Presentation on theme: "MODERN AUDITING 7th Edition"— Presentation transcript:
1 MODERN AUDITING 7th Edition William C. BoyntonCalifornia Polytechnic State University at San Luis ObispoRaymond N. JohnsonPortland State UniversityWalter G. KellUniversity of MichiganDeveloped by:Dr. Raymond N. Johnson, CPAGregory K. Lowry, MBA, CPAJohn Wiley & Sons, Inc.
2 CHAPTER 7 ACCEPTING THE ENGAGEMENT AND PLANNING THE AUDIT Overview of a Financial Statement AuditClient Acceptance and RetentionPlanning the AuditObtaining an Understanding of the Client’s Business and IndustryPerforming Analytical Procedures
3 Overview of a Financial Statement Audit 4 Phases of an Audit1. Client Acceptance and Retention2. Planning the Audit3. Performing Audit Tests4. Reporting the Findings
4 Steps in Accepting an Audit Engagement Figure 7-1
5 Management Integrity Communication with the Predecessor Auditor Make inquiries of other third partiesReview previous experience with existing clientsKnowledge of critical success factors & competitionClient background checksPrevious bankruptcyPrevious convictionsSuspected ties to organized crimeIndustry experience
6 Identify Special Circumstances and Unusual Risks Focus on the auditor’s business risksIdentify intended users of audited statementsPurchase and sale of businessAssess prospective client’s legal and financial stabilityClient’s need for capitalIdentify scope limitationsEvaluate the entity’s financial reporting systems and auditabilityInadequate internal controls
7 Assess Competence to Perform the Audit Services desiredIdentify the audit teamNeed for consultation and use of specialistsTrend in industry specialization
8 Evaluating Independence Evaluate whether there are any circumstance that would impair independence
9 Decision to Accept80’s: Accept clients as route to partnership, but not as cognizant of risks90’s: Clean up client list during good times with a focus on growth oriented clients2002:Fee competition as auditor’s compete for Anderson clientsHow much will audit fees increase in the next few years?
10 Steps in Accepting an Audit Engagement Figure 7-1 Page 241
11 Key Steps in Planning the Audit Figure 7-3 Chapter 7Chapter 7Chapter 8Chapter 8Chapter 8Chapter 9
13 Knowledge of the Business and Industry Understand the Entity’s Business RisksDeveloping Expectations of Financial StatementsIndustry Impact on Information SystemsEvaluation of Reasonableness of Accounting EstimatesGAAP for Specific IndustriesFoundation for Other Value-Added Services
14 Consider LiventTheater company producing shows like Phantom of the Opera, Showboat, etc.Financial statement misstatements:Capitalized cost of shows as pre-production costsRevenue recognition for tickets given awayCost structureHeavy fixed costsPredictable costsNeed for ticket revenues and cash flows
15 Overview of Business Cycle Figure 7-4 Understand andQuantifyUnderstand,Quantify,and Correlate with Outcomes
16 Understanding the Business and Industry The clients business risks are strongly correlated with the auditor audit risk.Do audit tests ensure that the entity’s outcomes associated with business risks are fairly presented in the financial statements?
21 Performing Analytical Procedures Analytical procedures are used in auditing for the following purposes:1. In the planning phase of the audit, to assist the auditor in planning the nature, timing, and extent of other auditing procedures2. In the testing phase, as a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions3. At the conclusion of the audit, in a final review of the overall reasonableness of the audited financial statements
22 Performing Analytical Procedures The following steps are involved in performing analytical procedures:1. Identify calculations and comparisons to be made2. Develop expectations3. Perform the calculations/comparisons4. Analyze data and identify significant differences5. Investigate significant unexpected differences6. Determine effects on audit planning
23 New Technology, Inc. Evaluate the data presented on pp 260-261. Develop your own expectationsCompare company data with expectationsIdentify issues that need audit attention.
24 CHAPTER 7 ACCEPTING AND PLANNING THE AUDIT ENGAGEMENT
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