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CHAPTER 8: Audit Planning & Analytical Procedures
Transcript of CHAPTER 8: Audit Planning & Analytical Procedures
Presenters: Jackie Jawitz, Kaneez Masoom, and Mari Pape
Setting the Stage:
the bankruptcy of Enron was not coincidental, rather it was the effect of several years of planning, or lack of, within the company
Key Parts of Audit Planning to be Discussed:
Accept client and perform initial planning
Understand the client’s business and industry
Assess client business risk
Perform preliminary analytical procedures
Initial Audit Planning
Auditor investigates new clients and evaluates existing clients
Preliminary audit strategy
Select staff for engagement
Evaluate the need for outside specialists
Question 1: What are the 3 reasons for audit planning?
Reasons for audit planning:
To obtain sufficient and appropriate evidence
Maintain reasonable audit costs
Avoid any misunderstanding with the client
Understanding of Business and Industry
Purpose: to identify and assess the risks of material misstatement that is based on the entity and its environment
Assess Client Business Risk
What is client business risk?
Auditor’s primary concern: risk of material misstatement
Management is the source of identifying risk
Sarbanes-Oxley: requires management certification of disclosure controls and procedures
Evaluation of internal controls
Perform Preliminary Analytical Procedures
Purpose: to understand the client’s business and identify areas of risk
4 key factors auditors should understand
Major sources of revenue
Key customers and suppliers
Sources of financing
Information about related parties
Tour client facilities and operations
Identify related parties
Who is a related party?
What is a related party transaction?
Assess management’s philosophy and operating style and ability to respond to risk:
Code of Ethics
Ratios are used to identify risk
Short-term debt-paying ability
Liquidity activity ratios
Ability to meet long-term obligations
Some ratios include:
Debt to equity
4 Subsequent Parts of Audit Planning
Set materiality and assess acceptable audit risk
Understand and asses internal controls
Gather Information to assess fraud risks
Develop overall audit strategy and audit program
Selecting Appropriate Procedures:
Analytical procedures help to:
Understand the business
Assess going concern
Indicate possible misstatements
Types of Analytical Procedures
The auditor compares client’s balances and ratios with expected balances and ratios using the following types of analytical procedures:
Similar historical data
Client expected results
Auditors expected results
Expected results based from non-financial data
Question 2: As an auditor, what are the key factors in understanding a particular business or industry?
Question 3: What is a related party?
Question 4: What are 2 of the ratio categories in the analytical procedures?
Question 5: When following analytical procedures, what do we compare client data against?