Chapter_8_Solutions_Manual - 1 Chapter 8 Audit Planning and...

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Unformatted text preview: 1 Chapter 8 Audit Planning and Analytical Procedures Review Questions 8-1 There are three primary benefits from planning audits: it helps the auditor obtain sufficient appropriate evidence for the circumstances, helps keep audit costs reasonable, and helps avoid misunderstandings with the client. 8-2 Eight major steps in planning audits are: 1. Accept client and perform initial planning 2. Understand the clients business and industry 3. Assess client business risk 4. Perform preliminary analytical procedures 5. Set materiality, and assess acceptable audit risk and 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 8-3 The new auditor (successor) is required by SAS 84 (AU 315) to communicate with the predecessor auditor. This enables the successor to obtain information about the client so that he or she may evaluate whether to accept the engagement. Permission must be obtained from the client before communication can be made because of the confidentiality requirement in the Code of Professional Conduct . The predecessor is required to respond to the successors request for information; however, the response may be limited to stating that no information will be given. The successor auditor should be wary if the predecessor is reluctant to provide information about the client. 8-4 Prior to accepting a client, the auditor should investigate the client. The auditor should evaluate the clients standing in the business community, financial stability, and relations with its previous CPA firm. The primary purpose of new client investigation is to ascertain the integrity of the client and the possibility of fraud. The auditor should be especially concerned with the possibility of fraudulent financial reporting since it is difficult to uncover. The auditor does not want to needlessly expose himself or herself to the possibility of a lawsuit for failure to detect such fraud. 8-5 SAS 108 requires the auditor to document their understanding of the terms of the engagement with the client in an engagement letter. The engagement letter should include the engagements objectives, the responsibilities of the auditor and management, and the engagements limitations. An engagement letter is an agreement between the CPA firm and the client concerning the conduct of the audit and related services. It should state what services will be provided, whether any restrictions will be imposed on the auditors work, deadlines for completing the audit, and assistance to be provided by client personnel. The engagement letter may also include the auditors fees. In 8-1 addition, the engagement letter informs the client that the auditor cannot guarantee that all acts of fraud will be discovered....
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This note was uploaded on 11/17/2010 for the course AC555 AC555 taught by Professor Tarbet during the Spring '10 term at Keller Graduate School of Management.

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Chapter_8_Solutions_Manual - 1 Chapter 8 Audit Planning and...

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