaterhouse. Coopers

Audit Comfort Cycle ACCEPTANCE/CONTINUANCE ASSESSMENT 4 Key Questions • What does management need to get comfort on? • How does management get comfort? • Are they entitled to that comfort? • Can we audit that comfort? Market Overview Strategy Value Creating Activities Financial Performance SIGNIFICANT CONTROLS COMFORT NO/LIMITED CONTROLS COMFORT SUBSTANTIVE AUDIT EVIDENCE MAINLY SUBSTANTIVE ANALYTICAL PROCEDURES MAINLY TESTS OF DETAILS OTHER AUDIT PROCEDURES FINANCIAL STATEMENTS COMPLETION 10 Pricewaterhouse. Coopers

Audit Comfort Cycle ACCEPTANCE/CONTINUANCE ASSESSMENT Market Overview • What does management need to get comfort on? Strategy Value Creating Activities Financial Performance SIGNIFICANT CONTROLS COMFORT NO/LIMITED CONTROLS COMFORT SUBSTANTIVE AUDIT EVIDENCE MAINLY SUBSTANTIVE ANALYTICAL PROCEDURES MAINLY TESTS OF DETAILS OTHER AUDIT PROCEDURES FINANCIAL STATEMENTS COMPLETION 11 Pricewaterhouse. Coopers

Scoping: Forming a Point of View • Perform company and industry analytical procedures • Research and analyze external communications • Partners connect with staff members • Document the team’s understanding of the business • Knowledge broker to capture and share industry information • Form a point of view on the risks that management should be concerned about 12 Pricewaterhouse. Coopers

Scoping: Business Analysis Framework 13 Pricewaterhouse. Coopers

Scoping: Risk Assessment – Key Risks Business Risks Key Risk Key risks are those conditions or factors within an audit that, in the We identify audit judgment of the auditor, give risk through understanding the to a greater risk of material entity’s business or other financial misstatement objectives and matters resulting related risks. in the issuance of an inappropriate audit report. Key Risk Audit Risks 14 Pricewaterhouse. Coopers

Scoping: Analytical Procedures • High Level – Understand the business – Identify areas of risk • Disaggregated Account Level – Determine the nature, timing & extent of testing • External benchmarking to peers, market trends – Looking for anomalies, areas of risk – Use of extensive knowledge management tools available 15 Pricewaterhouse. Coopers

Scoping Translated into Audit Strategy Business Objectives Risks Controls Stakeholders Alignment Where controls over significant account balances or classes of transaction are not aligned, we will need to perform substantive tests of details. 16 Pricewaterhouse. Coopers

Scoping: Audit Team of Specialists Computer-Assisted Audit Techniques Financial Business Risk Energy Trading Risk Enterprise-wide Risk Business Resilience Objectives Project Management Risks Business Process Controls Stakeholders Performance Improvement Security Data Risk Internal Audit Systems & Technology Alignment Fraud Regulatory/ Compliance Treasury Our best teams use our specialist capabilities to help in forming a point of view. 17 Pricewaterhouse. Coopers

Scoping: Use of Specialists • Policies for the use of Systems and Process Assurance specialists and Fraud Risk & Controls specialists are based around risk attributes • Policies are for consultation with specialists – level of involvement remains a decision of engagement leader • At a minimum, Required to consider use of specialists at mobilization stage 18 Pricewaterhouse. Coopers

Audit Comfort Cycle ACCEPTANCE/CONTINUANCE ASSESSMENT 4 Key Questions Market Overview • What does management need to get comfort on? • How does management get comfort? • Are they entitled to that comfort? • Can we audit that comfort? Strategy Value Creating Activities Financial Performance SIGNIFICANT CONTROLS COMFORT NO/LIMITED CONTROLS COMFORT SUBSTANTIVE AUDIT EVIDENCE MAINLY SUBSTANTIVE ANALYTICAL PROCEDURES MAINLY TESTS OF DETAILS OTHER AUDIT PROCEDURES FINANCIAL STATEMENTS COMPLETION 19 Pricewaterhouse. Coopers

Applying Audit Comfort Cycle from the Top-Down • Organize audit team to align with how management runs the business. Audit controls from the top down Board Sr Mgmt Department Heads Operations • Extend discussions about business objectives & risk to management controls. • Understand & evaluate how management controls risk. • Validate controls against engagement team’s point of view. Transaction Processing 20 Pricewaterhouse. Coopers

“Taking Stock”: Real-Time Linkage in the Iterative Process • Share team members’ cumulative knowledge • Update risk identification and assessment • Consider the audit comfort gained to date, by audit assertion • Answer: “Do we have enough comfort? ” • Answer: “What do we do next? ” 21 Pricewaterhouse. Coopers

Connecting the Dots … Business Objectives Business Risks related to achieving Objectives ·…… ·…… Business Process A · Completeness · Accuracy · Validity · Restricted Access Account Balances and Transactions Business Process B · Completeness · Accuracy · Validity · Restricted Access Account Balances and Transactions Business Process C · Completeness · Accuracy · Validity · Restricted Access Account Balances and Transactions Financial Statement Assertions/ Audit Objectives Classes of Transactions · Occurrence · Completeness · Accuracy · Cutoff · Classification Account Balances · Rights & Obligations · Existence · Completeness · Accuracy/Valuation Presentation & Disclosure · Occurrence/R&O · Completeness · Understandability · Accuracy/Valuation General Computer Controls 22 Pricewaterhouse. Coopers

Audit Comfort Matrix 23 Pricewaterhouse. Coopers

Summary of Comfort 24 Pricewaterhouse. Coopers

Substantive Audit Evidence ACCEPTANCE/CONTINUANCE ASSESSMENT Market Overview Strategy Value Creating Activities Financial Performance SIGNIFICANT CONTROLS COMFORT NO/LIMITED CONTROLS COMFORT SUBSTANTIVE AUDIT EVIDENCE MAINLY SUBSTANTIVE ANALYTICAL PROCEDURES MAINLY TESTS OF DETAILS OTHER AUDIT PROCEDURES FINANCIAL STATEMENTS COMPLETION 25 Pricewaterhouse. Coopers

Achieving the Right Balance No/Limited Controls Comfort 26 Significant Controls Comfort Pricewaterhouse. Coopers

Assurance Hierarchy Will we obtain audit assurance from tests of controls? Yes No Test controls. Can we obtain audit assurance from substantive analytical procedures? Yes No Perform substantive analytical procedures. Do we need additional audit assurance? Yes 27 Perform tests of details. No No further testing required. Pricewaterhouse. Coopers

Other Audit Procedures ACCEPTANCE/CONTINUANCE ASSESSMENT Market Overview Strategy Value Creating Activities Financial Performance SIGNIFICANT CONTROLS COMFORT NO/LIMITED CONTROLS COMFORT SUBSTANTIVE AUDIT EVIDENCE MAINLY SUBSTANTIVE ANALYTICAL PROCEDURES MAINLY TESTS OF DETAILS OTHER AUDIT PROCEDURES FINANCIAL STATEMENTS COMPLETION 28 Pricewaterhouse. Coopers

Other Audit Procedures: More Connecting the Dots • Link management information to financial statements • Review adjustments necessary to reconcile management information to the financial statements • Review non-standard journal entries and other adjustments to ascertain whether entries may be indicative of fraud based upon the risk of management override on controls • Perform ongoing analytical procedures, including updating analytical procedures related to revenue 29 Pricewaterhouse. Coopers

Audit Committee Communications Framework: Objectives • Promote effective and candid communications • Enhance timely reporting, dialogue and sharing views – Service approach – Risk and Control – Financial Reporting – Governance • Provide consistency in our deliverables through recommended templates and practice aids 30 Pricewaterhouse. Coopers

Audit Committee Communications Plan Getting started Understanding the audit Staying informed Resolution and completion [Indicate timing] Our audit plan Service approach Risk and control Financial reporting Pw. C principles and practices Communications plan Risk condition alert Quarterly review – Reporting timetable – Business unit scope Engagement letter and independence confirmation – Engagement team – Other deliverables Risk analysis Perspectives on fraud risk Internal control and business issues report Other regulatory requirements – plan Quarterly review Update on accounting/audit issues and risk analysis Reporting requirements Quarterly review – Internal control deficiencies – Accounting Transparency of corporate reporting Best practices in corporate reporting policies – Management Audit opinion judgments – Quality of earnings – Independence Governance – Transparency Corporate governance: roles and practices Assessing our performance and yours Ongoing assessment of needs & expectations 31 Pricewaterhouse. Coopers

The Pw. C Audit • Global approach adaptable to all clients • Designed for continuous improvement • Performance metrics will play a larger role in future audits • Audit quality is at the core of our long term business objectives. 32 Pricewaterhouse. Coopers

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