Presentation is loading. Please wait.

Presentation is loading. Please wait.

Audit Planning and Analytical Procedures

Similar presentations

Presentation on theme: "Audit Planning and Analytical Procedures"— Presentation transcript:

1 Audit Planning and Analytical Procedures

2 Acceptance of Clients Juan M. Garcia Merced

3 First Standard of Field Work
The work is to be adequately planned, and assistants, if any, are to be properly supervised.

4 Obtaining Clients Through: Acquisitions Business contacts Social contacts Advertising

5 Auditor’s Business Risk
A thoroughly investigation of prospective clients should be made.

6 Submitting a Proposal Should include: Nature of services
Qualifications Fees & other information Audit committee

7 Communication with Predecessor Auditor
The successor auditor must ask management to authorize the predecessor to respond fully. Key issue in deciding whether to accept the engagement.

8 Auditor inquiries will include:
Disagreements with management over accounting principles or scope limitations The predecessor’s understanding for the change in auditors The integrity of management Communications with audit committees regarding important audit issues

9 Items Included in Engagement Letters
Name of the entity Management responsibilities Financial statements Establishing effective internal control over financial reporting Compliance with laws and regulations Making records available to the auditors Providing written representations at end of the audit, including that adjustments discovered by the auditors and not recorded to the financials are not material Auditor responsibilities Conducting an audit in accordance with GAAS Obtaining an understanding of internal control to plan audit and to determine the nature, timing and extent of procedures Making communications required by GAAS 2 2

10 Engagement Letters--Optional Items
Arrangements regarding Conduct of the audit (e.g., timing, client assistance) Use of specialists or internal auditors Obtaining information from predecessor auditors Fees and billing Other services to be provided, such as examination of internal control over financial reporting Limitation of or other arrangements regarding liability of auditors or client Conditions under which access to the auditors’ working papers may be granted to others 3

11 ENGAGEMENT LETTER Required!!!!!!!!!!!!!!!

12 Generally Accepted Auditing Standards
Technical training and efficiency Independence Due professional care Field Work Planning and supervision Internal control Evidence Reporting GAAP Disclosure Opinion Consistency

13 Audit Planning Gain an understanding of the
client’s business and industry.

14 Business Operations and Processes
Factors the auditor should understand: Major sources of revenue Key customers and suppliers Sources of financing Information about related parties

15 Tour the Plant and Offices
By viewing the physical facilities, the auditor can asses physical safeguards over assets and interpret accounting data related to assets.

16 Management and Governance
Management establishes the strategies and processes followed by the client’s business. Governance includes the client’s organizational structure, as well as the activities of the board of directors and the audit committee. Corporate charter and bylaws Code of ethics Meeting minutes

17 Measurement and Performance
The client’s performance measurement system includes key performance indicators. Examples: market share sales per employee unit sales growth Web site visitors same-store sales sales/square foot Performance measurement includes ratio analysis and benchmarking against key competitors.

18 Assess Client Business Risk
Client business risk is the risk that the client will fail to achieve its objectives. What is the auditor’s primary concern? Material misstatements in the financial statements due to client business risk

19 Perform preliminary analytical procedures.

20 Preliminary Analytical Procedures
Comparison of client ratios to industry or competitor benchmarks provides an indication of the company’s performance. Preliminary tests can reveal unusual changes in ratios.

21 Examples of Planning Analytical Procedures
Selected Ratios Client Industry Short-term debt-paying ability: Current ratio Liquidity activity ratio: Inventory turnover Ability to meet long-term obligations: Debt to equity Profitability ratio: Profit margin

22 Summary of the Parts of Auditing Planning
A major purpose is to gain an understanding of the client’s business and industry.

23 Key Parts of Planning Perform preliminary analytical procedures

24 Analytical Procedures
SAS 56 emphasizes the expectations developed by the auditor. Required in the planning phase Often done during the testing phase Required during the completion phase

25 Five Types of Analytical Procedures
Compare client data with: 1. Industry data 2. Similar prior-period data 3. Client-determined expected results 4. Auditor-determined expected results 5. Expected results using nonfinancial data.

26 Compare Client and Industry Data
2007 2006 2007 2006 Inventory turnover Gross margin % 26.4% 27.3% 26.2%

27 Compare Client Data with Similar Prior Period Data
2007 2006 (000) Prelim. % of Net sales (000) Prelim. % of Net sales Net sales $143, $131, Cost of goods sold , , Gross profit $ 39, $ 36, Selling expense , , Administrative expense , , Other , , Earnings before taxes $ 5, $ 4, Income taxes , , Net income $ 3, $ 3,

28 Common Financial Ratios
Short-term debt-paying ability Liquidity activity ratios Ability to meet long-term debt obligations Profitability ratios

29 Short-term Debt-paying Ability
Cash ratio = (Cash + Marketable securities) Current liabilities Quick ratio = (Cash + Marketable securities + Net accounts receivable) Current liabilities Current ratio = Current assets Current liabilities

30 Liquidity Activity Ratios
Accounts receivable turnover = Net sales Average gross receivables Days to collect receivable = 365 days Accounts receivable turnover Inventory turnover = Cost of goods sold Average inventory Days to sell inventory = 365 days Inventory turnover

31 Ability to Meet Long-term Debt Obligation
Debt to equity = Total liabilities Total equity Times interest earned = Operating income Interest expense

32 Profitability Ratios Earnings per share = Net income
Average common shares outstanding Gross profit percent = (Net sales – Cost of goods sold) Net sales Profit margin = Operating income Net sales

33 Profitability Ratios Return on assets = Income before taxes
Average total assets Return on common equity = (Income before taxes – Preferred dividends) Average stockholders’ equity

34 Summary of Analytical Procedures
They involve the computation of ratios and other comparisons of recorded amounts to auditor expectations. They are used in planning to understand the client’s business and industry. They are used throughout the audit to identify possible misstatements, reduce detailed tests, and to assess going-concern issues.

35 End of Chapter

Download ppt "Audit Planning and Analytical Procedures"

Similar presentations

Ads by Google