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The PwC Audit

A Continuous Improvement Approach
to Audit Methodology
PricewaterhouseCoopers 1
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

PricewaterhouseCoopers 2
PwC Audit Governance
Global Audit Policy Board
Establish global overarching
policy principles & goals
and ratify policy statements.
Global R&Q
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
PricewaterhouseCoopers 3
Towards Performance Audit:
a continuous improvement program
PwC
Audit
PwC
Audit
Audit Comfort
Cycle
Management
controls focus
Show me and
Taking stock
Team re-
deployment
2001:
Historical Financial
Statements Opinion
Changes in Deliverables
Business
analysis
framework
Enhanced audit
guides/ practices
Scaling up -
different client
situations
MyClient
integration
2002:
Converged
approach,
enhanced testing
guidance
Enhanced client
communications,
transparency focus
Application to small
companies/ MNCs
Better use of
specialists and
knowledge sources
2003:
Time
PricewaterhouseCoopers 4
Changing the Focus of the Audit Model


Audit Risks
Identified

Risk
Key
Risk
Key

Key
Risk
Key
Risk
Key
Risk
Key
Risk
Business Risks
PricewaterhouseCoopers 5
PwC Audit in 2004
Acceptance and Continuance (FRISK)
Audit Comfort Cycle
Scoping
Understanding
Evaluating
Validating
Substantive Testing
Other Audit Procedures
Audit Committee Communications Plan


PricewaterhouseCoopers 6
PwC Audit Approach
Other audit procedures
Financial statements
Completion
No / Limited
controls
comfort
Significant
controls
comfort
Other audit evidence
Mainly Mainly
tests of details substantive analytical
procedures
Audit
Comfort
Cycle
Acceptance/Continuance Assessment
PricewaterhouseCoopers 7
PwC Audit Approach With Attestation
Other audit procedures
Financial statements
Completion
No / Limited
controls
comfort
Significant
controls
comfort
Other audit evidence
Mainly Mainly
tests of details substantive analytical
procedures
Audit
Comfort
Cycle
Broader and deeper assessment of COSO
controls over financial reporting, including
managements evaluation of those controls.
e.g., estimates, fraud, tax accrual, more
locations.
Additional procedures deemed necessary
to provide independent assurance on
financial statements, taking into
consideration the internal controls
assessment.
Report on managements assertions on
internal controls over financial reporting
Report on Financial Statements
Acceptance/Continuance Assessment
PricewaterhouseCoopers 8
Acceptance & Continuance Process
Governance and oversight of management
Past performance
Managements 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
PricewaterhouseCoopers 9
Acceptance & Continuance Process
Risk Conditions (13)

(defined within
Acceptance &
Continuance module)

Key Risks
(user defined or
selected from
Master Data)
Engagement Leader and Team Manager apply
professional judgment in describing specific Key
Risks that relate to the broader Risk Conditions

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

1
2
3
MyClient
Client File
Audit Comfort
Matrix

PricewaterhouseCoopers 10
Audit Comfort Cycle
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
OTHER AUDIT PROCEDURES
FINANCIAL STATEMENTS
COMPLETION
ACCEPTANCE/CONTINUANCE ASSESSMENT
SUBSTANTIVE AUDIT EVIDENCE
MAINLY SUBSTANTIVE
ANALYTICAL
PROCEDURES
SIGNIFICANT
CONTROLS
COMFORT
NO/LIMITED
CONTROLS
COMFORT
Audit
comfort
cycle
MAINLY TESTS
OF DETAILS
PricewaterhouseCoopers 11
Audit Comfort Cycle
Market
Overview
Strategy Value
Creating
Activities
Financial
Performance
OTHER AUDIT PROCEDURES
FINANCIAL STATEMENTS
COMPLETION
ACCEPTANCE/CONTINUANCE ASSESSMENT
SUBSTANTIVE AUDIT EVIDENCE
MAINLY SUBSTANTIVE
ANALYTICAL
PROCEDURES
SIGNIFICANT
CONTROLS
COMFORT
NO/LIMITED
CONTROLS
COMFORT
Audit
comfort
cycle
MAINLY TESTS
OF DETAILS
What does management
need to get comfort on?
PricewaterhouseCoopers 12
Scoping: Forming a Point of View
Perform company and industry analytical procedures
Research and analyze external communications
Partners connect with staff members
Document the teams 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
PricewaterhouseCoopers 13
Scoping:
Business Analysis Framework
PricewaterhouseCoopers 14
Scoping:
Risk Assessment Key Risks
Key Risk
We identify audit risk
through understanding
the entitys business
objectives and related
risks.
Business
Risks
Audit
Risks
Key Risk
Key Risk
Key Risk
Key Risk
Key risks are those conditions or
factors within an audit that, in
the judgment of the auditor, give
rise to a greater risk of material
financial misstatement or other
matters resulting in the issuance
of an inappropriate audit report.
PricewaterhouseCoopers 15
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
PricewaterhouseCoopers 16
Scoping Translated into Audit Strategy
Where controls over significant account balances or classes of transaction are not
aligned, we will need to perform substantive tests of details.

Stakeholders
Risks Controls
Alignment
Business
Objectives
PricewaterhouseCoopers 17
Scoping: Audit Team of Specialists
Our best teams use our specialist capabilities to help in forming a point of view.
Stakeholders
Business
Objectives
Financial
Risk
Business
Process
Enterprise-wide
Risk
Systems &
Technology
Energy Trading
Risk
Business
Resilience
Project
Management
Internal Audit
Security
Data Risk
Regulatory/
Compliance
Performance
Improvement
Treasury
Risks Controls
Alignment
Computer-Assisted Audit
Techniques
Fraud
PricewaterhouseCoopers 18
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
PricewaterhouseCoopers 19
Audit Comfort Cycle
4 Key Questions
What does management
need to get comfort on?
Market
Overview
Strategy Value
Creating
Activities
Financial
Performance
OTHER AUDIT PROCEDURES
FINANCIAL STATEMENTS
COMPLETION
ACCEPTANCE/CONTINUANCE ASSESSMENT
SUBSTANTIVE AUDIT EVIDENCE
MAINLY SUBSTANTIVE
ANALYTICAL
PROCEDURES
SIGNIFICANT
CONTROLS
COMFORT
NO/LIMITED
CONTROLS
COMFORT
Audit
comfort
cycle
MAINLY TESTS
OF DETAILS
How does
management get
comfort?
Are they entitled to
that comfort?
Can we audit that
comfort?
PricewaterhouseCoopers 20
Applying Audit Comfort Cycle
from the Top-Down
Organize audit team to align
with how management runs
the business.
Extend discussions about
business objectives & risk
to management controls.
Understand & evaluate how
management controls risk.
Validate controls against
engagement teams point of
view.
Audit controls
from the
top down


Board
Sr Mgmt
Department
Heads
Operations
Transaction Processing
PricewaterhouseCoopers 21
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?

PricewaterhouseCoopers 22
Business
Risks
related to
achieving
Objectives



Business Process A
Completeness
Accuracy
Validity
Restricted Access
Business Process B
Completeness
Accuracy
Validity
Restricted Access
Business Process C
Completeness
Accuracy
Validity
Restricted Access
Account
Balances and
Transactions
Account
Balances and
Transactions
General Computer Controls
Account
Balances and
Transactions
Connecting the Dots
Business Objectives
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
PricewaterhouseCoopers 23
Audit Comfort Matrix
PricewaterhouseCoopers 24
Summary of Comfort
PricewaterhouseCoopers 25
Substantive Audit Evidence
Market
Overview
Strategy Value
Creating
Activities
Financial
Performance
OTHER AUDIT PROCEDURES
FINANCIAL STATEMENTS
COMPLETION
ACCEPTANCE/CONTINUANCE ASSESSMENT
SUBSTANTIVE AUDIT EVIDENCE
MAINLY SUBSTANTIVE
ANALYTICAL
PROCEDURES
SIGNIFICANT
CONTROLS
COMFORT
NO/LIMITED
CONTROLS
COMFORT
Audit
comfort
cycle
MAINLY TESTS
OF DETAILS
PricewaterhouseCoopers 26
Achieving the Right Balance
No/Limited Controls Comfort Significant Controls Comfort
PricewaterhouseCoopers 27
Assurance Hierarchy
Will we obtain audit assurance from
tests of controls?
Test controls.
No further testing
required.
Can we obtain audit assurance from
substantive analytical procedures?
Perform substantive
analytical procedures.
Perform tests of
details.
Do we need additional
audit assurance?
No
Yes
No
No
Yes
Yes
PricewaterhouseCoopers 28
Other Audit Procedures
Market
Overview
Strategy Value
Creating
Activities
Financial
Performance
OTHER AUDIT PROCEDURES
FINANCIAL STATEMENTS
COMPLETION
ACCEPTANCE/CONTINUANCE ASSESSMENT
SUBSTANTIVE AUDIT EVIDENCE
MAINLY SUBSTANTIVE
ANALYTICAL
PROCEDURES
SIGNIFICANT
CONTROLS
COMFORT
NO/LIMITED
CONTROLS
COMFORT
Audit
comfort
cycle
MAINLY TESTS
OF DETAILS
PricewaterhouseCoopers 29
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

PricewaterhouseCoopers 30
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
PricewaterhouseCoopers 31
Service
approach
Risk and
control
Financial
reporting
Governance
Ongoing assessment of needs & expectations
[Indicate timing] [Indicate timing] [Indicate timing] [Indicate timing]
Understanding the audit Staying informed Resolution and completion



Corporate
governance:
roles and
practices
Internal
control and
business
issues
report
Assessing
our
performance
and yours



Reporting timetable
Business unit
scope
Engagement team
Other deliverables
Risk analysis
Perspectives on
fraud risk
Other regulatory
requirements
plan
Our audit plan
Communications
plan
Risk condition
alert
Transparency
of corporate
reporting

Reporting
requirements

Internal control
deficiencies
Accounting
policies
Management
judgments
Quality of
earnings
Independence
Transparency

Audit
opinion Best
practices in
corporate
reporting








PwC principles
and practices
Engagement
letter and
independence
confirmation



Update on
accounting/audit
issues and risk
analysis
Quarterly
review
Quarterly
review
Quarterly
review
Getting started
Audit Committee Communications Plan
PricewaterhouseCoopers 32
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.
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