The PwC Audit
A Continuous Improvement Approach
to Audit Methodology
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Agenda
• Governance of PwC Audit
• Overview of recent evolution of PwC Audit
• Overview key elements of PwC Audit
– Acceptance and Continuance
– Audit Comfort Cycle
– Substantive Procedures
– Other Audit Procedures
– Audit Committee Communications Plan
1
PricewaterhouseCoopers
PwC 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
PricewaterhouseCoopers
Towards Performance Audit:
a continuous improvement program
PwC
Audit
PwC
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
• MyClient
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
PricewaterhouseCoopers
Changing the Focus of the Audit Model
Key
Risk
Key
Risk
Business Risks
4
Key
Risk
Key
Risk
Key
Risk
Key
Risk
Audit Risks
Identified
PricewaterhouseCoopers
PwC Audit in 2004
• Acceptance and Continuance (FRISK)
• Audit Comfort Cycle
– Scoping
– Understanding
– Evaluating
– Validating
• Substantive Testing
• Other Audit Procedures
• Audit Committee Communications Plan
5
PricewaterhouseCoopers
PwC Audit Approach
Acceptance/Continuance Assessment
Audit
Comfort
Cycle
No / Limited
controls
comfort
Significant
controls
comfort
Other audit evidence
Mainly
tests of details
•
•
•
6
Mainly
substantive analytical
procedures
Other audit procedures
Financial statements
Completion
PricewaterhouseCoopers
PwC 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
•
•
•
7
Mainly
substantive analytical
procedures
Other audit procedures
Financial statements
Completion
Additional procedures deemed necessary
to provide independent assurance on
financial statements, taking into
consideration the internal controls
assessment.
Report on Financial Statements
PricewaterhouseCoopers
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
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PricewaterhouseCoopers
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
MyClient
Client File
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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
Audit
comfort
cycle
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
PricewaterhouseCoopers
Audit Comfort Cycle
ACCEPTANCE/CONTINUANCE ASSESSMENT
Market
Overview
• What does management
need to get comfort on?
Strategy
Value
Creating
Activities
Financial
Performance
Audit
comfort
cycle
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
PricewaterhouseCoopers
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
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PricewaterhouseCoopers
Scoping:
Business Analysis Framework
13
PricewaterhouseCoopers
Scoping:
Risk Assessment – Key Risks
Business
Risks
Key Risk
Key risks are those conditions or
factors within an audit that, in
We identify audit risk
the judgment
the auditor, give
through of
understanding
entity’srisk
business
rise tothe
a greater
of material
objectives
and related
financial
misstatement
or other
risks.
matters resulting in the issuance
of an inappropriate audit report.
Key Risk
Key Risk
Key Risk
Key Risk
Audit
Risks
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PricewaterhouseCoopers
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
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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.
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PricewaterhouseCoopers
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
Data Risk
Regulatory/
Compliance
Internal Audit
Security
Systems &
Technology
Fraud
Alignment
Treasury
Our best teams use our specialist capabilities to help in forming a point of view.
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PricewaterhouseCoopers
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
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PricewaterhouseCoopers
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
Audit
comfort
cycle
SIGNIFICANT
CONTROLS
COMFORT
NO/LIMITED
CONTROLS
COMFORT
SUBSTANTIVE AUDIT EVIDENCE
MAINLY SUBSTANTIVE
ANALYTICAL
PROCEDURES
MAINLY TESTS
OF DETAILS
OTHER AUDIT PROCEDURES
FINANCIAL STATEMENTS
COMPLETION
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PricewaterhouseCoopers
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
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PricewaterhouseCoopers
“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?”
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PricewaterhouseCoopers
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
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Audit Comfort Matrix
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Summary of Comfort
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PricewaterhouseCoopers
Substantive Audit Evidence
ACCEPTANCE/CONTINUANCE ASSESSMENT
Market
Overview
Strategy
Value
Creating
Activities
Financial
Performance
Audit
comfort
cycle
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
PricewaterhouseCoopers
Achieving the Right Balance
No/Limited Controls Comfort
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Significant Controls Comfort
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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
Perform tests of
details.
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No
No further testing
required.
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Other Audit Procedures
ACCEPTANCE/CONTINUANCE ASSESSMENT
Market
Overview
Strategy
Value
Creating
Activities
Financial
Performance
Audit
comfort
cycle
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
PricewaterhouseCoopers
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
PricewaterhouseCoopers
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
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PricewaterhouseCoopers
Audit Committee Communications Plan
Getting started
Understanding the audit
Staying informed
Resolution and completion
[Indicate timing]
[Indicate timing]
[Indicate timing]
[Indicate timing]
Our audit plan
Service
approach
PwC principles
and practices
Communications
plan
Engagement
letter and
independence
confirmation
– Reporting timetable
– Business unit
scope
– Engagement team
– Other deliverables
Risk analysis
Risk and
control
Financial
reporting
Risk condition
alert
Quarterly
review
Transparency
of corporate
reporting
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
Best
practices in
corporate
reporting
– Internal control
deficiencies
– Accounting
policies
– Management
judgments
Audit
opinion
– Quality of
earnings
– Independence
Governance
– Transparency
Corporate
governance:
roles and
practices
Assessing
our
performance
and yours
Ongoing assessment of needs & expectations
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The PwC 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
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