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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 7 Accepting the Engagement and Planning the Audit Slide 2 Chapter 7 Overview Slide 3 Client Acceptance and Retention Slide 4 Evaluating the Integrity of Management Communicate with the Predecessor Auditor Make Inquiries of Other Third Parties Review Previous Experience with Existing Clients Slide 5 Identifying Special Circumstances and Unusual Risks Identify Intended Users of Audited Statements Assess Prospective Clients Legal and Financial Stability Identify Scope Limitations Evaluate the Entitys Financial Reporting Systems and Auditability Slide 6 Assessing Competence to Perform the Audit Services Desired Identify the Audit Team Partner Manager(s) Senior(s) Staff Assistants Consider Need for Consultation and Specialists Slide 7 Evaluating Independence Identify Circumstances Impairing Independence Identify Professional Staff Financial and Business Relationships Identify Conflicts of Interest with Other Clients Slide 8 Making the Decision to Accept or Decline the Audit Integrity of Management Special Circumstances and Unusual Risks Competence Issues Independence Issues Slide 9 Preparing the Engagement Letter Clear identification of entity and financial statements to be audited Objective or purpose of the audit Reference to professional standards to be followed Explain nature and scope of audit and auditors responsibilities Slide 10 Preparing the Engagement Letter Statement that not all material fraud may be detected Reminder of management responsibility for financial statements and internal controls Indicate potential request for written representations Describe any auxiliary services to be provided Slide 11 Preparing the Engagement Letter Basis on which fees will be computed and billing arrangements Request to confirm terms of engagement by signing and returning a copy to the auditor Slide 12 Study Break 1.While evaluating the integrity of management, which would be considered to be the least useful? A.Inquiries of management B.Communications with preceding auditor C.Inquiries of other third parties D.Evaluate previous experiences with client A. Inquiries of management Slide 13 Study Break 2. Outside specialists include all of the following except: A.Appraisers B.Internal auditors C.Actuaries D.Attorneys B. Internal auditors Slide 14 Risk Assessment Procedures Slide 15 Understanding the Entity and Its Environment Slide 16 Industry, Regulatory, and Other External Factors Industry Conditions Regulatory Environment Other External Factors Affecting the Entitys Business Slide 17 The Nature of the Entity and Accounting Policies Business Operations Investing Activities Financing Activities Financial Reporting Slide 18 Entitys Objectives, Strategies, and Related Business Risks Entitys Objectives Entitys Strategies Business Risks Effects of Implementing a Strategy Slide 19 Measurement and Review of the Entitys Financial Performance Ratios and Operating Statistics Performance Indicators Employee Performance Measures and Incentive Compensation Plans Industry Trends Forecasts, Budgets, and Variance Analysis Analyst Reports and Credit Rating Reports Slide 20 Study Break 3. In order to understand the entitys ______, we must understand matters such as the accounting principles, revenue recognition practices, and financial statement presentation and disclosure. A.Business Operations B.Investing Activities C.Financing Activities D.Financial Reporting Slide 21 Study Break 4. ______ are the operational approaches by which management intends to achieve its objectives. A.Entitys objectives B.Entitys strategies C.Business risks D.Financing activities B. Entitys strategies