Post on 14-Apr-2015
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Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the
Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition
Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the
Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition
William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State
University at San Luis ObispoUniversity at San Luis Obispo
Raymond N. Raymond N. JohnsonJohnson
Portland State UniversityPortland State University
Chapter 7 – Accepting the Engagement and Planning the Audit
Chapter 7 OverviewChapter 7 OverviewChapter 7 OverviewChapter 7 Overview
Client Acceptance and Client Acceptance and RetentionRetention
Client Acceptance and Client Acceptance and RetentionRetention
Evaluating the Integrity of Evaluating the Integrity of ManagementManagement
Evaluating the Integrity of Evaluating the Integrity of ManagementManagement
• Communicate with the Predecessor Auditor
• Make Inquiries of Other Third Parties
• Review Previous Experience with Existing Clients
Identifying Special Identifying Special Circumstances and Unusual Circumstances and Unusual
RisksRisks
Identifying Special Identifying Special Circumstances and Unusual Circumstances and Unusual
RisksRisks• Identify Intended Users of Audited
Statements
• Assess Prospective Client’s Legal and Financial Stability
• Identify Scope Limitations
• Evaluate the Entity’s Financial Reporting Systems and Auditability
Assessing Competence to Assessing Competence to Perform the AuditPerform the Audit
Assessing Competence to Assessing Competence to Perform the AuditPerform the Audit
• Services Desired
• Identify the Audit Team– Partner– Manager(s)– Senior(s)– Staff Assistants
• Consider Need for Consultation and Specialists
Evaluating IndependenceEvaluating IndependenceEvaluating IndependenceEvaluating Independence
• Identify Circumstances Impairing Independence
• Identify Professional Staff Financial and Business Relationships
• Identify Conflicts of Interest with Other Clients
Making the Decision to Accept Making the Decision to Accept or Decline the Auditor Decline the Audit
Making the Decision to Accept Making the Decision to Accept or Decline the Auditor Decline the Audit
• Integrity of Management
• Special Circumstances and Unusual Risks
• Competence Issues
• Independence Issues
Preparing the Engagement Preparing the Engagement LetterLetter
Preparing the Engagement Preparing the Engagement LetterLetter
• 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 auditor’s responsibilities
Preparing the Engagement Preparing the Engagement LetterLetter
Preparing the Engagement Preparing the Engagement LetterLetter
• 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
Preparing the Engagement Preparing the Engagement LetterLetter
Preparing the Engagement Preparing the Engagement LetterLetter
• 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
Study BreakStudy BreakStudy BreakStudy Break
1. While evaluating the integrity of management, which would be considered to be the least useful?
A. Inquiries of managementB. Communications with preceding
auditorC. Inquiries of other third partiesD. Evaluate previous experiences with
client
A. Inquiries of management
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2. Outside specialists include all of the following except:
A. AppraisersB. Internal auditorsC. ActuariesD. Attorneys
B. Internal auditors
Risk Assessment Risk Assessment ProceduresProcedures
Risk Assessment Risk Assessment ProceduresProcedures
Understanding the Entity and Understanding the Entity and Its EnvironmentIts Environment
Understanding the Entity and Understanding the Entity and Its EnvironmentIts Environment
Industry, Regulatory, and Industry, Regulatory, and Other External FactorsOther External Factors
Industry, Regulatory, and Industry, Regulatory, and Other External FactorsOther External Factors
• Industry Conditions
• Regulatory Environment
• Other External Factors Affecting the Entity’s Business
The Nature of the Entity and The Nature of the Entity and Accounting PoliciesAccounting Policies
The Nature of the Entity and The Nature of the Entity and Accounting PoliciesAccounting Policies
• Business Operations
• Investing Activities
• Financing Activities
• Financial Reporting
Entity’s Objectives, Strategies, Entity’s Objectives, Strategies, and Related Business Risksand Related Business Risks
Entity’s Objectives, Strategies, Entity’s Objectives, Strategies, and Related Business Risksand Related Business Risks
• Entity’s Objectives
• Entity’s Strategies
• Business Risks
• Effects of Implementing a Strategy
Measurement and Review of Measurement and Review of the Entity’s Financial the Entity’s Financial
PerformancePerformance
Measurement and Review of Measurement and Review of the Entity’s Financial the Entity’s Financial
PerformancePerformance• 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
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3. In order to understand the entity’s ______, we must understand matters such as the accounting principles, revenue recognition practices, and financial statement presentation and disclosure.
A. Business OperationsB. Investing ActivitiesC. Financing ActivitiesD. Financial Reporting
D. Financial Reporting
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4. ______ are the operational approaches by which management intends to achieve its objectives.
A. Entity’s objectivesB. Entity’s strategiesC. Business risksD. Financing activities
B. Entity’s strategies