arens solution manual Chapter 8

Chapter 8 – Audit Planning and Analytical Procedures8 - *
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1. To obtain sufficient competent evidence
for the circumstances
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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Accept client and perform initial audit planning.
Understand the client’s business and industry.
Assess client business risk.
Perform preliminary analytical procedures.
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Set materiality and assess acceptable audit risk
and inherent risk.
Gather information to assess fraud risks.
Develop overall audit plan and audit program.
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Develop overall audit strategy
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Factors that have increased the
importance of understanding the
Global operations
Information technology
Human capital
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Industry and external environment
Business operations and processes
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client’s industry and external environment:
1. Risks associated with specific industries
2. Inherent risks common to all clients in
certain industries
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Major sources of revenue
Key customers and suppliers
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company, a principal owner of the client
company, or any other party with which
the client deals, where one of the parties
can influence the management or
policies of the other.
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processes followed by the client’s business.
Governance includes the client’s organizational
structure, as well as the activities of the board
of directors and the audit committee.
Corporate charter and bylaws
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now requires each public company to disclose
whether is has adopted a code of ethics that
applies to senior management.
amendments and waivers to the code of ethics.
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entity to achieve organizational objectives.
Auditors should understand client objectives.
Effectiveness and efficiency of operations
Financial reporting reliability
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includes key performance indicators. Examples:
market share
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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
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Risk of Material Misstatement
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business risks is made known to them.
It also requires that management certify
it has informed the auditor and audit
committee of any significant deficiencies
in internal control.
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emerged as a new paradigm for managing risk.
ERM integrates and coordinates risk
management across the entire enterprise.
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or competitor benchmarks provides an
indication of the company’s performance.
Preliminary tests can reveal unusual
changes in ratios.
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Liquidity activity ratio:
Profitability ratio:
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of the client’s business and industry.
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New client acceptance and continuance
Identify client’s reasons for audit
Obtain an understanding with client
Staff the engagement
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Understand client’s industry and external
environment
and performance system
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procedures and the timing
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Often done during the testing phase
Required during the completion phase
SAS 56 emphasizes the expectations
developed by the auditor.
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(Required)
Planning
Phase
Purpose
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Compare client data with:
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Inventory turnover 3.4 3.5 3.9 3.4
Gross margin 26.3% 26.4% 27.3% 26.2%
Client
Industry
2007
2006
2007
2006
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Net sales $143,086 100.0 $131,226 100.0
Cost of goods sold 103,241 72.1 94,876 72.3
Gross profit $ 39,845 27.9 $ 36,350 27.7
Selling expense 14,810 10.3 12,899 9.8
Administrative expense 17,665 12.4 16,757 12.8
Other 1,689 1.2 2,035 1.6
Earnings before taxes $ 5,681 4.0 $ 4,659 3.5
Income taxes 1,747 1.2 1,465 1.1
Net income $ 3,934 2.8 $ 3,194 2.4
2007
(000)
Prelim.
% of
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Profitability ratios
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Debt to equity
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Net sales
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and other comparisons of recorded
amounts to auditor expectations.
the client’s business and industry.
They are used throughout the audit to identify
possible misstatements, reduce detailed tests,
and to assess going-concern issues.
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arens solution manual Chapter 8

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