modern auditing
TRANSCRIPT
MODERN AUDITING MODERN AUDITING 7th Edition7th Edition
MODERN AUDITING MODERN AUDITING 7th Edition7th Edition
William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State
University at San Luis University at San Luis ObispoObispo
Raymond N. JohnsonRaymond N. JohnsonPortland State UniversityPortland State University
Walter G. KellWalter G. KellUniversity of MichiganUniversity of MichiganDeveloped by:
Dr. Raymond N. Johnson, CPAGregory K. Lowry, MBA, CPA
John Wiley & Sons, Inc.
CHAPTER 7CHAPTER 7ACCEPTING THE ENGAGEMENT AND ACCEPTING THE ENGAGEMENT AND
PLANNING THE AUDITPLANNING THE AUDIT
CHAPTER 7CHAPTER 7ACCEPTING THE ENGAGEMENT AND ACCEPTING THE ENGAGEMENT AND
PLANNING THE AUDITPLANNING 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
Overview of a Financial Overview of a Financial Statement AuditStatement Audit
Overview of a Financial Overview of a Financial Statement AuditStatement Audit
4 Phases of an Audit1. Client Acceptance and Retention2. Planning the Audit3. Performing Audit Tests4. Reporting the Findings
Steps in Accepting an Audit Steps in Accepting an Audit EngagementEngagementFigure 7-1Figure 7-1
Steps in Accepting an Audit Steps in Accepting an Audit EngagementEngagementFigure 7-1Figure 7-1
Management Integrity 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
Identify Special Circumstances and Unusual Risks
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
Assess Competence to Perform the Audit
Assess Competence to Perform the Audit
• Services desired
• Identify the audit team
• Need for consultation and use of specialists
• Trend in industry specialization
Evaluating Independence Evaluating Independence
• Evaluate whether there are any circumstance that would impair independence
Decision to AcceptDecision 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
Steps in Accepting an Audit Steps in Accepting an Audit EngagementEngagementFigure 7-1Figure 7-1
Steps in Accepting an Audit Steps in Accepting an Audit EngagementEngagementFigure 7-1Figure 7-1
Page 241
Key Steps in Planning the AuditKey Steps in Planning the AuditFigure 7-3Figure 7-3
Key Steps in Planning the AuditKey Steps in Planning the AuditFigure 7-3Figure 7-3
Chapter 7Chapter 7 Chapter 8
Chapter 8 Chapter 8 Chapter 9
Overview of Business CycleOverview of Business CycleFigure 7-4Figure 7-4
Overview of Business CycleOverview of Business CycleFigure 7-4Figure 7-4
Consider LiventConsider 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
Overview of Business CycleOverview of Business CycleFigure 7-4Figure 7-4
Overview of Business CycleOverview of Business CycleFigure 7-4Figure 7-4
Understand and Quantify
Understand, Quantify,and Correlate with Outcomes
Understanding the Business and Industry
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?
Understanding the Client’s BusinessUnderstanding the Client’s BusinessFigure 7-5Figure 7-5
Understanding the Client’s BusinessUnderstanding the Client’s BusinessFigure 7-5Figure 7-5
Key Issues What to Understand
Senior Management Does management depend on one or a few key individuals? How experienced is the entity’s management? What is management’s attitude toward accepting risks? How does management delegate authority and responsibility? What is management’s reputation for integrity and business ethics?
Management Goals What are management’s primary goals?and Objectives Obtaining additional market share?
Growth in sales? Growth in profits? Growth in operating cash flows? Growth in market valuation?
Understanding the Client’s BusinessUnderstanding the Client’s BusinessFigure 7-5Figure 7-5
Understanding the Client’s BusinessUnderstanding the Client’s BusinessFigure 7-5Figure 7-5
Understanding the Client’s BusinessUnderstanding the Client’s BusinessFigure 7-5Figure 7-5
Understanding the Client’s BusinessUnderstanding the Client’s BusinessFigure 7-5Figure 7-5
Understanding the Client’s BusinessUnderstanding the Client’s BusinessFigure 7-5Figure 7-5
Understanding the Client’s BusinessUnderstanding the Client’s BusinessFigure 7-5Figure 7-5
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 procedures2. In the testing phase, as a substantive test to obtain evidential matter about
particular assertions related to account balances or classes of transactions3. At the conclusion of the audit, in a final
review of the overall reasonableness of the audited financial statements
Performing Analytical Performing Analytical ProceduresProcedures
Performing Analytical Performing Analytical ProceduresProcedures
The following steps are involved in performing analytical procedures:1. Identify calculations and comparisons to be made2. Develop expectations3. Perform the calculations/comparisons4. Analyze data and identify significant
differences5. Investigate significant unexpected
differences6. Determine effects on audit planning
Performing Analytical Performing Analytical ProceduresProcedures
Performing Analytical Performing Analytical ProceduresProcedures
New Technology, Inc.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.
CHAPTER 7CHAPTER 7 ACCEPTING AND PLANNING ACCEPTING AND PLANNING
THE AUDIT ENGAGEMENTTHE AUDIT ENGAGEMENT
CHAPTER 7CHAPTER 7 ACCEPTING AND PLANNING ACCEPTING AND PLANNING
THE AUDIT ENGAGEMENTTHE AUDIT ENGAGEMENT
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