What is the purpose of audit planning if the audit may not ultimately follow the carefully thought out plan? As may be inferred from Dwight D. Eisenhower's words--"Plans are worthless, but planning is everything"--the value of audit planning is not derived solely from the resulting audit plan. Often overlooked, the real benefit of audit planning is gained from the process itself. In painstakingly documenting endless client details, auditors achieve more than just compliance with professional standards--they also develop more efficient engagements and help reduce professional liability risk.
Consider the importance of planning in this claim scenario:
The senior on a CPA firm's largest audit engagement received a request from the client's CFO for a copy of "any communications the firm has sent relating to internal-control-related matters identified during the current- and prior-year audits and copies of internal control documentation completed by the firm." Operating under the assumption that the client was finally going to address its many pesky control deficiencies, the senior happily sent an email with the requested documents.
A short time later the firm received notification of a lawsuit from the client. The complaint asserted that the audit firm had failed to detect an embezzlement scheme perpetrated by the accounts payable clerk. It further indicated that the firm's failure to detect a breakdown in internal controls allowed for the payment of fictitious vendor invoices.
The firm's legal counsel hired an expert to review each year's engagement workpapers. One hopeful yet disturbing issue arose: The firm had informed the client of a significant deficiency in internal controls in its prior-year management letter. Had the deficiency been corrected, the embezzlement scheme likely would have been discovered. The disturbing point--the significant deficiency was not mentioned in current-year engagement planning documentation, neither in risk assessment nor in the design of planned audit procedures. It appeared as though the prior-year documentation had simply been copied to the current-year file with updated completion dates. No additional audit procedures addressed the issue, and the scheme continued for an additional six months beyond issuance of the current-year audit report.
As exemplified above, use of the "same as last year" (SALY) mentality can be a major pitfall in audit planning. SALY disregards the advantages of the planning thought...