Chief Financial Officer (CFO) Influence on Audit Planning

7/30/2019 Chief Financial Officer (CFO) Influence on Audit Planning

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Chief Financial Officer (CFO)

Influence On Audit Planning

Prepare by:

ONG HUI LING AH090283KOH SO HA AH090116


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Introduction

Aims is to contribute with field-based empirical

research in the area of auditor-client interaction

Auditors have to make trade-offs between being close

to the clients and at the same time maintaining

enough distance


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Knechel (2007)

The increased use of audit tools such as internalcontrol evaluations and the performance ofanalytical tests require much interaction with client

personnel

Bamber& Iyer (2007)

The interaction with clients creates risks for reduceaudit quality and threats to auditor independence


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Purpose

1. To investigate the extent to which CFOs of listed

companies seek to influence audit planning

2. What issues CFOs seek to influence

3. How CFOs justify the seeking of influence


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Prior Research

Client Influence On Audit

Planning


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ISA 300

The purpose of Audit Planning

Help the auditor to obtain sufficient appropriate

evidence for the circumstances Help keep audit costs at a reasonable level

Helps avoid misunderstanding with the client


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ISA 315

The need for understanding the entity and its environment,which in turn requires much interaction in order to gainknowledge regarding business matters and internal controlsystems

It does not seem possible to perform a good audit withoutgetting rather close to the clients operation (business,organization, system)

Keeping distance to the auditee may increase the reliability ofthe audit evidence, but the information received from closer

interaction with the client may be considered more relevantwhen performing the audit.


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The role of clients in the auditing

context

Knechel (2007)

The increase reliance on systems controls and performancemeasurement as audit evidence tends to make the auditorsrelationship with management increasingly symbiotic

because of the close interaction needed


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The interaction between client representatives and

members of the audit team will take place at many

different levels.

The board of directors and the audit committee will

have direct contact with the auditors and mayinfluence the relationship between management and

auditor , Carrington & Johed (2007)


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Turley& Zaman (2007)

Audit Committee effectiveness - the need for distinguishingbetween routine and non-routine activities.

Routine activities- external auditors tended to rely onnegotiation and communication with management and the AChad limited impact on power relationships

External auditor presented the audit plan to the AC after ithad first been discussed with executive management and thediscussions at the AC did not normally lead to anyadjustments to the plan


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ISA 300

Planning an audit is a continual and iterative process wherethe nature of planning activities will vary according to thesize and complexity of the entity and any changes in

circumstances The auditor may decide to discuss elements of planning with

the entitys management to facilitate the conduct andmanagement of the audit engagement

Discussing about audit strategy or audit plan, care is requiredin order not to compromise the effectiveness of the audit


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McCracken et al . (2008)

Relationship between the CFO and the audit partner

The CFOs defined the roles and the relationships with theaudit partners in terms of proactive and reactive relationships

Proactive relationship: CFO might initiate consultations withthe audit partner before transactions were undertaken ordisclosures drafted


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Research Questions

1. To what extent do CFOs seek to influence audit

planning and how is this manifested during audit

planning meetings?

2. With regard to what issues do CFOs seek to

influence audit planning?

3. Howdo CFOs justify the seeking of influence overaudit planning?


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1) To what extent did CFOs seek to

influence audit planning and howwas this visible during audit

planning meetings?


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Data analysis shows 49 of the 52 clients seeking to

influence audit planning

Interviewee sought influence on audit

planning- Weak level

10


planning- Intermediate level

31


planning- Strong level

8


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the interviewees used cautious and passive

formulations towards their influence

the interviewees believed the auditors should have

different plan compared to the company

CFO try to enter the planning process at early stage,

before the internal audit department and Audit

Committee, which give him better position to seekinginfluence


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the interviewees took their own initiative to seek to

influence audit planning

CFOs used expressions like we plan shows that the

auditors did the planning together with the client


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CFOs emphasized the right to influence because thecompany paid for the audit and should get value for

the fee

CFOs believed they had the same goal and equal

position as the auditors regard to audit planning andtherefore should participate in the planning


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when interviewees considered auditors to be

providers of consultancy services

CFOs appeared to order things they demanded from

the audit, asking for audit by paying a high price and

expressing desires to change staff on the audit team

CFO seek to order what the auditors should do andview audit as tool for management control purposes

Strong level


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2) With regard to what issues doCFOs seek to influence audit

planning?


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Table below summarizes what issues

brought up by the interviewees

Category Frequency(%)

Internal control issues 85

Entities subject to audit 50

Financial accounting issues 33

Time schedules 17

Audit fees/time budgets 13

Management expenses 13

Audit teams 12

Management letters 8

Financial position/going concern 4


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Internal control issues

Many interviewees perceived auditing regulation required very

little regarding on audit of internal control, and therefore there

was more room for client demands

Though the standard open discussion with the client

concerning limitations and restrictions regarding audit strategy

and timing, the issues of interviewees right to influence

internal control threaten the auditors ability to not

compromise the effectiveness of audit


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Selection of entities subject to audit

Discussion at planning meeting could concern what

audit scope to apply to a certain entities, they present

an audit scope for different legal entities

Entities- countries, factories, project , depending on

what was relevant in a particular company

From an auditor view, scope of audit in legal entities

is key issue where one would expect little clientimpact


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3) How do CFOs justify the seeking of

influence over audit planning?

CFO perceived their relation with auditors as

customer-supplier relationship, which give them the

right to demand things from the auditor

belief that the CFO and the auditors shared a

common interest of examine the company in order to

discover inappropriateness


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Conclusion CFOs seek to influence audit planning

Because they benefit from audit work related to

internal control

Because they believe they have the right to influence,viewing themselves as customers who share a

common interest with the auditors in terms of

controlling subordinates in the company


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The available room for influence during planningmeeting was related to flexibility in the terms of

engagement given the opportunity for clients to

influence certain parts during the audit planning

meeting


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Chief Financial Officer (CFO) Influence on Audit Planning

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