Audit Planning and Analytical Procedures

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 8 - 1

Audit Planning andAudit Planning andAnalytical ProceduresAnalytical Procedures

Chapter 8Chapter 8

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 8 - 8 - 22

與本章有關我國之審計準則公報與本章有關我國之審計準則公報審計準則公報第審計準則公報第 4747 號財務報表審計之規號財務報表審計之規劃劃審計準則公報第審計準則公報第 1717 號繼任會計師與前任號繼任會計師與前任會計師間之聯繫會計師間之聯繫審計準則公報第審計準則公報第 5050 號分析性程序號分析性程序審計準則公報第審計準則公報第 2727 號審計委任書號審計委任書審計準則公報第審計準則公報第 3737 號對受查事業之瞭解號對受查事業之瞭解


Learning Objective 1Learning Objective 1

Discuss why adequate auditDiscuss why adequate audit

planning is essential.planning is essential.


Three Main Reasons for PlanningThree Main Reasons for Planning

1.To obtain sufficient appropriate evidence for the circumstances: is essential if the CPA firm to minimize legal liability and maintain a good reputation in the business community.

2. To help keep audit costs reasonable helps the firm remain competitive.

3. To avoid misunderstanding with the client is necessary for good client relations and for facilitating high-quality work at reasonable cost.


Risk TermsRisk Terms

Acceptable audit risk is a measure of how willing theauditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualifed opinion has been issued.

Acceptable audit risk is a measure of how willing theauditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualifed opinion has been issued.

Inherent risk is a measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control.

Inherent risk is a measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control.


Planning an Audit and Planning an Audit and Designing an Audit ApproachDesigning an Audit Approach

1.Accept client and perform initial audit planning.

2.Understand the client’s business and industry.

3.Assess client business risk.

4.Perform preliminary analytical procedures.


Planning an Audit and Planning an Audit and Designing an Audit ApproachDesigning an Audit Approach

5.Set materiality and assess acceptable audit riskand inherent risk.

6.Understand internal control and assess control risk.

7.Gather information to assess fraud risks.

8.Develop overall audit plan and audit program.



Make client acceptance decisionsMake client acceptance decisions

and perform initial audit planning.and perform initial audit planning.


Initial Audit PlanningInitial Audit Planning

1. Client acceptance and continuance

2. Identify client’s reasons for audit

3. Obtain an understanding with the client

4. Develop overall audit strategy


1.Client Acceptance and 1.Client Acceptance and ContinuanceContinuance

New Client InvestigationNew Client Investigation

AU315-the new (successor) auditor is required by AU315-the new (successor) auditor is required by auditing standardsauditing standards

-- 審計準則公報第審計準則公報第 1717 號繼任會計師與前任會計師號繼任會計師與前任會計師間之聯繫間之聯繫Continuing ClientsContinuing Clients

Under the AICPA Under the AICPA CodeCode of Professional Conduct of Professional Conduct rules on independence,rules on independence,…unpaid fees,… …unpaid fees,… previous conflicts,…client lacks integrityprevious conflicts,…client lacks integrity


2. Identify client’s reasons for audit

3.Obtain an understanding with the client

-Auditing standards (AU311) require that auditors document their understanding with the client in an engagement letter.

- 審計準則公報第審計準則公報第 2727 號審計委任書號審計委任書4. 4. Develop overall audit strategy

-Select Staff for Engagement

-Evaluate Need for Outside Specialists



Gain an understanding of theGain an understanding of the

client’s business and industry.client’s business and industry.


Understanding of the Client’s Understanding of the Client’s Business and IndustryBusiness and Industry

Factors that have increased theimportance of understanding theclient’s business and industry:

Global operations

Information technology

Human capital


Understanding of the Client’s Understanding of the Client’s Business and IndustryBusiness and Industry

Industry and external environmentIndustry and external environment

Business operations and processesBusiness operations and processes

Management and governanceManagement and governance

Objectives and strategiesObjectives and strategies

Measurement and performanceMeasurement and performance

Understand client’s business and industryUnderstand client’s business and industry


Industry and External Industry and External EnvironmentEnvironment

Reasons for obtaining an understanding of theclient’s industry and external environment:

1. Risks associated with specific industries

2. Inherent risks common to all clients incertain industries

3. Unique accounting requirements


Business OperationsBusiness Operationsand Processesand Processes

Factors the auditor should understand:

Major sources of revenue Key customers and suppliers Sources of financing Information about related parties


Tour the Plant and OfficesTour the Plant and Offices

By viewing the physical facilities, the auditor can asses physical safeguards over assets and interpretaccounting data related to assets.


Identify Related PartiesIdentify Related Parties

A related party is defined as an affiliatedcompany, a principal owner of the clientcompany, or any other party with whichthe client deals, where one of the partiescan influence the management orpolicies of the other.


Management and GovernanceManagement and Governance

Management establishes the strategies andprocesses followed by the client’s business.

Governance includes the client’s organizationalstructure, as well as the activities of the boardof directors and the audit committee.

Corporate charter and bylaws

Meeting minutes

Code of ethics


Code of EthicsCode of Ethics

In response to the Sarbanes-Oxley Act, the SECnow requires each public company to disclosewhether is has adopted a code of ethics thatapplies to senior management.

The SEC also requires companies to discloseamendments and waivers to the code of ethics.


Client Objectives and StrategiesClient Objectives and Strategies

Strategies are approaches followed by theentity to achieve organizational objectives.

Auditors should understand client objectives.

Effectiveness and efficiency of operations

Financial reporting reliability

Compliance with laws and regulations


Measurement and PerformanceMeasurement and Performance

The client’s performance measurement systemincludes key performance indicators. Examples:

market share sales per employee unit sales growth

Web site visitors same-store sales sales/square foot

Performance measurement includes ratio analysisand benchmarking against key competitors.



Assess client business risk.Assess client business risk.

重要說明列示重要說明列示於於 figure 8-4(figure 8-4( 下面投影片說明下面投影片說明 ))


Assess Client Business RiskAssess Client Business Risk

Client business risk is the risk that theclient will fail to achieve its objectives.

What is the auditor’s primary concern?

Material misstatements in the financialstatements due to client business risk


Client’s Business, Risk, andClient’s Business, Risk, andRisk of Material MisstatementRisk of Material Misstatement

Understand client’sbusiness and industry

Industry and external environment

Business operations and processes

Management and governance

Objectives and strategies

Measurement and performance

Assess client businessrisk

Assess risk of materialmisstatements


Sarbanes-Oxley ActSarbanes-Oxley Act

The Sarbanes-Oxley Act requires thatmanagement certify it has designeddisclosure controls and procedures toensure that material information aboutbusiness risks is made known to them.

It also requires that management certifyit has informed the auditor and auditcommittee of any significant deficienciesin internal control.



Perform preliminary analyticalPerform preliminary analytical

procedures.procedures.


Preliminary Analytical Preliminary Analytical ProceduresProcedures

Comparison of client ratios to industryor competitor benchmarks provides anindication of the company’s performance.

Preliminary tests can reveal unusualchanges in ratios.


Examples of Planning Analytical Examples of Planning Analytical ProceduresProcedures

Liquidity activity ratio:Inventory turnover 3.36 5.20

Ability to meet long-term obligations:Debt to equity 1.73 2.51

Profitability ratio:Profit margin 0.05 0.07

Short-term debt-paying ability:Current ratio 3.86 5.20

ClientClient IndustryIndustrySelected RatiosSelected Ratios


Summary of the PartsSummary of the Partsof Auditing Planningof Auditing Planning

A major purpose is to gain an understanding of the client’s business and industry.


Key Parts of PlanningKey Parts of Planning

Accept client and perform initial planning

New client acceptance and continuance

Identify client’s reasons for audit

Obtain an understanding with client

Staff the engagement



Understand the client’s business and industry

Understand client’s industry and externalenvironment

Understand client’s operations, strategies,and performance system



Assess client business risk

Evaluate management controlsaffecting business risk

Assess risk of material misstatements



Perform preliminary analytical procedures



State the purposes of analyticalState the purposes of analytical

procedures and the timingprocedures and the timing

of each purpose.of each purpose.


Analytical ProceduresAnalytical Procedures

1. Required in the planning phase

2. Often done during the testing phase

3. Required during the completion phase

AU 329 emphasizes the expectationsdeveloped by the auditor.


Timing and Purposes of Timing and Purposes of Analytical ProceduresAnalytical Procedures

(Required)Planning

PhasePurpose

Understand client’sindustry and business

Assess going concern

Indicate possiblemisstatements(attention directing)

Reduce detailed tests

TestingPhase

(Required)Completion

Phase

Primarypurpose

Secondarypurpose

Primarypurpose

Secondarypurpose

Primarypurpose

Primarypurpose

Secondarypurpose

Secondarypurpose



Select the most appropriateSelect the most appropriate

analytical procedure fromanalytical procedure from

among the five major types.among the five major types.


Five Types of Analytical Five Types of Analytical ProceduresProcedures

Compare client data with:

1. Industry data

2. Similar prior-period data

3. Client-determined expected results

4. Auditor-determined expected results

5. Expected results using nonfinancial data.


Compare Client and Industry Compare Client and Industry DataData

Inventory turnover 3.4 3.5 3.9 3.4Gross margin 26.3% 26.4% 27.3% 26.2%

ClientClient IndustryIndustry

2009 2008 2009 2008


Compare Client Data with Compare Client Data with Similar Prior Period DataSimilar Prior Period Data

Net sales $143,086 100.0 $131,226 100.0Cost of goods sold 103,241 72.1 94,876 72.3Gross profit $ 39,845 27.9 $ 36,350 27.7Selling expense 14,810 10.3 12,899 9.8Administrative expense 17,665 12.4 16,757 12.8Other 1,689 1.2 2,035 1.6Earnings before taxes $ 5,681 4.0 $ 4,659 3.5Income taxes 1,747 1.2 1,465 1.1Net income $ 3,934 2.8 $ 3,194 2.4

20092009

(000)(000)Prelim.Prelim.

% of% ofNet salesNet sales

20082008

(000)(000)Prelim.Prelim.

% of% ofNet salesNet sales



Compute common financial ratios.Compute common financial ratios.


Common Financial RatiosCommon Financial Ratios

Short-term debt-paying ability

Liquidity activity ratios

Ability to meet long-term debt obligations

Profitability ratios


Short-term Debt-paying AbilityShort-term Debt-paying Ability

Current ratioCurrent assets

Current liabilities=

Cash ratio(Cash + Marketable securities)

Current liabilities=

Quick ratio(Cash + Marketable securities

+ Net accounts receivable)Current liabilities

=


Liquidity Activity RatiosLiquidity Activity Ratios

Accounts receivableturnover

Net salesAverage gross receivables

=

Days to collectreceivable

365 days365 daysAccounts receivable turnover

=

Inventoryturnover

Cost of goods soldCost of goods soldAverage inventory

=

Days to sellinventory

365 days365 daysInventory turnover

=


Ability to Meet Long-term Debt Ability to Meet Long-term Debt ObligationObligation

Debt to equityTotal liabilities

Total equity=

Times interestearned

Operating incomeInterest expense

=


Profitability RatiosProfitability Ratios

Earningsper share

Net incomeAverage common shares outstanding

=

Gross profitpercent

(Net sales – Cost of goods sold)Net sales

=

Profit marginOperating income

Net sales=


Profitability RatiosProfitability Ratios

Return oncommonequity

(Income before taxes– Preferred dividends)

Average stockholders’ equityAverage stockholders’ equity=

Return onassets

Income before taxesAverage total assets

=


Summary of Analytical Summary of Analytical ProceduresProcedures

They involve the computation of ratiosand other comparisons of recordedamounts to auditor expectations.

They are used in planning to understandthe client’s business and industry.

They are used throughout the audit to identifypossible misstatements, reduce detailed tests,and to assess going-concern issues.

©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 8 - 50

End of Chapter 8End of Chapter 8

Audit Planning and Analytical Procedures

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