1. MODERN AUDITING 7th Edition
William C. Boynton
California Polytechnic State University at San Luis Obispo
Raymond N. Johnson
Portland State University
Walter G. Kell
University of Michigan
Developed by:
Dr. Raymond N. Johnson, CPA
Gregory K. Lowry, MBA, CPA
John Wiley & Sons, Inc.

2. CHAPTER 7 ACCEPTING THE ENGAGEMENT AND PLANNING THE AUDIT
Overview of a Financial Statement Audit
Client Acceptance and Retention
Planning the Audit
Obtaining an Understanding of the Client’s Business and Industry
Performing Analytical Procedures

3. Overview of a Financial Statement Audit
4 Phases of an Audit
1. Client Acceptance and Retention
2. Planning the Audit
3. Performing Audit Tests
4. 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 parties
Review previous experience with existing clients
Knowledge of critical success factors & competition
Client background checks
Previous bankruptcy
Previous convictions
Suspected ties to organized crime
Industry experience

6. Identify Special Circumstances and Unusual Risks
Focus on the auditor’s business risks
Identify intended users of audited statements
Purchase and sale of business
Assess prospective client’s legal and financial stability
Client’s need for capital
Identify scope limitations
Evaluate the entity’s financial reporting systems and auditability
Inadequate internal controls

7. Assess Competence to Perform the Audit
Services desired
Identify the audit team
Need for consultation and use of specialists
Trend in industry specialization

8. Evaluating Independence
Evaluate whether there are any circumstance that would impair independence

9. Decision to Accept
80’s: Accept clients as route to partnership, but not as cognizant of risks
90’s: Clean up client list during good times with a focus on growth oriented clients
2002:
Fee competition as auditor’s compete for Anderson clients
How 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 7
Chapter 7
Chapter 8
Chapter 8
Chapter 8
Chapter 9

12. Overview of Business Cycle Figure 7-4

13. Knowledge of the Business and Industry
Understand the Entity’s Business Risks
Developing Expectations of Financial Statements
Industry Impact on Information Systems
Evaluation of Reasonableness of Accounting Estimates
GAAP for Specific Industries
Foundation for Other Value-Added Services

14. Consider Livent
Theater company producing shows like Phantom of the Opera, Showboat, etc.
Financial statement misstatements:
Capitalized cost of shows as pre-production costs
Revenue recognition for tickets given away
Cost structure
Heavy fixed costs
Predictable costs
Need for ticket revenues and cash flows

15. Overview of Business Cycle Figure 7-4
Understand and
Quantify
Understand,
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?

17. Understanding the Client’s Business Figure 7-5

18. Understanding the Client’s Business Figure 7-5

19. Understanding the Client’s Business Figure 7-5

20. Understanding the Client’s Business Figure 7-5

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 procedures
2. In the testing phase, as a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions
3. 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 made
2. Develop expectations
3. Perform the calculations/comparisons
4. Analyze data and identify significant differences
5. Investigate significant unexpected differences
6. Determine effects on audit planning

23. New Technology, Inc. Evaluate the data presented on pp 260-261.
Develop your own expectations
Compare company data with expectations
Identify issues that need audit attention.

24. CHAPTER 7 ACCEPTING AND PLANNING THE AUDIT ENGAGEMENT

25. Copyright
Copyright 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.