Chapter Six – Preaudit Activities

Summary

This Chapter discusses the various preaudit activities that should be

completed by the audit team before commencing work on the current year
audit.

Introduction
6.01 Certain activities should be completed by the audit team before starting
the current year audit. These include the following:
 performing client acceptance procedures for initial audits
 performing client reacceptance procedures for continuing audits
 determining whether GTI member firms, the firm and the audit team
are independent
 obtaining an engagement letter to document the understanding
established with the client of the terms of the engagement
 completing EPF to determine whether a quality control reviewer will be
assigned to the audit team
 determining whether the firm can serve as the group auditor, when
applicable

6.02 These procedures are called preaudit activities. Preaudit activities impact
how the firm will approach the current year audit and in some cases may
impact whether the firm chooses to perform an audit. Accordingly, the
timing of preaudit activities will vary, but should always be performed
before significant other audit activities (e.g., risk assessment procedures)
are performed. For example, in most circumstances, it is often preferable
that reacceptance procedures be performed at the conclusion of the prior
year audit whereas other preaudit activities may be performed just prior to
beginning significant other audit activities for the current year audit.

6.03 Preaudit activities should not be confused with risk assessment

procedures. Preaudit activities are performed outside of the current year
audit. Yet information obtained in performing preaudit activities may affect
how the audit team assesses risks related to performing the audit. For
example, client acceptance procedures are performed to identify matters
associated with the engagement that may pose risks to the firm. The firm
carefully considers these risks and determines whether or not to accept
the risks and perform the engagement. Some of these risks may have
little, if any, affect on the audit itself, such as risks related to reputation
and collection of fees. In other words, audit risk may be assessed as low
even when engagement acceptance risk was assessed as high.

6.04 As previously mentioned, certain information obtained in performing

preaudit activities may affect how the audit team assesses risks related to
performing the audit. While not performed for the purpose of assessing
 audit risk, information learned in performing preaudit activities with audit
implications should be carried forward and addressed when performing
risk assessment procedures related to the audit. For example, while
performing client acceptance procedures, the audit team learns that the
predecessor auditor communicated internal control deficiencies related to
the financial reporting process. In this circumstance, the audit team should
consider this when performing risk assessment procedures for the current
year audit.

6.05 Many preaudit activities can be performed by the audit team and others in
the firm without the direct involvement of client personnel, especially for
continuing engagements. However, the audit team may need to conduct
preliminary discussions with client personnel to effectively perform certain
other preaudit procedures. These discussions may include:
 matters impacting independence and client continuance
 establishing an understanding of the terms of the engagement,
including fees
 establishing the tentative timetable
 maximizing use of client personnel
While assessments of independence, ethics and management integrity are
done at the beginning of the audit, these should also be re-evaluated
throughout the audit as circumstances change.

Client Acceptance and Reacceptance

6.06 The firm establishes policies and procedures for accepting new audit
clients and continuing relationships with existing audit clients
(reacceptance). These policies and procedures are a key element of the
firm’s quality control systems. Accordingly, client acceptance policies and
procedures attempt to identify and reject prospective clients of dubious
reputation or who present engagements that are likely to involve the firm
in litigation or government investigations, or will not bring a proper reward
in light of the risks involved. Client reacceptance policies and procedures
aim to identify and reject existing clients with similar characteristics.

6.07 Chapter 3 discusses these policies and procedures.

Ethics and Independence

6.08 The firm is committed to complying with the applicable codes of
professional ethics, especially independence. Accordingly, the audit team
must evaluate whether the firm, each audit team member and other
auditors who participate in the audit (including GTI member firms and their
personnel) maintain independence in fact and appearance.

6.09 Firm policies and procedures regarding ethics and independence are
discussed in the firm’s Independence Manual. The Independence Manual
can be accessed in GEL.
 Engagement Letters
6.10 The audit team should obtain a written engagement letter for every audit.
An engagement letter formalizes the understanding with the client
regarding the services the firm is to provide and describes the nature of
the work to be performed. The letter also deals with various professional,
legal and other business considerations.

6.11 For recurring audit engagements, professional standards require the audit
team to consider whether circumstances require the terms of the
engagement to be revised and whether there is a need to remind the client
of existing terms of the engagement. In the current environment where
firm policies, legal interpretations, and professional standards continuously
change and evolve, a continuing engagement letter, even with addendums
and supplements, cannot adequately protect the firm against the risk of
non-compliance with policies and provide the legal protections that the
firm believes are prudent. Accordingly, the firm requires a new
engagement letter every year and precludes the use of continuing
engagement letters for all assurance services.

6.12 Because of their professional and legal implications, engagement letters

are formal in nature. The negative impression such formality may convey
to a client may be mitigated by either delivering the letter to the client
personally or including a more personal transmittal letter with the
engagement letter. However, professionals should be careful that they do
not leave the impression in the discussion or use wording in the transmittal
that could be construed as a modification or alteration of the engagement
terms in any way.

6.13 Engagement letters should be included in the current year workpapers.

The actual engagement letter should be maintained in the paper file and
an electronic version in the Voyager file.

Government Engagement Contracts

6.14 Engagements to audit various governmental organizations or agencies

may require use of various "audit contracts" instead of the firm's illustrative
engagement letter. Such contracts are frequently incomprehensible or
onerous and do not usually contain the descriptive or protective language
that is included in the firm's engagement letters. Additionally, Government
Auditing Standards require the audit team to make certain
communications to the auditee during the planning stage. Generally, these
communications should be included in the engagement letter. Accordingly,
the firm will usually insist upon certain modifications before signing such
contracts and consultation with the OMP and the firm’s legal counsel is
required. When making such consultations:
 the OMP should be contacted before the matter is referred to the firm’s
legal counsel
 the entire proposed contract should be submitted
 considerable time is usually needed to redraft or assist the office in
renegotiating the contract therefore allow sufficient time
 Other Services

6.15 Non-audit services directly related to an audit (assistance in drafting

financial statements, preparing reconciliations, preparing tax accruals,
etc.) or other attestation engagements directly related to the audit
(supplementary reports) should be included in the engagement letter
covering the audit or other attest services. The acknowledgement of the
services to be provided and management’s responsibilities related to
these services should also be documented in the audit engagement letter.

6.16 Services unrelated to the audit should be documented in a separate

engagement letter. These services may include:
 tax compliance
 internal audit outsourcing
 other bookkeeping services
 forensic services
 other outsourcing arrangements

6.17 In each situation where the audit team intends to perform non-audit
services, they must comply with the applicable independence rules (for
example, not performing management functions or making management
decisions; determining whether management can evaluate the adequacy
of the services; and management accepting responsibility for the results,
etc.).

Drafting Engagement Letters

6.18 The audit team should draft the engagement letter using the most current
illustrative letter, which is located in GEL under Grant Thornton Letters
and Forms > Audit Engagement Letters. The audit team should never draft
the engagement letter by tailoring the prior year letter or using an
engagement letter issued for another client. The firm believes this will
prevent unintended omissions from letters and thereby reduce the chance
of inappropriate tailoring.

6.19 Modifications to the wording in the illustrative letters should only be made
to describe specific terms of a particular engagement and paragraphs that
are clearly not applicable should be omitted. Unless otherwise specifically
noted, all paragraphs are required. If a client proposes eliminating or
modifying required verbiage, the audit team should consult with the PSP
and the RPPS, as appropriate.

6.20 When drafting engagement letters for assurance services not specifically
addressed by the firm’s existing engagement letters in GEL, preparers
should refer to the most closely related illustrative letters (SEC, non-SEC,
governmental) for permitted and prohibited language. These letters will
provide guidance on language prohibited by independence rules and legal
protections for the firm, such as limitation of liability, indemnification
prohibitions and performance standards clauses.
 Additional Guidance for Engagement Letters

Address and Salutation

6.21 The engagement letter is addressed to (and signed by) the owner or an
officer or director of the entity, preferably the chief executive officer. For
listed entity audit clients, the audit committee is directly responsible for
appointment, compensation and oversight. Therefore, the engagement
letter should be addressed to and signed by the chair of the audit
committee, or the chair of the board of directors, where no audit
committee exists.

6.22 There should be no question as to the official's authority to engage the

firm for this purpose. It is preferable that the letter be addressed to (and
signed by) an individual so that the acknowledgment will be by the person
designated instead of the entity name. Where the letter is addressed to
someone who is not in senior management, such as the chair of the Board
of Directors, an officer or member of senior management, such as the
CEO, COO, President or CFO, should ordinarily sign the letter to
acknowledge the terms and conditions of the engagement.

6.23 The introductory paragraph should cordially set forth the primary purpose
of the letter. For example, either of these types of wording options may be
used:

The purpose of this letter is to set forth the terms of our engagement.

Thank you for meeting with us to discuss the requirements of our

forthcoming engagement.

Names of All Entities Included

6.24 The firm prefers that the names of all companies or other entities be
identified instead of being referred to inclusively as in "... and
subsidiaries." If one or more subsidiaries are to be audited by another firm,
this fact should be stated as a part of our understanding. Where there are
numerous entities, it is preferable to list them. Some examples are:

Single Entity

Grant Thornton LLP (“Grant Thornton”) will audit the balance sheet of
Brown Equipment Co., Inc. …

Consolidated Statements

Grant Thornton LLP (“Grant Thornton”) will audit the consolidated

balance sheet of Brown Equipment Co., Inc., and its subsidiaries,
Black Warehouse Co., Inc., and Green Machinery Corporation...
 Large Number of Subsidiaries

Grant Thornton LLP (“Grant Thornton”) will audit the consolidated

balance sheet of Brown Equipment Co., Inc., and its subsidiaries:

 Black Warehouse Co., Inc.

 Green Machinery Corporation
 Blue Gadgets, Inc., and
 Red Valve Company

In some cases it may be desirable to refer to an attached list of the entities

to be audited.

Omitted Subsidiary
Same as the consolidated statement for a large number of subsidiaries,
with the following added:

The separate financial statements of Red Valve Company, included

in the consolidated financial statements, will be audited by other
certified public accountants.

In such situations, the audit team should discuss the procedures they may
employ with respect to the other auditor's work and its possible effects on
the report with the client and should also include language in the
engagement letter covering such procedures.

Identification of the Statements to be Audited

All statements to be included in the audit are referred to in the first
paragraph, rather than being referred to inclusively as "... financial
statements..." The identification should be consistent with the captions
expected to be used on the statements themselves.

Change in Services

6.25 When the nature of services is significantly modified from the previous
year's engagement letter, it is suggested that this be clearly spelled out,
particularly where it will result in a substantially higher fee. Some of the
changes in scope that might be referred to include:
 inclusion of certain subsidiaries audited by another firm the preceding
year
 change from unaudited statements to the expression of an opinion
Reference to the latter change might read:

The foregoing understanding represents a change from our

engagement of the preceding year, which called for our preparation
of compiled financial statements.

This does not refer to limitations of scope imposed after an audit has
started or to a change to unaudited financial statements when an audit
was conducted in the preceding year.
 Fees and Billing Arrangements

6.26 All engagement letters should contain language relating to fees and billing
arrangements. When establishing fees with clients, the following should be
considered:
 Fee arrangements should be made prior to the work commencing. The
engagement letter, reviewed with the client, is the means to assure
that such arrangements were made.
 Fixed fee arrangements are generally to be avoided.
 Due to the many uncertainties involved in SEC registrations and
related types of engagements, it is difficult, if not impossible, to
accurately estimate the time charges. Because of possible implications
that work is limited based on fee limitations, the firm prefers non-fixed
fees for registration engagements, except in certain rare situations
when it is necessary to furnish an estimate. The fee quoted, in such
case, should be restricted to an estimate for fieldwork plus hourly rates
for conferences with underwriters, attorneys, and the SEC, and for any
additional, resulting work. An all-inclusive quotation normally should
not be furnished, except in unusual circumstances. In such cases, a
statement indicating that the quotation should not be considered a
maximum fee should be included in the engagement letter.
 Care should be exercised in providing estimated fee quotations. When
such estimates are provided, the firm's policies with respect to billing,
collections and retainer requests should be followed.
 If a fee or rate quotation is provided, it should avoid comparison with
the prior year. For example, the letter should not state: "The annual
fee for services will be increased from __________ to __________."
 Retainer considerations for new clients, clients who have
demonstrated poor payment performance in the past, and other
situations where collection may be deemed problematic. The
engagement partner may need to consult with the OMP to determine
engagement situations requiring a retainer.
 The firm will not enter into deferred fee arrangements for engagements
where the firm needs to maintain its independence. Other deferred fee
arrangements should be avoided. In instances where a registration
statement is being filed, such an arrangement could impair
independence because the outcome of the offering is dependent upon
the success of the registration statement and subsequent underwriting.

Standard Fee Clauses

6.27 The firm’s standard fee clauses and supplemental schedules are included
in the illustrative engagement letters in GEL under Grant Thornton Letters
and Forms.

Fee Estimate Including Hourly Rates

6.28 Individuals' hourly rates should generally not be spelled out. However,
where a client insists, or where the proposal was based on hourly rates,
the following may be used:
 This engagement will be undertaken based upon our (per diem or
hourly - as appropriate) rates for this type of work, which are as
follows, depending upon the individuals involved:
Partners from $XXX to $XXX
Managers from $XXX to $XXX
Senior associates from $XXX to $XXX
Associates from $XXX to $XXX
Typists and other
administrative personnel from $XXX to $XXX

Fee Clause - Engagement Planning Data

6.29 When the optional Engagement Planning Data (see the Appendices for
Enhanced Fee Realization) is used, it should usually be referred to in the
engagement letter in a manner such as:

Our estimated fee takes into account pertinent information you (or your
personnel) have given us concerning your records and audit facilitation
materials to be provided by your personnel, which has been summarized
(or if to be completed later: you have agreed to summarize) on our
Engagement Planning Data Form.

When the optional Engagement Planning Data is attached to the

engagement, the fee paragraph of the letter should include language like
either of the following examples:

Our estimated fee takes into account the Engagement Planning Data
attached (or: reflected in Attachment X to this letter).

Our fee for this engagement, which takes into account the
Engagement Planning Data attached, is estimated to approximate
$XX,000.

Engagement-Related Expenses

6.30 One effective way of improving realization of fees is to verify that ALL
expenses relating to an engagement (both direct and indirect) are billed to
our clients in a timely and consistent manner. This includes billing for
administrative charges. Annually, the firm provides policies for billing and
collections and also updates fee language for engagement letters.
Revisions to engagement letter language are updated in the firm’s
illustrative letters.

Optional Recovery for Discounted Fees Upon Termination of

Services
6.31 At the beginning of a client relationship, the audit team should inform a
client in situations where the firm is providing services at a significant
discount from standard rates in anticipation of a long-term continuing
 relationship. Although most clients honor that commitment, a long-term
relationship with certain clients does not happen. A change in auditors
may arise in connection with an event, such as an initial public offering,
debt issuance, or the sale of the company, change in control, or other
reasons.

6.32 In these instances, the basis for the discount (i.e., the anticipation of a
long term relationship) has not been realized. Had the firm known that the
basis for the discount would not be realized, it likely would not have
agreed to provide the services at discounted fees. Accordingly, the only
way for to be fairly compensated is by charging the client a termination
fee, which represents the recouping of the discounted fees. In certain
situations, the partner should annually advise clients in the engagement
letter that the firm will recover our discounted fees if our services are
terminated. This termination fee would be in addition to any fees for future
services that might be necessary. Care needs to be taken to avoid any
implication that the discounted fees are either an unpaid or a contingent
fee, which in some cases would create independence impairment or
violate state regulatory requirements. Recovering discounted fees upon
termination can be best accomplished by adding language in the
engagement letter. The firm’s illustrative letters contain the appropriate
language. (The number of years to include such a clause is at the
discretion of the partner, but ordinarily such a fee would not be charged
after the fifth year of the relationship.)

Adoption of New Standards

6.33 Because of the complexities of adopting new standards, it may not be
possible to establish a definitive fee for the procedures that will be
required as a result of the implementation of these standards. The firm’s
illustrative engagement letters contain language that should be used,
regardless of whether the client has approved additional fees related to
the adoption of new standards.

Additional Clauses

6.34 Additional clauses should be considered in situations where there is a

perceived need for additional protection. In such situations, the RPPS
should be consulted and may include:
 disputes between members of management or ownership that has
resulted or may result in litigation. The firm frequently becomes
entangled in such situations even when not a named target.
 when the client is undergoing or is likely to undergo a regulatory
agency investigation, or other intensive scrutiny

6.35 In the non-SEC illustrative engagement letters, the firm includes additional
protections, such as limitation of liability and indemnification clauses
(labeled “Standards of Performance”). These legal protections are only
included when they are not prohibited by the applicable independence
rules or other rules and regulations. It is imperative for the engagement
 team to carefully follow the instructions in the illustrative engagement
letters so that independence is not impaired by use of these provisions.

Employee Solicitation Clause

6.36 The firm expends a great deal of time and effort in ensuring that it has top
quality and highly trained professionals to appropriately service its clients.
Likewise, the firm’s clients make similar investments in their employees.
The firm’s investment is in anticipation of its professionals’ long-term
continuing employment. When a professional leaves the firm for another
opportunity, this investment is substantially lost. In many cases, the
professional leaves to join the staff of a client; and the client may not
realize the significant costs the firm has in recruiting and training new staff,
scheduling demands on remaining staff, and lost opportunities to accept
new assignments. In some instances, the firm has been successful in
recouping a portion of these costs when an understanding with a client
that a fee will be charged if the client solicits or hires any firm professional
participating in the client’s engagement without our express written
consent. In establishing such an understanding, the firm should avoid any
implication that the fee is either an unpaid fee or a contingent fee, which in
certain circumstances, could create an independence impairment or
violate state regulatory requirements.

6.37 Due to the changes in independence rules for SEC registrants when a
member of the audit team is lost, the firm not only incurs significant
expenses in hiring and training replacements, but their employment by the
client also raises serious independence issues. If it is determined that
Grant Thornton is not independent because of a client’s employment of an
audit team member, the firm would not be able to complete the audit,
perform any interim reviews, or update the firm’s reports for any
subsequent events or other matters for any registrations within the
mandated, one-year “cooling-off” period or for any period for which the
firm is not independent.

6.38 Because of this, the firm requires the use of an employment solicitation
clause for all SEC audit engagements and other engagements where the
firm is also the auditor of record under the SEC’s independence rules.
This puts the client “on notice” regarding the ramifications of hiring an
audit team member and also protects the firm from any financial losses
incurred as a result of their hiring decision. Therefore, unless prohibited by
statute or by court rulings, SEC engagement letters should contain this
clause. For all other engagement letters, use of this clause is optional.

Electronic Transmittals

6.39 The firm’s Technology Usage and Information Security Policy stresses
that confidential information must only be transmitted in a secure manner,
like the firm’s secure file transfer utility. Emails are viewed as the legal
equivalent of post cards, sent without the expectation of privacy inherent
in the regular mail, an overnight courier or even a fax. Although
technology is changing rapidly, the law on this subject still suggests that
 neither sender nor recipient can have an expectation of privacy in
information sent by email over the Internet. The firm’s external email is
transmitted over the Internet, which is not a secure system under the
firm’s control. Therefore, in addition to taking care whether to transmit
information or documents over the Internet, the Technology Usage and
Information Security Policy discourages transmission of confidential client
documents or information by email over the Internet.

6.40 At a client’s written request, professionals use email to transmit client

financial statements, confidential documents, or information to clients and
to others outside the firm, such as valuation specialists (e.g. Harvest
Investments), legal counsel, etc. The firm’s Technology Usage and
Information Security Policy’s intent is not to preclude these email
transmissions, but to obtain the client’s consent to govern the entire
engagement rather than every time information is about to be sent.
Accordingly, the engagement team obtains the client’s consent, including
such authorization in engagement letters. If a client will not agree to the
inclusion of this clause in the engagement letter, audit teams may not
transmit any financial information to the client, or to others, including
Harvest Investments, through the Internet.

Dispute Resolution Clause

6.41 The firm requires a dispute resolution clause in all engagement letters,
unless the OMP, in consultation with the firm’s legal counsel specifically
approves its omission (or modification). There are two options for this
clause that depend on whether a GTI member firm is assisting us with the
engagement.

6.42 The current business climate and the costly and often unfair litigation
system has led the firm to reevaluate how it deals with potential claims
against it by clients and how much risk the firm is willing to assume to a
client, to a bankruptcy trustee or other entity which might stand in the
shoes of a client and pursue a claim against the firm.

6.43 One way to lessen the firm’s risk is through the use of an alternative
dispute resolution (“ADR”) provision in the firm’s engagement letters,
specifically binding arbitration. Many of the lawsuits against the firm were
made by clients blaming their own poor decision making on the firm or by
a representative of the former client, such as the FDIC or a bankruptcy
trustee seeking recovery of all losses to the failed client. The engagement
letter provisions for arbitration can go a long way to leveling the playing
field in this type of litigation.

6.44 The following are points which support the firm’s use of the arbitration
provision:
 The provisions used by the firm do not impair independence. Each
illustrative engagement letter includes an acceptable provision, in
consideration of applicable independence and other rules and
regulations.
 ADR allows the firm to privately resolve any disputes with its clients or
any entity standing in the shoes of a client, such as a trustee or the
 FDIC. This will alleviate negative publicity associated with a complaint
being filed. In addition, when the provision precludes an arbitrator from
awarding punitive damage awards (discussed below), it can also stop
some of the more outrageous claims for damages.
 ADR has the potential to speed up the time to resolve disputes with our
clients allowing the firm to focus again on its business rather than
focusing energy and resources on litigation. It requires less
involvement in the dispute process for engagement personnel.
 The provision, when managed correctly, can reduce the cost of dispute
resolution, allowing resources to be allocated to other practice areas.
 ADR allows clients a chance to air emotional issues and to talk through
issues which can be a stumbling block in traditional litigation.
 When permitted by independence and other rules and regulations, the
provision precludes an arbitrator from awarding punitive damage
awards, which can be larger than actual damages. Punitive damage
awards are not appropriate in what are essentially professional
negligence cases, but are often used to threaten defendants into
settling unreasonable cases.

6.45 The ADR provision benefits clients in the following ways:

 Arbitration can be tailored to recognize the type of dispute by providing
arbitrators with knowledge of the industry and accounting standards.
 ADR provides an opportunity to discuss the issues in a setting
intended to resolve an issue quickly and to the best advantage of both
parties if possible, ensuring that business and accounting aspects are
fully discussed.
 With arbitration, decision makers can meet in a controlled environment
to express their views and better understand potential solutions
including those solutions which could not normally be ordered by a
court.
 There is a better opportunity for both sides to obtain satisfactory
business solutions and to maintaining business relationships by using
a dedicated arbitrator who can spend the necessary time and effort to
resolve matters rather than just the issues presented to the court.
 ADR, when managed correctly, can reduce the cost of dispute
resolution, including attorneys’ fees, for both the firm and its clients.
This can keep the decision making on a dispute in the hands of the
client and not the clients’ attorneys in a court proceeding.
 Discovery is limited by agreement. Relevant information can be
produced by both sides but can avoid time wasting, full blown, costly
discovery into irrelevant information.
 Opinions of arbitrators are not public record and unwanted publicity
can be avoided while at the same time arbitrators opinions are
recognized as legally binding. Any confidential business information
can be kept out of the public record.
 Arbitration resolves disputes more quickly through the ability to control
the dispute process thereby minimizing the amount of management
attention required to resolve the disputes (also, it is scheduled at the
parties’ convenience).
 Signature

6.46 An assurance partner must sign all assurance engagement letters.

Ordinarily, the signing partner normally should be the engagement
partner. If the engagement partner is unavailable, the engagement letter
may be signed by the local OMP.

Engagement Profile Factor (EPF)

6.47 The cornerstone of the firm’s quality control review policies is the EPF
determination. EPF evaluates risks along two continuums: the
engagement continuum and the engagement team continuum. A quality
control reviewer is added to the audit team only on those engagements
whose risk profile is such that additional resources are needed to manage
the risks inherent in the engagement or the skills of the audit team.

6.48 The engagement partner is responsible for initially selecting the

appropriate EPF. The PSP should approve the selection and where
necessary, assign a quality control reviewer. The effectiveness of the
firm’s quality control review policies relies upon properly evaluating the
risks of the engagement and the skills of the audit team.

6.49 EPF is a preaudit activity, but is somewhat flexible in when it can be

performed. It can be done at the completion of the prior year engagement,
if the audit team is known, or anytime during the year prior to the start of
the current year audit. In all cases, however, it should be completed prior
to beginning significant audit work on the current year engagement to
enable the quality control reviewer, if assigned, to perform his or her
responsibilities.

6.50 Chapter 19 discusses EPF in more detail.

Group Audits
6.51 For audits of consolidated groups, the determination of who can serve as
the group auditor is a matter of judgment. Professional standards allow
latitude in determining who can serve as the group auditor, but provide
considerations that include:
 the materiality of the portion of the group financial statements audited
by the firm in comparison with that audited by other auditors
 the importance of components audited by the firm in relation to the
total entity
 the extent of knowledge of the overall financial statements

6.52 The firm’s policies and procedures for working with other auditors are
included in Chapter 24. Most of the procedures related to working with
other auditors are performed during the course of the audit, but the
determination of who the group auditor is must be done during preaudit
activities.
 Other Considerations

The Audit Team

6.53 The engagement partner is responsible for determining that the audit team
assembled has the requisite skills and time to perform the engagement.
The necessary skills required are unique to each engagement, but may
include considerations such as:
 previous experience with the client
 industry expertise
 accounting expertise
 specialized knowledge and skills in IT, tax or valuation

Staff Scheduling

6.54 Staff scheduling is an important aspect of planning. While the scheduling

process may differ depending on the size of the office, effective
scheduling recognizes the exercise of judgment in choosing among
alternatives that may affect the assignment of staff. In larger offices, the
person assigned the scheduling responsibility usually assigns staff to
specific engagements after considering the requests made by audit
partners and managers and factors such as staff utilization, staffing
requirements, personnel skills, individual and overall office needs. The
staff scheduler and the audit partner are expected to satisfy themselves
that the assigned personnel have the background and training requisite to
their professional responsibilities on the engagement. In smaller offices,
the audit partners or managers might consider these matters and make
staffing decisions either by themselves or after discussions with the other
partners and/or managers in the office.

6.55 The experience and training of personnel assigned significant

engagement responsibilities should be commensurate with the
assessment of risk for the engagement. Ordinarily, higher risk requires
more experienced personnel, team members with specialized skills or
more extensive supervision by the audit partner and/or manager during
the audit.

6.56 The following factors should ordinarily also be considered:

 engagement size and complexity
 matching of client and staff personalities
 personnel availability
 efficient conduct of the engagement
 opportunities for on-the-job training
 circumstances where questions about independence or conflicts of
interest might be raised
 ability to perform the work within a reasonable period of time
 involvement of supervisory personnel

6.57 For engagements where an OMP is the engagement partner, the PSP
should be consulted regarding the assignment of staff at the in-charge
level and above.
6.58 Many offices have adopted a policy that the PSP either participate in
staffing meetings or review the staff scheduling on a weekly or other
periodic basis. This overall review meets the objective of the foregoing
policy and explicit documentation is not necessary.

Administration

6.59 The audit team should consider matters that affect the administration of
the audit. These matters include:
 preparing a time budget to determine staffing requirements and
schedule fieldwork
 determining that assigned staff have the appropriate background and
experience to fulfill their responsibilities
 preparing a schedule for completion of the audit
 ensuring the audit program considers any additional reports or other
services required
 notifying the partner of issues that might affect the amount of our fees

Engagement Management Tools

6.60 To assist in administering engagements, GTUS uses Engagement

Management Process (“EMP”) Tools (using Microsoft Excel). These
include the Time and Billing Control Form (Form 1), the Profitability Tool
and the Consolidator Tool. Form 1 is used for budgeting and as the basis
for determining fees, planned realization and net rate per hour. It is also
designed to track actual time incurred and percentage to completion. This
can assist in identifying out-of-scope work for additional billings. The
Profitability Tool is designed to provide additional guidance to price
engagements. The Consolidator Tool is used to summarize multiple Form
1 workbooks for review at the client level, combing data across service
lines and assignments.

6.61 Form 1 is required for assurance engagements greater than 200 hours
and should be approved annually by the APL. The OMP may set local
office policy for their approval of Form 1 and also set lower thresholds for
its use. The audit team should update Form 1 each week to ensure timely
identification of overruns and out-of-scope work. The APL is responsible
for monitoring compliance with this policy.

6.62 The Profitability Tool is optional as a supplement to Form 1 for assurance

engagements. The Consolidator Tool is highly recommended, when
appropriate, to aggregate client data.

6.63 The tools and instructions for their use can be found in GEL under Grant
Thornton Letters and Forms > Audit Form 1.

Voyager Files

6.64 The cornerstone of Voyager is the masterfile, which contains the

procedures that audit teams must execute to demonstrate compliance with
firm policies and professional standards. Therefore, it is imperative that
 each partner and manager verify that the correct field version of Voyager
is installed before creating or rolling forward Voyager files.

6.65 Certain basic procedures can be completed without the Voyager file.
These include:
 preparing budgets
 drafting the engagement letter
 meeting with management to plan the audit and make inquiries
 performing preliminary analytical procedures
 obtaining or updating permanent file information
 reviewing work of internal auditors
 obtaining and updating related party information
Later, when the Voyager file is created or rolled forward, documents and
forms created during planning can be attached and sign offs completed.

Multiple Voyager Files

6.66 A separate Voyager engagement file should be created for each report
that is to be issued. For example, if there is a report on the consolidated
entity and a report on one of the subsidiaries, a separate Voyager file
should be used for each report. This provides the most efficient and
effective method of documenting and evaluating materiality, appropriately
applying GTSP, performing all procedures for each report in compliance
with professional standards and complying with the documentation
standards and the firm’s record retention and archiving policies.

6.67 There are other fact patterns that also require separate Voyager files for
the same client. See Exhibit 6.1, “When to Create Separate Voyager
Files”, for further guidance. In situations where the governance structures
vary within an entity, a separate Voyager file should be created for all of
these entities. This is necessary because it is not possible to document
more than one governance structure within one file, as entity-level
processes and controls cannot be duplicated in Voyager. In the same
respect, separate Voyager files should be used for locations or business
units that use different financial reporting systems. Since financial
reporting processes and controls are documented in entity-level controls
which cannot be duplicated, it is not possible to document two separate
financial reporting systems within a single file.

6.68 In situations where the work performed by other offices for a subsidiary,
location or business unit is extensive, a separate Voyager file is often the
most efficient method to organize the files. This approach allows the other
office to complete its work without having to check files out for an
extended period. Once a file is checked out, the risk assessment tools,
global questions and tailoring for the entire file is locked down. The
inability to change these portions of the file will create noticeable
inefficiencies in the performance of the engagement.

6.69 In instances where the audit team deems only one Voyager file is
necessary, the audit team should consider whether any of the cycles
 should be duplicated within the one Voyager file. The audit team should
consider duplicating a cycle when there are:
 reasonably possible risks at different locations or business lines and
therefore, internal control documentation and walkthroughs will be
different
 different application systems used; and therefore, processes and
controls will be different

6.70 The internal control documentation and walkthroughs should link to their
associated reasonably possible risk. For example, if an entity has two
distinct product lines with separate processes and controls for recognizing
revenue, the engagement team should duplicate the revenue cycle so that
the separate process and controls can be documented for both sets of
reasonably possible risks. Cycles should also be duplicated when different
applications are used and therefore, the process and who performs the
processes and controls are different.
Exhibit 6.1 – When to Create Multiple Voyager Files

(1) Does the entity have separate reporting entities?

Yes No
(2) What best describes the reporting? (3) Multiple locations, business lines?

Separate More than one One Yes No

report for report, but do report for Judgment required. Create Use one file,
each not report on all all separate file for location or evaluate
entity entities entities business unit if: whether
• Work by other
duplicate
cycles are
offices or auditors is needed
Create Create separate Create so extensive, it is in
separate file for each separate file effect, a separate
file for reporting entity for entities audit
each and entities with
entity different entity-
with different
entity-level
• Location or business
level controls. unit uses different
controls.
Others, go to (3) financial reporting
Others, go to
(3) systems
If a separate file is
unnecessary, evaluate
whether duplicate cycles
are needed