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CH8 (2013) : Planning The Audit

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samar gad

on 24 May 2013

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Transcript of CH8 (2013) : Planning The Audit

CH8: Planning the Audit The Planning Phase of the Audit

Accept client and perform initial audit planning Evaluation of the client Evaluate client's firm
determine materiality and risks levels Organize audit work The auditor should: STEP 1: Accept Client and Perform Initial audit Planning Decide to Accept (new) client or Continue with (current) client
Understand terms with the client
Develop overall strategy What the auditors should do before accepting a client? 1 Investigate Client's Background 2 Determine whether they are:
Independent 3 Communicate with previous auditor Evaluation of Existing Client Understand terms with the client It should include:
Auditor and Management Responsibility
Statement of other services provided
Audit work deadline
Agreement on fees
Reasonable Assurance Information It is a bad plan that can not be changed Second Step: Understand
client’s business and industry Business risk: The risk that the client will fail to meet its objectives Why is it important to gain an understanding? Reasons Economic conditions Information Technology Human
capital and other Intangible
assets Complex Financial Instruments Industry and External Environment Risk Associated with certain Industries
Identify common (IRs) common to all clients
Industry Unique accounting requirements IMPORTANT: Recent deregulation in the industry
Fluctuations in energy prices effect on operations Business Operations and Processes Tour client facilities and operations
Identify related parties Business Operations and Processes Major points to check:

Major sources of revenue
Key customers and supplier
Sources of financing
Information about related parties
Number of products offered
Market share Fourth Step: Estimate Reliance on internal Control Why? To plan the tentative (not final) nature, timing and extent of substantive tests Sometimes, this estimation is basedon prior year audit findings. Strong Internal Control Less Planned Substantive Tests Control Risk Low Reliable Internal Control Fourth Step: Estimate Reliance on internal Control Fifth Step: Estimate Planning Materiality When? Early in the year audited How? Quantitative, Qualitative factors Relationship: (-ve) relation between Materiality Border and planned amount of substantive tests Sixth Step: Identify Potential Problem Areas Problems existed in previous audit.
New accounting standard
Recognition of "not-independent" third party Specialists needed in non-accounting situations Seventh Step: Perform Analytical Procedures Example: Historical Comparison for account balances Why? Allow auditor:
Understand client’s business
Direct attention unusual or unexpected balances or transactions Great East earthquake and Tsunami operations, production adjustments, delay in delivery Depressed consumer and corporate spending, GDP declined damaged supply chain, loss of life and property credit rating downgrade Develop Preliminary Audit Strategy Why to develop it? Preliminary Strategy Identifies: Intention to distort financial statement lack of control Unreliable estimates Risky Matters Partner Manager Senior Auditor Staff Auditor Audit Team Performs audit procedures as directed by a senior auditor Performs difficult audit procedures, supervises and review the daily work of the staff auditors. Reviewing the audit work performed by staff and senior auditor, arranging and requesting staff and billing and collecting the audit fee. Reviewing the audit work performed by staff, senior auditor, and manager, resolving audit problems with the client and approves the form and sign the report. Engagement team develop an audit strategy, and determine reliance on internal control Manager summarizes the audit strategy in a memorandum Senior uses the memorandum in developing the audit program Gather preliminary planning information Senior Partner Manager What is the process of developing audit strategy and audit program? Ninth step: Prepare the Audit program It is the most important control mechanism and It should be written and outline all of the audit procedures. •It should be tailored for each audit engagement,
•It is a tentative program What are the benefits of the audit program? Evidence of proper planning of the work performed
Guidance to less experienced staff members
Evidence of work performed
A means of controlling the time spent on an audit
Evidence of the consideration of control risk in designing the proposed audit procedures. What are the sections of the audit program?

An account description
Evaluation of audit risk
Audit procedures
Conclusion Tenth Step: Schedule The Audit Work 2002 March (cc) image by jantik on Flickr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Plan Study IC Perform Sub. tests Issue Audit report What are additional audit procedures required when planning the first-time audit? Determine if the entity is auditable
Plan to perform audit procedures on assets and liabilties balances at the beg of the year.
Check the consistency of accounting principles applications
Review prior year audit why is it important to plan the audit? Required by standard of field work
To obtain sufficient/appropriate evidence
Keep audit costs reasonable
Avoid misunderstanding with client Understand the client's business and industry
Assess client business risk
Perform preliminary analytical procedures
Set materiality and assess AR and IR
Understand internal control and assess fraud risks Develop overall audit plan and audit program what are the risks that affect the cost and conduct of an audit? Acceptable Audit Risk

Inherent Risk Why? Conflicts about scope of the audit
Type of opinion to issue
Unpaid fees
Lack of integrity
Extensive risk related to the client
Reasons behind why client needs the audit Engagement Letter Client’s business and industry
Material misstatement risk areas
Number of client locations
Past effectiveness of controls in the client’s firm To determine:
Resource requirements and staffing
Staff continuity
Need for specialists Why? Tour Client Facilities and Operations Observe operations
Meet key personnel
Assess physical safeguards
Identify inherent risks
Discussion with non-accounting employees why ? it helps the auditor to: Identify Related Parties What is a related party? Management and Governance What's a firm governance?
It is understood through:
code of ethics
minutes of meetings Code of Ethics Required by Sarbanes-Oxley Act
The auditor should know about it to assess management integrity. Minutes of Meetings official records of BOD and stockholders meetings

Key authorization
Important topics summaries
Information relevant to the auditor Client Objectives and Strategies Strategies are approaches followed by the entity to achieve organizational objectives Auditors should understand client objectives Financial reporting reliability
Effectiveness and efficiency of operations
Compliance with laws and regulations Measurement
Performance market share
sales per employee
unit sales growth
Web site visitors
sales/square foot Performance measurement includes ratio analysis and benchmarking against key competitors Global Expansion Economic Conditions downturns You have to know more about: Failure to understand nature of the industry leads to litigation cases Remember: Enron Case Joint Ventures and Strategic Alliances Starbucks + Pepsi co Shell + British petrolium strategic alliance Joint Venture Affiliated company, a principal owner of the client company, or any other part with which the client deals Required
by GAAP Why auditor assess high inherent risk
for related party transactions? It is required by accounting standards

Lack of independence

Chance to engage in fraudulent reporting what should
disclosed? Nature of related party relationship
Description of the transaction
Including dollar amount
Amounts due from and to related parties How to Identify Related Party Transactions? Previous audit files
Inquiry of Management
Review of SEC filings
Examine Stockholder's listing Third Step:
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 Client’s Business, Risk, and
Risk of Material Misstatement Fourth Step:
Preliminary Analytical Procedures Refer to PowerPoint presentation End of Chapter 8 :)
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