Audit Planning: Understanding the Client Business & Industry. Auditing Course. CPA Exam

In this video, I discuss as part of audit planning is understanding the client business and industry.

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0:00 Introduction

This video by Farhat Lectures is about understanding the client's business and industry in the audit planning phase. Here's a quick summary:

Understanding the Client and Industry (0:00-1:14): It's crucial to understand the client's business and industry for proper auditing and risk assessment.
Five Steps to Understanding (1:15-1:59):
Industry and external environment
Business operations and processes
Management and governance
Business strategy
Measurement and performance
Industry and External Environment (2:52-5:25): Understanding the industry helps identify risks and unique accounting requirements.
Business Operations and Processes (5:26-8:08): Auditors should understand revenue sources, visit operations, and discuss with staff.
Management and Governance (10:16-14:12): It's important to evaluate management's philosophy, operating style, and governance, including their code of ethics and board meeting minutes.
Client Strategy and Business Risk (14:16-14:59): Auditors need to understand the client's strategies and objectives to assess business risks and potential misstatements.
Measurement and Performance (15:00-17:55): Understanding how a client measures performance through KPIs can reveal inherent risks.
Multiple Choice Question (17:56-19:57): Walks through a multiple choice question related to the initial audit planning phase.




A clear understanding of the terms of the engagement should exist between the client and the CPA firm. Auditing standards require that auditors obtain an understanding with the client in an engagement letter, including the engagement’s objectives, the responsibilities of the auditor and management, identification of the financial reporting framework used by management, reference to the expected form and content of the audit report, and the engagement’s limitations. For public companies, the audit committee is responsible for hiring the auditor as required by the Sarbanes–Oxley Act. The engagement letter is typically signed by management for private companies.
The engagement letter may also include an agreement to provide other services such as tax returns or management consulting allowed under the Code of Professional Conduct and regulatory requirements. It should also state any restrictions to be imposed on the auditor’s work, deadlines for completing the audit, assistance to be provided by the client’s personnel in obtaining records and documents, and schedules to be prepared for the auditor. It often includes an agreement on fees. The engagement letter also serves the purpose of informing the client that the auditor cannot guarantee that all acts of fraud will be discovered.

Engagement letter information is important in planning the audit principally because it affects the timing of the tests and the total amount of time the audit and other services will take. For example, if the deadline for submitting the audit report is soon after the balance sheet date, a significant portion of the audit must be done before the end of the year. If unexpected circumstances arise or if client assistance is not available, arrangements must be made to extend the amount of time for the engagement. Client-imposed restrictions on the audit can affect the procedures performed and possibly even the type of audit opinion issued.

Develop Overall Audit Strategy

After understanding the client’s reasons for the audit, the auditor should develop and document a preliminary audit strategy that sets the scope, timing, and direction of the audit and that guides the development of the audit plan. This strategy considers the nature of the client’s business and industry, including areas where there is greater risk of significant misstatements. The auditor also considers other factors such as the number of client locations and the past effectiveness of client controls in developing a preliminary approach to the audit. The planned strategy helps the auditor determine the resources required for the engagement, including engagement staffing.

Select Staff for Engagement
The auditor must assign the appropriate staff to the engagement to comply with auditing standards and to promote audit efficiency. One of the underlying principles in auditing standards is that:



Staff must therefore be assigned with that requirement in mind, and those assigned to the engagement must be knowledgeable about the client’s industry. Larger audit engagements are likely to require one or more partners and staff at several experience levels. Individuals in multiple offices of the firm may be involved, including offices outside the United States, if the client has operations in numerous locations around the world. Specialists in such technical areas as statistical sampling, business valuation, and information technology risk assessment may also be assigned.