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