A424Chapter_8 - A424 Chapter 8 Audit Planning and...

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A424: Chapter 8 Audit Planning and Analytical Procedures Learning Objectives: 1. Understand purpose of audit planning 2. Make client acceptance and initial audit planning 3. Understand client’s business and its industry 4. Assess client’s business risk 5. Understand purpose of analytical procedures 6. Perform appropriate analytical procedures 7. Compute common financial ratios Audit Planning Preparation Question: Which GAAS standard talks about planning? A. Reasons for planning: obtain sufficient appropriate evidence for the circumstances: industry, personnel, audit alerts, etc. keep audit cost reasonable avoid misunderstandings with the client evaluate acceptable audit risk : a measure of how willing the auditor is to accept that he/she may erroneously issue an unqualified report. Preparation questions: If the auditor wants to completely certain about her/his decision about the opinion expressed on the financial statements then acceptable audit risk is __________. If the auditor is will to be completely uncertain about his/her decision about the opinion on the financial statements then acceptable audit risk is __________. evaluate inherent risk : a measure of the likelihood that there are material misstatements in an account balance. Preparation Question: How does the potential for material misstatements relate to acceptable audit risk in decisions about evidence gathering? In other words, the more likely a client is to have misstatements in its financial statement and the less the acceptable audit risk the ___________ higher/lower the amount of evidence gathered. B. Accept client and perform initial planning 1. Client acceptance and continuance SAS 84 requires that old and new auditors communicate. Preparation Question: Who is responsible for initiating communication? 1
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Predecessor Must have client permission to respond openly (client confidentiality) Required to respond , even if to say no information will be provided. Communicate with other entities (attorneys, banks, other CPAs, etc.). Investigate backgrounds of management. Consider amount of risk for a failed audit. Previous conflicts on the report or fees. Evidence of lack of integrity of upper management. Pending lawsuit with client. Unpaid fees. 2. Identify client’s reasons for audit SEC/SOX State regulation Other regulation Loan requirements Shareholders Plans for future (IPO) In general, more users more evidence C. Obtain an understanding with the client Preparation Question: Is it required to document an understanding with the client? Preparation Question
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A424Chapter_8 - A424 Chapter 8 Audit Planning and...

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